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Current State of U.S. Economic Sanctions Imposed in Response to Russia’s Invasion of Ukraine – August 29, 2024

Current State of U.S. Export Controls in Response to the Russian Federation’s Invasion of Ukraine – August 29, 2024

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In a continued effort to hinder Russia’s invasion of Ukraine, the U.S. government has deployed a whole-of-government approach to impose sanctions and tighter export controls on Russia. This alert summarizes the key export restrictions currently in place, including those imposed by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) and by the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC). These controls significantly curtail exports, reexports and transfers (in country) of technology, commodities, and software (collectively, the “items”) destined for or transiting Russia or Belarus and items intended for certain persons affiliated with Russia or Belarus. The BIS restrictions are described in the Export Administration Regulations (<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C" target="_blank" rel="noreferrer noopener">EAR</a>), which are set forth in 15 C.F.R. Parts 730-774. This website provides an overview of the key export controls currently in place.

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This alert is not intended to be and is not a detailed summary of the export controls implemented in response to the invasion of Ukraine. Rather, it is a tool to help businesses, both American and foreign, identify whether their transactions with Russia, Belarus or Ukraine may now require a license or be prohibited under the wide-ranging controls that have been imposed. A review of the regulations will be necessary to determine specific licensing requirements.

An overview of the sanctions imposed by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), which apply in addition to the export controls summarized in this alert, can be viewed <a href="https://www.bakerlaw.com/insights/current-state-of-u-s-economic-sanctions-imposed-in-response-to-russias-invasion-of-ukraine-august-29-2024/" target="_blank" rel="noreferrer noopener">here</a>.

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Executive Summary of Changes Since May 21, 2024

Consistent with its prior actions, since May 21, 2024 BIS has amended the EAR and added additional persons to the Entity List to further degrade Russia’s ability to continue waging war in Ukraine. We summarize the recent material changes below.

1. BIS Announces Expanded Due Diligence for Diversion Risk to Russia. 
a. On July 10, 2024, BIS issued further guidance on export diversion to Russia and entities of concern by recommending that companies screen parties to a transaction against the new Trade Integrity Project (TIP) list that contains over 700 entities. This is a significant and novel action by BIS as TIP is a third-party website and the 700 plus identified entities are not listed on any US export controls or sanctions restricted or prohibited persons lists. BIS advised companies that screening against the TIP list is a best practice to ensure red flags are identified and properly cleared before proceeding with a transaction.&nbsp; The new guidance can be found here: <a href="https://www.bis.gov/sites/default/files/files/Guidance-for-Complying-with-BIS-Letters-Identifying-Transaction-Parties-of-Diversion-Risk_v8.pdf">Guidance to Industry on BIS Actions Identifying Transaction Parties of Diversion Risk</a>.
2. Additions to the Entity List, Including Unprecedented Designation of Addresses. 
a.<a href="https://www.federalregister.gov/documents/2024/06/18/2024-13148/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration"> Effective June 12, 2024</a>, BIS added:
i. one Russian entity and four Chinese entities (each with a footnote 3 designation); and. ii. eight addresses that are associated with significant transshipment of sensitive goods to Russia (all located in Hong Kong).
b. <a href="https://www.federalregister.gov/documents/2024/06/24/2024-13695/additions-to-the-entity-list">Effective June 24, 2024</a>, Kaspersky entities in Russia and the United Kingdom were added.
c. <a href="https://www.federalregister.gov/documents/2024/07/03/2024-14635/addition-of-entities-and-revision-of-entries-on-the-entity-list">Effective July 3, 2024</a>, a UAE entity was added to the for engaging in shipments of U.S. origin items to Russia.
d.<a href="https://www.federalregister.gov/documents/2024/08/27/2024-19130/revisions-to-the-entity-list"> Effective August 27, 2024</a>, BIS added an additional 123 entities, including dozens with a footnote 3 designation, and an additional four addresses; three addresses in China and one in Turkey.
3. Effective June 12, 2024, BIS Expanded License Requirements for Exports, Reexports and Transfers to Russia and Belarus.
a. 522 HTS codes were added to Supplement No. 4 to Part 746 to further limit Russia’s access to weapons and munitions. These newly added HTS codes include EAR99 oil and gas equipment, aerospace and defense products, and chemicals.
b. The licensing requirements that were previously located in Section 746.5 (Russian Industry Sector Sanctions), 746.8 (Russia and Belarus FDPR) and 746.10 (Luxury Goods) of the EAR have been consolidated into Section 746.8. However, the supplements listing items subject to these license requirements (Supplements 2, 4, 5 (luxury goods), and 6) will be maintained. BIS is evaluating further consolidation of the license requirements to provide better clarity on licensing requirements regarding exports, reexports, or transfers to or within Russia.
c. Ten riot control agents were added to Supplement No. 6 to Part 744, noting that they were subject to license requirements as they are listed on Category 1 of the Commerce Control List (CCL).
d. License Exception Consumer Communications Devices (CCD) was revised to clarify that certain consumer communications devices and related batteries, chargers, carrying cases and accessories are not eligible for export, reexport or transfer (in country) to Russia or Belarus.
e. BIS clarified that the fastener exclusion relating to Part 746 supplements does not apply if the fasteners are classified under an HTS code in Supplement Nos. 2, 4, 5 or 7, and further clarified that the fastener exclusion does not apply in the case of restrictions that apply to all items subject to the EAR (e.g., Entity List license requirements).
4. Expansion of Licensing Requirements on Important EAR99 Software (<a href="https://www.federalregister.gov/documents/2024/06/18/2024-13148/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration">EAR99 Software Rule</a>). 
a. <a href="https://www.federalregister.gov/documents/2024/06/18/2024-13148/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration">On June 12, 2024, BIS announced</a> that effective September 16, 2024, a license will be required to export, reexport, or in-country transfer, to or within Russia or Belarus, the following EAR99 software:
i. enterprise resource planning (ERP);
ii. customer relationship management (CRM);
iii. business intelligence (BI);
iv. supply chain management (SCM);
v. enterprise data warehouse (EDW);
vi. computerized maintenance management system (CMMS);
vii. project management software (PMS);
viii. product lifecycle management (PLM);
ix. building information modeling (BIM);
x. computer-aided design (CAD);
xi. computer-aided manufacturing (CAM); and
xii. engineering to order (ETO),
The new controls on EAR99 software do not apply when destined to parties exclusively engaged in the agriculture or medical industries.
5. Expansion of Controls on EAR99 Software (Effective September 16, 2024).
a.<a href="https://www.federalregister.gov/documents/2024/08/27/2024-19132/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration"> The August 27, 2024, BIS Federal Register Notice</a> amended the EAR to include additional controls on EAR99 software for the operation of computer numerical control (CNC) machine tools. These controls are designed to ensure that CNC machine tools in Russia or Belarus cannot receive software updates.
6. Expansion of Russia and Belarus Military End User Foreign Direct Product Rule (FDPR) to Procurement Networks (Effective August 27, 2024).
a. <a href="https://www.federalregister.gov/documents/2024/08/27/2024-19130/revisions-to-the-entity-list">The August 27, 2024, BIS Federal Register Notice</a> also amended the Russia and Belarus FDPR to include procurement entities – i.e., entities on the Entity List that pose a significant risk of involvement in the supply or diversion of items subject to the EAR to procurement networks for Russia’s or Belarus’s defense industry or intelligence services. All such entities will be identified with a footnote 3 designation on the Entity List. Of the 123 entities designated on August 27, over 40 were designated as procurement entities under the EAR and received a footnote 3 designation.
b. While BIS introduced a new term “U.S. branded” items in the preamble to the BIS August 27, 2024, Federal Register Notice, the expansion only relates to the end-user scope of the Russia/Belarus-Military End User FDPR in Section 734.9(g) (i.e., procurement entities on the Entity List with a footnote 3 designation). The product scope of the rule was not amended.

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I. Overview of BIS Export Controls Relating to Russia and Belarus

A. BIS License Requirements Relating to Russia

Exports (direct or indirect), reexports (from one third country to another) and transfers (in country) (any transfer within any third country) of the following items are subject to license requirements:

All items on the EAR’s Commerce Control List (CCL).

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Luxury goods (EAR99) listed in Supplement No. 5 to Part 746 of the EAR.

Sector-specific items listed in Section 746.5 and Supplement Nos. 2, 4 and 6 to Part 746 of the EAR.

Any items subject to the EAR going to a military end use or end user (MEU) or a military intelligence end use or end user (MIEU), regardless of whether located in or outside Russia (note that slightly different due diligence standards apply for exports to end users outside Russia; please consult Section 744.21 of the EAR).

Any item subject to the EAR going to a person or entity designated on the SDN List under the Russia program (or certain others) who is a party to the transaction if the transaction is not subject to OFAC jurisdiction.

Foreign-produced items that are subject to the EAR under the FDPRs, including the specific Russia/Belarus rules in Sections 746.8 and 734.9(f) and (g) of the EAR.

Any item subject to the EAR if a person on the BIS Entity List, BIS Denied Persons List or another sanctioned persons list is involved in the transaction.

Effective September 16, 2024, certain EAR99 software and related software updates.

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For a detailed summary of each of these requirements, see Part II below.

B. BIS License Requirements Relating to Belarus

&nbsp;Exports, reexports and transfers (in country) of the following items are subject to license requirements:

Sector-specific items listed in Section 746.5 and Supplement Nos. 2, 4 and 6 to Part 746 of the EAR (noting that Section 746.5(a)(1)(i) and Supplement No. 2 apply only to use in Arctic offshore locations or shale formations in Belarus).

Any items subject to the EAR going to a MEU or MIEU, regardless of whether it is located in or outside Belarus (note that slightly different due diligence standards apply for exports to end users outside Russia; please consult Section 744.21 of the EAR).

Foreign-produced items that are subject to the EAR under the FDPR, including the specific Russia/Belarus rules in Sections 746.8 and 734.9(f) and (g) of the EAR.

For a detailed summary of each of these requirements, see Part III below.

C. License Requirements Relating to the Covered Regions of Ukraine

Exports, reexports and transfers (in country) of the following items are subject to license requirements:

All items subject to the EAR, including EAR99 items.

The covered regions of Ukraine are Crimea, the Donetsk People’s Republic (DNR), and the Luhansk People’s Republic (LNR) (Covered Regions of Ukraine).

For a detailed summary of each of these requirements, see Part IV below.

D. DDTC License Requirements

The following requirements apply to U.S. Munitions List (USML) items:

All defense articles and defense services on the USML contained in the International Traffic in Arms Regulations (ITAR) require licenses for export to Belarus, and applications for such licenses have long been subject to a policy of denial.

All defense articles and defense services on the USML require licenses for export to Russia and applications for such licenses are subject to a policy of denial, except for license applications related to government space cooperation, which will be considered on a case-by-case basis.

For a detailed summary of each of these requirements, see Part V below.

In addition to the information provided in Parts II through V regarding the BIS export controls applicable to Russia, Belarus and the Covered Regions of Ukraine, as well as ITAR controls applicable to Russia and Belarus, further information on the BIS Entity List-based controls and compliance tips may be found in Parts VI and VII below.

II. License Requirements Relating to Russia

Items subject to the jurisdiction of BIS under the EAR include most items exported from the United States, U.S.-origin items, wherever located, and foreign-produced items subject to the EAR under the&nbsp;De Minimis&nbsp;Rule or any of the applicable FDPRs. The EAR’s jurisdiction is based on the item; both U.S. and foreign persons must comply with the EAR – including the EAR’s General Prohibition 10, which prohibits any transaction related to an item that has been exported in violation of the EAR. For example, BIS has issued several public notices regarding Russian-owned aircraft that are subject to these prohibitions.

All items on the EAR’s CCL require a BIS license for export (direct and indirect), reexportation (from one third country to another) or transfer (in country; any transfer within any third country)&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-746#p-746.8(a)(1)" target="_blank" rel="noreferrer noopener">(15 C.F.R. Section 746.8(a)(1))</a>&nbsp;if the intended end user is in Russia or the item will transit Russia.

As of April 8, 2022, any item listed in any of the 10 CCL categories requires a BIS license when destined for Russia, regardless of the end use or end user. The license requirements for items in Categories 3-9 of the CCL were&nbsp;<a href="https://www.federalregister.gov/documents/2022/03/03/2022-04300/implementation-of-sanctions-against-russia-under-the-export-administration-regulations-ear" target="_blank" rel="noreferrer noopener">imposed on February 24, 2022</a>, and the license requirements for items in Categories 0-2 of the CCL were imposed on&nbsp;<a href="https://www.federalregister.gov/documents/2022/04/14/2022-07937/expansion-of-sanctions-against-russia-and-belarus-under-the-export-administration-regulations-ear" target="_blank" rel="noreferrer noopener">April 8, 2022</a>. The permitted uses of license exceptions are very limited though; for example, certain carve-outs for some mass market items classified under ECCNs 5A992 or 5D992 may apply.

Deemed exports and reexports are not subject to these license requirements.

Items, including EAR99 items, subject to&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-746#746.8" target="_blank" rel="noreferrer noopener">Russian industry sector sanctions</a>&nbsp;require a BIS license (15 CFR 746.8(a)(4) through (6)).

Under the EAR99 Software Rule, EAR99 designated software subject to the EAR is subject to a license when exported, reexported, or transferred to or within Russia or Belarus. This license requirement applies to the following covered software effective September 16, 2024:

enterprise resource planning (“ERP”);

customer relationship management (“CRM”);

computerized maintenance management system (“CMMS”);

&nbsp;project management software, product lifecycle management (“PLM”);

building information modelling (“BIM”);

computer-aided manufacturing (“CAM”);

Also, effective September 16, 2024, the software license requirement will cover EAR99 software for the operation of computer numerical control (CNC) machine tools and related software updates.

As of August [27], 2024, BIS has not issued definitions of the EAR99 software identified above or related guidance. Licensing requirements under the EAR should be considered together with OFAC’s services prohibition prior to proceeding with a transaction as certain services outside the scope of the EAR may be subject to OFAC licensing requirements.

A BIS license is required for the export, reexport or transfer (in country) to or within Russia of items subject to the ECCNs listed in Section 746.8(a)(4)(i) or any of the items listed in Supplement No. 2 to Part 746 of the EAR (for certain deepwater, Arctic offshore, or shale formation oil-and-gas-related end uses. In addition, a BIS license is required for the export, reexport or transfer (in country) to or within Russia of items listed in&nbsp;Supplement Nos. 4 and 6 to Part 746 of the EAR.

As of October 2, 2023, all items in Supplement Nos. 2 and 4 to Part 746 of the EAR were identified by a six-digit HTS code and description. The license requirement is based on the six-digit HTS code. This means that if an item is classified under the six-digit HTS code but does not correspond to the HTS description, the item is nonetheless covered and subject to licensing requirements. If any item is potentially described in more than one HTS description, the HTS code controls license determinations. Further, any item classified under an eight- or 10-digit HTS code that begins with a listed six-digit HTS code is also subject to license requirements.

As of August 27, 2024, there are over&nbsp;2,600 items listed in Supplement No. 4, a list of commercial and industrial items that require a license for export or reexport to or transfer within Russia or Belarus. Supplement No. 4 now covers items classified in 18 chapters of the HTS. Under the June 2024 Rule, newly added items include metal products, aircraft, transportation equipment, and parts and accessories for firearms.

As of October 2, 2023, Supplement No. 4 included modified or designed “components,” “parts,” “accessories,” and “attachments” for items listed in Supplement 4 regardless of the HTS code or HTS description of the “components,” “parts,” “accessories,” and “attachments.” The January 2024 Rule clarifies that while certain “parts” or minor “components” (i.e., fasteners, washers, spacers, insulators, grommets, bushings, springs, wires or solder) are excluded from the scope of Supplement No. 4 (as well as Supplement Nos. 2, 5 and 7 to Part 746 of the EAR, discussed above and below), the end use and end-user requirements of Part 744 of the EAR continue to apply to these items. <a href="https://www.federalregister.gov/documents/2024/06/18/2024-13148/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration">BIS’s June 2024 Federal Register Notice</a>&nbsp; (“June 2024 Rule”) further clarified that the fastener exclusion relating to Part 746 supplements does not apply if the fasteners are classified under an HTS code in Supplement Nos. 2, 4, 5 or 7, and further clarified that the fastener exclusion does not apply in the case of restrictions that apply to all items subject to the EAR (e.g., Entity List license requirements).

License applications for items in Supplement Nos. 2, 4, and 6 submitted by companies not headquartered in Country Groups D:1, D:5, E:1 or E:2 and intending to curtail or close all operations in Russia will be reviewed on a case-by-case basis to determine whether any item to be disposed of will benefit the Russian government or military.

Over 140 items are listed in&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-746/appendix-Supplement%20No.%206%20to%20Part%20746" target="_blank" rel="noreferrer noopener">Supplement No. 6</a>&nbsp;as of August 27, 2024. The items in Supplement No. 6 include riot control agents, discrete chemicals, biologics, fentanyl and its precursors, and related equipment. The chemicals are specified based on their Chemical Abstracts Service (CAS) Registry Numbers in certain concentrations by weighted percentage and include:

Triethylamine (CAS 121-44-8), trimethylamine (CAS 75-50-3), lithium chloride (CAS 7447-41-8), lithium chloride hydrate (CAS 85144-11-2), (44) lithium chloride monohydrate (CAS 16712-20-2) and lithium carbonate (CAS 554-13-2).

Assay kits and reagents for nucleotide or peptide isolation, extraction or purification, n.e.s.

Laboratory equipment, including “components,” “parts,” “accessories” and “consumable materials” for such equipment for the analysis or detection, destructive or nondestructive, of chemical substances, n.e.s.

As of June 12, 2024, Supplement No. 6 includes certain riot control agents (CAS 8023–77–6; CAS 404–86–4; CAS 19408–84–5; CAS 2444–46–4; CAS 58493–48–4; CAS 20279–06–5; CAS 28789–35–7; CAS 2142–68– 9; CAS 99–02–5; CAS 18270–61–6; CAS 37794–87–9).

A list of the HTS codes set forth in Supplement No. 2, 4, and 5 to Part 746 have been included in a table available on BIS’s website for <a href="https://www.bis.gov/russia-belarus_export_controls_resources#downloadable-compliance-resources">download</a> as a resource to companies.

The license requirement is based on product description and the CAS in distinct concentrations. Supplement No. 6 also includes quantum computing items, cryogenic refrigeration systems, additive manufacturing equipment, microscopes and several other items. The January 2024 Rule clarified that medicines as defined in Section 722.1 of the EAR are not included in Supplement No. 6 (i.e., medicines that meet the definition of “drug” in Section 201 of the Federal Food, Drug, and Cosmetic Act). However, it should be noted that certain medicines are on the CCL and thus subject to license requirements, as discussed above.

As a result of the <a href="https://www.federalregister.gov/documents/2024/06/18/2024-13148/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration">June 2024 Rule</a>, license requirements that were previously in Section 746.5 (Russian Industry Sector Sanctions), 746.8 (Russia and Belarus FDPR) and 746.10 (Luxury Goods) of the EAR were consolidated into one section under Section 746.8 in order to clarify the licensing requirements applicable under the aforementioned sections. The licensing requirements remain the same, and the order of review provided in Section 746.8(a) consolidates order of review instructional text that previously appeared in each section.

Thus, if an item has an ECCN on the CCL, you start with Section 746.8(a)(1), which covers all items on the CCL. A license will be required to export, reexport, or transfer (in-country) such items to or within Russia or Belarus. See below for limited availability for license exceptions. If the item is EAR99, then you should determine the HTS code and whether it is covered in Supplement 4, 5 or 6 to Part 746, and if yes, then a license will be required (see Section 746.8(a)(5) through (7). License requirements under Section 746.8(a)(2) and (3) should then be considered, followed by those under 746.8(a)(4). Due to the complexity of the new order of review, it may require assistance from an expert in HTS codes, export classifications, and the EAR to determine whether a license is required.

EAR99 Luxury Goods Require a BIS License&nbsp;(15 C.F.R. Section 746.8(a)(7))&nbsp;

<a href="https://www.bis.doc.gov/index.php/component/docman/?task=doc_download&amp;gid=2932" target="_blank" rel="noreferrer noopener">Since March 11, 2022</a>, a BIS license has been required for exports, reexports and transfers to or within Russia of certain luxury goods subject to the EAR, as well as to designated Russian oligarchs or other persons, regardless of their location.

Over 600 luxury goods are listed in&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-746/appendix-Supplement%20No.%205%20to%20Part%20746" target="_blank" rel="noreferrer noopener">Supplement No. 5 to Part 746 of the EAR</a>&nbsp;as of August 27, 2024; they include household and department store items such as kitchen appliances, fans, radio/TV products, certain spirits, tobacco products, clothing items, jewelry, leather items, plastic items, vehicles, antiques, sporting goods and other goods. Unlike items listed in other supplements to Part 746, the items in Supplement No. 5 are identified by a Schedule B number, the two-digit Schedule B chapter heading and a 10-digit commodity description. In certain cases, value thresholds apply, although in many cases, value thresholds have not been assigned, and in some cases, the value thresholds have changed over the course of the past year. Thus, it is important to check the value thresholds to determine whether identified luxury goods were or will be subject to the licensing requirements of Supplement No. 5 to Part 746 of the EAR.

The <a href="https://www.federalregister.gov/documents/2024/01/25/2024-01408/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration">January 2024 Rule</a> clarified the order of review for licensing determinations under Section 746.10 for luxury goods. If the item has an ECCN on the CCL, you should review the Section 746.8(a)(1) license requirements first. If the item is EAR99, you should review Supplement 5 to Part 746 to determine whether a license is required under Section 746.8(a)(7), which applies to luxury goods destined for Russia or Belarus.

The <a href="https://www.federalregister.gov/documents/2024/01/25/2024-01408/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration">January 2024 Rule</a> clarified how to apply&nbsp;de minimis&nbsp;calculations for foreign-produced goods incorporating luxury good items identified in Supplement No. 5. The January 2024 Rule added a new subsection (now 746.8(a)(12)) to clarify that parties can exclude any U.S.-origin content if the item is identified in Supplement No. 5 and the foreign-made item will be exported from abroad or reexported from a country listed in Supplement 3 to Part 746, provided that the content is not excluded from the applicable scope column in Supplement No. 3. License applications for luxury goods listed in Supplement No. 5 are reviewed on a case-by-case basis for those goods that meet humanitarian needs. As discussed above, license applications for disposition of items subject to the EAR under certain conditions are reviewed on a case-by-case basis.

EAR99 Items to MEUs Require a BIS License&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-744#744.21" target="_blank" rel="noreferrer noopener">(15 C.F.R. Sections 744.21 and 744.22)</a>

A BIS license is required for the export, reexport or transfer to or within Russia and Belarus of all items subject to the EAR (including foreign-produced items subject to the EAR as well as U.S.-origin items) to MEUs or MIEUs located anywhere in the world. Conducting due diligence to verify whether an entity qualifies as an MEU or MIEU remains essential, but the Russian and Belarusian MEUs and MIEUs that are located outside Russia or Belarus are on the BIS Entity List in Supplement No. 4 to Part 744 of the EAR. The terms “military end use” and “military end user,” as well as “military intelligence end use” and “military intelligence end user,” are broadly defined in the EAR.

As of August 27, 2024, BIS has designated over 500 Russian and Belarusian entities/individuals as MEUs. They are now on the BIS Entity List. No license exceptions, other than for limited use of License Exception GOV, are available to overcome this license requirement.

“Common High Priority Items” Sought by Russia – High Risk of Diversion

In cooperation with its international partners, namely the European Union, Japan, and the United Kingdom<a href="https://www.bis.doc.gov/index.php/documents/policy-guidance/3339-tent-final-best-practice-customer-certification-v4/file" target="_blank" rel="noreferrer noopener"> BIS</a>&nbsp;issued a list of “common high priority items” that Russia is actively seeking to acquire for its weapon programs. As of August 27, 2024, 50 HTS codes have been identified as high-priority codes and referenced in numerous BIS publications. The HTS codes include both EAR99 items and CCL items (ECCNs 2A001, 2A101, 2A991, 2B001, 2B002, 2B003, 2B201, 2B991, 2B992, 2B993, 2B998, 3A001, 3A002, 3A090, 3A991, 3A992, 3B001, 3B991, 3B992, 5A001, 5A991, 6A002, 6A003, 6A993, 7A003, 7A994, and 9A991).

There are 4 Tiers of high-priority items, with Tier 1 covering the items most crucial to Russia’s maintenance of its weapons program. The Tiers are:

Tier 1: Items of the highest concern due to their critical role in the production of advanced Russian precision-guided weapons systems, Russia’s lack of domestic production, and limited global manufacturers;

Tier 2: Additional electronics items for which Russia may have some domestic production capability but a preference to source from the United States and its partners and allies;

Tier 3.A: Further electronic components used in Russian weapons systems, with a broader range of suppliers;

Tier 3.B: Mechanical and other components utilized in Russian weapons systems.

Tier 4.A: Manufacturing, production and quality testing equipment for electric components, circuit boards and modules; and

Tier 4.B: Computer Numerically Controlled (CNC) machine tools and components.

The full list of Common High Priority Items as of August 27, 2024, can be viewed&nbsp;<a href="https://www.bis.gov/articles/russia-export-controls-list-common-high-priority-items" target="_blank" rel="noreferrer noopener">here</a>.&nbsp;

Use of License Exceptions Has Been Severely Limited

The availability of license exceptions has been severely limited for transactions involving Russia. Even when a license exception is available, the terms and conditions of its use are very restrictive. However, to support Ukraine’s war efforts against Russia, the <a href="https://www.federalregister.gov/documents/2024/01/25/2024-01408/implementation-of-additional-sanctions-against-russia-and-belarus-under-the-export-administration">January 2024 Rule</a> clarified that items destined to or transferred in Crimea, the DNR or the LNR for use by the Ukrainian military are not subject to the license requirements of EAR Section 746.6. No license exception will overcome the licensing requirement that becomes effective September 16, 2024, in Section 746.8(a)(8), which imposes controls on software specified above, including updates for the covered software. Effective June 12, 2024, BIS narrowed the scope of License Exception CCD by not allowing for exports, reexports, or transfers to or within Russia and Belarus of certain low level graphics processing units and similar items. As discussed in the January 2024 Rule, firearms subject to the EAR previously exported, reexported, or transferred under a BIS or DDTC license to Ukraine can be temporarily imported for service and repair in the United States and sent back for use by the Ukrainian military, notwithstanding the exceptions to License Exceptions TMP and RPL related to Ukraine. It is important to review each specific control carefully, as the availability and scope of license exceptions differ among the various controls.

Certain Foreign-Produced Items Require a BIS License

There are two ways that foreign-produced items (commodities, technology, and software) can be subject to the EAR – under the&nbsp;De Minimis&nbsp;Rule or under the FDPRs. These complex rules are summarized below; the applicable regulations should be consulted to determine whether the rules may apply to a specific foreign-produced item. If a foreign-produced item is subject to the EAR, it may be subject to the same export license requirements as if the item were exported from the United States.&nbsp;(Note:&nbsp; FDPRs targeted at Russia and Belarus are summarized below; for a complete list of FDPRs, please consult EAR Section 734.9.)

De Minimis&nbsp;Rule&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-734#734.4" target="_blank" rel="noreferrer noopener">(15 C.F.R. Section 734.4)</a>.&nbsp;The&nbsp;De Minimis&nbsp;Rule provides that a foreign-produced item that derives more than 25 percent of its value from controlled U.S.-origin items is subject to the EAR. As of January 23, 2024, there is&nbsp;no de minimis&nbsp;level for any foreign-produced item incorporating a U.S.-origin item that is on the EAR’s CCL classified as a 9×515 or 600 series .y item when destined for Russia or Belarus. For all other items, any U.S.-origin item on the EAR’s CCL would qualify as controlled content for the purpose of calculating whether more than 25 percent of the foreign-made item’s value is derived from controlled items under the&nbsp;De Minimis&nbsp;Rule. (To date, the lower&nbsp;de minimis&nbsp;level of 10 percent or more applicable to shipments to Country Group E:1 countries (Iran, Syria, Sudan, and North Korea) has not been applied to Russia or Belarus.)

FDPRs&nbsp;<a href="https://bis.doc.gov/index.php/documents/regulations-docs/2382-part-734-scope-of-the-export-administration-regulations-1/file" target="_blank" rel="noreferrer noopener">(15 C.F.R. Sections 746.8 and 734.9).</a>&nbsp;Under the FDPRs, if the foreign-produced item is the “direct product” of certain U.S.-origin-controlled technology or software, it can be subject to the EAR. There are two specific FDPRs that subject a broad range of foreign-produced items to the EAR when destined for Russia or Belarus. The first one applies to any end user in Russia or Belarus and the second one, which is more restrictive, relates to MEUs.

Russia/Belarus FDPR: See&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-746#p-746.8(a)(2)" target="_blank" rel="noreferrer noopener">15 C.F.R. Section 746.8(a)(2)</a>&nbsp;and&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-734#p-734.9(f)" target="_blank" rel="noreferrer noopener">Section 734.9(f)</a>. Foreign-produced items subject to the EAR under this FDPR include any foreign-produced item that is a direct product of U.S.-origin technology or software specified in any ECCN in product groups D or E of the CCL (or produced by a plant or “major component” of a plant that is itself a direct product of such U.S. technologies and software) and is specified in any ECCN on the CCL or identified in Supplement Nos. 6 or 7 to Part 746 of the EAR. A license will be required when there is reason to know the foreign-produced item meets the product scope and is destined for Russia, Belarus or the Crimea region of Ukraine or will be incorporated or used in the production or development of any part, component or equipment specified in any ECCN on the CCL or in Supplement Nos. 6 or 7 to Part 746 of the EAR and produced in or destined for Russia or Belarus.

Russia/Belarus MEU FDPR:&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-746#p-746.8(a)(3)" target="_blank" rel="noreferrer noopener">See 15 C.F.R. Section 746.8(a)(3)</a>&nbsp;and&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-734#p-734.9(g)" target="_blank" rel="noreferrer noopener">Section 734.9(g)</a>. This FDPR is applicable when there is knowledge that the foreign-produced item is a direct product of any technology or software on the CCL (or produced by a plant or major component of a plant that is itself a direct product of such U.S. technologies and software) and “will be incorporated into or used in the ‘production’ or ‘development’ of any ‘part,’ ‘component’ or ‘equipment’ produced, purchased or ordered by an entity” designated as a footnote 3 entity&nbsp;on the BIS Entity List that is a party to the transaction.

III. License Requirements Relating to Belarus

The license requirements and restrictions on the use of license exceptions imposed on transactions involving Belarus largely mirror those imposed on Russia. For a summary of the license requirements and availability of license exceptions relating to Belarus, please see the above discussion of controls applicable to Russia.

IV. License Requirements Relating to the Covered Regions of Ukraine

Export license requirements applicable to Crimea have been in place for several years&nbsp;<a href="https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-746#746.6" target="_blank" rel="noreferrer noopener">(15 C.F.R. 746.6)</a>, as have related sanctions.&nbsp;<a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2022/02/21/executive-order-on-blocking-property-of-certain-persons-and-prohibiting-certain-transactions-with-respect-to-continued-russian-efforts-to-undermine-the-sovereignty-and-territorial-integrity-of-ukraine/" target="_blank" rel="noreferrer noopener">Effective February 21, 2022</a>, these requirements were extended to cover all items subject to the EAR (other than food and medicine designated as EAR99 and certain software and Internet-based personal communications) destined for the DNR and LNR regions of Ukraine. That same day, the President issued an&nbsp;<a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2022/02/21/executive-order-on-blocking-property-of-certain-persons-and-prohibiting-certain-transactions-with-respect-to-continued-russian-efforts-to-undermine-the-sovereignty-and-territorial-integrity-of-ukraine/" target="_blank" rel="noreferrer noopener">executive order</a>&nbsp;prohibiting U.S. persons from engaging in new investment in the DNR and LNR regions or engaging in trade, including export, import, reexport, sale or supply of goods, services or technology, with the DNR and LNR regions. U.S. persons, wherever located, are prohibited from approving, financing, facilitating, or guaranteeing transactions by foreign persons that cannot be performed by U.S. persons because of the executive order. Licenses from both BIS and OFAC may be required for any export, reexport or transfer (in country) involving Crimea, the DNR, or the LNR regions.

V. DDTC License Requirements

All defense articles and services on the USML have long required licenses for export to Belarus, and applications for such licenses remain subject to a policy of denial. Since March 2021, all defense articles and services on the USML have been subject to license requirements for export to Russia, and applications for such licenses are subject to a policy of denial, except for license applications related to government space cooperation, which will be considered on a case-by-case basis.&nbsp;

Most license exemptions are not available for exports to Russia, although certain exemptions may be used in support of government space cooperation or when the U.S. government is the recipient.

VI. The BIS Entity List, Denied Persons List and Unverified List

Since March 2022, BIS has added over 1,050 Russian, Belarusian and other third-country entities and individuals to its Entity List, and more than 500 of those have been designated as MEUs carrying a footnote 3 designation on the Entity List. BIS has been continually adding Russian and non-Russian entities to the Entity List for their support of Russia’s invasion and ongoing aggression against Ukraine. Effective August 27, 2024, BIS is designating entities outside of Russia and Belarus as footnote 3 entities on the Entity List for procuring and/or diverting items to Russia and Belarus illicit end uses. These listings showcase the agency’s persistent effort to prevent the Russian military and industrial complex from obtaining vital items necessary to maintain Russia’s war efforts in Ukraine.

BIS has also added Russian individuals and related entities to its Denied Persons List, subjecting them to a denial order or temporary denial order (TDO) for violating the EAR or to prevent the occurrence of an imminent violation of the EAR. Effective <a href="https://www.bis.gov/press-release/department-commerce-announces-additional-export-restrictions-counter-russian">June 12, 2024</a>, BIS issued two TDOs against two Russian procurement networks for facilitating a large amount of aircraft parts to Russia. Many of the Russian airlines and associated foreign affiliates predominately operating out of Central Asia and Turkey remain subject to temporary denial orders issued in the early months of the conflict in Ukraine as a result of successive TDO renewals. The denial of export privileges is one of the most severe enforcement tools to address violations of U.S. export controls and to prevent imminent violations of the EAR, and it can be imposed even when there is no criminal component to the violation. Since BIS revised its TDO renewal policy in&nbsp;<a href="https://www.govinfo.gov/content/pkg/FR-2023-08-30/pdf/2023-18772.pdf" target="_blank" rel="noreferrer noopener">August 2023</a>&nbsp;to the one-year standard, it is now a common occurrence that TDOs are renewed for a one-year period rather than the prior 180-day maximum.

Also of importance is the BIS Unverified List (UVL), which is composed of foreign parties involved in any transaction involving an item subject to the EAR where BIS has been unable to verify the bona fides of a transaction through a post-shipment verification or pre-license check. Under BIS policy, if 60 days pass following addition to its UVL and BIS still has not been able to successfully complete an end-use check, BIS may begin the process to have the foreign party moved to its Entity List. Given this policy, adopted in October 2022, U.S. exporters and foreign reexporters should pay particular attention to parties listed on the BIS UVL due to the high risk that parties on this list may be added to the BIS Entity List.

The October 2022 policy and related&nbsp;Federal Register&nbsp;notice may be found&nbsp;<a href="https://www.bis.doc.gov/index.php/documents/policy-guidance/3156-axelrod-prevention-of-end-use-checks-policy-memo-10-7-22/file" target="_blank" rel="noreferrer noopener">here</a>&nbsp;and&nbsp;<a href="https://www.federalregister.gov/documents/2022/12/16/2022-27149/revisions-to-the-unverified-list-and-the-entity-list" target="_blank" rel="noreferrer noopener">here</a>, respectively. A BIS license (or, in the case of an entity on the BIS UVL, a BIS UVL statement as required by Section 744.15(b) of the EAR) must be obtained if a transaction involves an item subject to the EAR and a listed entity. Use of license exceptions is not permitted. Generally, license applications will be approved only on an exceptional basis for transactions involving a listed person.

VII. Diversion Risk: Red Flags for Identifying Transactions of Concern&nbsp;

As discussed in Section II above, BIS, in coordination with the United Kingdom, European Union and Japan, has identified a list of “common high-priority items” that are being actively sought by Russia for its weapons program. Attempts to acquire these items often involve a series of front companies or other illicit schemes to covertly acquire them for Russia. BIS and its sister agencies have issued several advisories and guidance documents highlighting red flags that companies should look for in any transaction, particularly with respect to one involving any of the high-priority HS codes. The red flag guidance includes:&nbsp;

22 Red Flags in&nbsp;<a href="https://www.fincen.gov/sites/default/files/2022-06/FinCEN%20and%20Bis%20Joint%20Alert%20FINAL.pdf" target="_blank" rel="noreferrer noopener">June 2022 BIS-FinCEN Alert</a>;

12 additional Red Flags in&nbsp;<a href="https://www.bis.doc.gov/index.php/documents/enforcement/3278-bis-guidance-to-prevent-evasion-of-prioritized-harmonized-system-codes-to-russia-final/file" target="_blank" rel="noreferrer noopener">May 2023 BIS Alert</a>;

13 Red Flags in the&nbsp;<a href="https://www.bis.doc.gov/index.php/component/docman/?task=doc_download&amp;gid=3240" target="_blank" rel="noreferrer noopener">March 2, 2023 Tri Seal Notice</a>;

9 Red Flags in the&nbsp;<a href="https://www.bis.doc.gov/index.php/component/docman/?task=doc_download&amp;gid=3272" target="_blank" rel="noreferrer noopener">May 19, 2023 BIS Guidance on HS Codes of Priority</a>; and

12 Red Flags from&nbsp;<a href="https://www.bis.doc.gov/index.php/all-articles/23-compliance-a-training/51-red-flag-indicators" target="_blank" rel="noreferrer noopener">BIS KYC webpage</a>&nbsp;(more general; not Russia focused).

A small sampling of common red flags are:

Freight forwarding firm is listed as the product’s final destination;

Payments from entities located in third countries not otherwise involved with the transactions;

Removing government/military affiliation from website;&nbsp;

Consolidating shipments/shippers in the United States;

Transactions associated with atypical shipping routes for a product or destination;

The buyer never ordered high-priority items prior to February 24, 2022;

Declining customary installation, training or maintenance;

IP addresses that do not correspond to a customer’s reported location;&nbsp;

Use of personal emails instead of company emails.

VIII. Keys to Compliance

Determine the export control jurisdiction and USML category or ECCN of any technology, commodity or software destined, directly or indirectly, for Russia or Belarus, and determine license requirements and availability.

If the item is not on the USML or the EAR’s CCL, verify its Schedule B number, Schedule B description, HTS code, value threshold and HTS description, and then review the relevant EAR supplements.

Conduct sanctioned person screening at the time of the order and prior to the export, reexport or transfer (in country) to verify that no party to a transaction is covered by any applicable sanctioned persons list, including BIS’s UVL, Denied Persons List or Entity List, and OFAC’s List of Specially Designated Nationals and Blocked Persons and conduct robust Know Your Customer Diligence.

Be vigilant against efforts by persons attempting to evade U.S. export controls; look for and address red flags.

Please do not hesitate to reach out to any member of our&nbsp;<a href="https://www.bakerlaw.com/International-Trade-National-Security" target="_blank" rel="noreferrer noopener">International Trade and National Security team</a>&nbsp;or your BakerHostetler relationship partner if you have questions. BakerHostetler continues to closely monitor this rapidly changing situation.

This alert is a tool to help businesses, both U.S. and foreign, identify whether their business with Russia, Belarus or Ukraine may now be subject to U.S. export license requirements or involve newly sanctioned or blocked persons. This alert cannot be relied on as legal advice and provides only a high-level summary of the export controls applicable to Russia, Belarus and the covered regions of Ukraine. The export controls and related sanctions are complex, detailed and continuing to develop, and legal counsel should be sought for guidance on specific transactions.

BakerHostetler publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act on the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely on advertisements. Before you decide, ask us to send you written information about our qualifications and experience.

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