Insights
The U.S. Announces New Sanctions and Export Controls on Russia
Following Alexei Navalny’s Death and on the Second Anniversary of the Russia-Ukraine Conflict
Insight by: T. James Min II and Chelsea Ellis
February 23, 2024
On February 23, 2024, the Office of Foreign Assets Control (“OFAC”), U.S. Department of the Treasury, imposed new sanctions on Russia targeting nearly 300 individuals and entities on the SDN list (now totaling over 2,000) and the Bureau of Industry and Security, U.S. Department of Commerce, designated additional 93 entities to the Entity List (which now include over 900 Russia related entities). While sanctions on Russia have been ongoing in some form since 2014, these new designations are symbolically significant in terms of its timing: second anniversary of the Ukraine-Russia military conflict and the recent death of Alexey Navalny. These new U.S. measures also coincide with the U.K. and the EU who also announced new measures this week.
Given that sanctions on Russia are already quite expansive, what is the significance of these new designations of entities and persons who include many non-Russian companies and persons from China, Germany, Serbia, UAE, and elsewhere?
Focus on cutting off Russia’s military industrial complex from funds, technology services, and goods. Many of the new designations to target the Russian military industrial complex include companies in Russia and elsewhere involved with the UAV industry, electronics, software, metals manufacturing, power supply, IT, and logistics. The BIS Entity List designations also include designation of over 50 entities as Military End Users, which has very strict U.S. export control restrictions.
Focus on Russia’s manufacturing base. Many of the new designations include Russian and other companies in the additive manufacturing (3D printing); machine tools, lubricants and industrial chemicals, semiconductor and electronics, industrial automation, optics, navigational instruments, aerospace, etc.
Focus on limiting the Russian financial infrastructure. New measures include many regional banks that are not top banks in Russia as well as venture capital and investment funds. However, OFAC did issue several new General Licenses (General Licenses 88, 89, 90, and 91) authorizing transactions related to the divestment and winding-down of transactions involving certain blocked entities, including new Russian banks that were newly designated.
Focus on third country companies and persons who are working with targeted Russia sectors or entities. New OFAC sanctions designations include companies in China, Serbia, UAE, Kyrgyzstan, Iran, Germany, and Liechtenstein. New Entity List additions include eight companies in the People’s Republic of China, sixteen in Turkiye, four in the United Arab Emirates (UAE), two in the Kyrgyz Republic, and one each in India and South Korea who will now be cut off from U.S. origin goods, software and technologies.
Designation of additional vessels and their owners alleged to have violated the Russian oil price cap policy, although General Licenses related to these blocked parties were also issued.
What do all these new measures mean from a practical standpoint?
The new measures of adding hundreds of new SDNs and over 90 on the Entity List widens the preexisting restrictions on Russia but it did not create any new material change to the Russia sanctions or export controls regime. In fact, so many companies have de-risked from Russia that in many cases, these designations are symbolic in nature.
However, it does mean that U.S. persons and now more than ever, non-US companies, need to continue to conduct effective due diligence to ensure that they are not transacting with entities outside of Russia that may be owned at least 50% or more by sanctioned persons or entities (which by operation of law means they are also sanctioned).
Persons exporting goods and technology to third countries other than Russia need to have strong and robust export control compliance programs and measures to ensure that their goods and technologies will not be diverted to Russia for use in sanctioned sectors or by sanctioned entities.
Robust due diligence, KYC, end use statements, etc. will continue to be important but there is no one single solution that will be fail safe.
Even if you are not a U.S. person or business, now it is clear that non-US persons and entities are exposed to secondary sanctions if transacting with targeted Russian sectors and entities.
The highest risk area appears to those related to Russia’s military-industrial base.
OFAC has also published in the new SDN designations that many of the new SDNs are explicitly subject to U.S. secondary sanctions.
Non-U.S. companies need to adopt compliance measures that will protect it from U.S. secondary sanctions risks as well as not violating U.S. export control laws. This means that non-US companies need to incorporate U.S. standard compliance measures when it comes to Russia sanctions, export controls, and the oil price cap policy.
While these new designations do not materially or substantively alter the preexisting Russia sanctions and export controls regimes it does widen the net of persons and entities that are restricted for U.S. persons and now even for non-US persons. Companies will need to continue to strengthen their due diligence, KYC and compliance measures to mitigate their risks in international business so that their products and services do not unintentionally end up in the sanctions targeted sectors of the Russian economy as well.
Law360 have covered this alert. Read the Law360 article here.
The U.S. Broadens and Clarifies Sanctions Regulations for Humanitarian Work in North Korea
Insight by: T. James Min II
February 16, 2024
On February 15, 2024, the Office of Foreign Assets Control (“OFAC”), U.S. Department of the Treasury published revisions to the North Korea Sanctions Regulations (“NKSR”, 31 CFR Part 510), which were long overdue to assist humanitarian organizations, non-governmental organizations (“NGOs”) and news media to utilize the appropriate sanctions exemptions. Before North Korea closed its borders in response to the Covid-19 pandemic, many NGO’s expressed frustration at the regulatory ambiguity as well as the administrative cost of complying with the NKSR.
The new revisions, in particular, to 31 CFR §. 510.512, provide greater clarity and maneuverability for humanitarian groups and other NGOs. So, what are the major changes to NKSR from the previous version? Below are the major highlights:
Unlike the previous 31 CFR 510.512 which only authorized the export of services by the NGOs, the new section authorizes “all transactions…that are ordinarily incident and necessary to the activities” listed in the NGO section of the NKSR.
The NGO activities authorized under the NKSR were enlarged to now include educational activities at the primary and secondary schools as long as they do not involve math, science, technology, engineering, and computer programming. Thus, arguably, certain medical, business or English training may be authorized.
The NGO activities authorized under the NKSR now includes “activities to support disarmament, demobilization, and reintegration (DDR) programs and peacebuilding, conflict prevention, and conflict resolution programs.” These are what many know as Track 2 engagement between North Koreans and U.S. scholars and policy analysts. One no longer needs to get a license from OFAC for such programs as long as the reporting requirements discussed later and any other legal requirements are fulfilled.
Previously, any partnership or partnership agreement with the Government of North Korea, the Korean Workers Party or instrumentalities thereof required NGOs to obtain a specific license from OFAC. After years of complaints by the NGO community, it appears OFAC has narrowed this requirement by only prohibiting partnerships with any military, intelligence or law enforcement entities, although partnership with such entities is also authorized to the extent necessary to export or import items to or from North Korea that are licensed or authorized under the NKSR or EAR. So now, partnership with, for example, the Ministry of Public Health would not require an OFAC license to dispense medical aid.
Another significant change is that unlike the previous NKSR, U.S. NGOs can procure beyond just food and medicine in third countries to export to North Korea. It now permits NGOs to procure agricultural commodities, medicine, medical devices and spare parts that would be classifiable as EAR99 (in other words, not dual-use goods) and not a luxury good. In the past only food and medicine could be purchased in third countries and sent to North Korea without an OFAC license, but now the categories are broader. Unlike the past NKSR, OFAC also defined agricultural commodities, medicine, medical devices and spare parts in the NKSR.
While NKSR is broader and clearer in its authorizations, it does add a new reporting mechanism that shifts some regulatory oversight to the U.S. State Department. Any NGO relying on the NGO regulatory authorizations must submit a report to the State Department at least 30 days prior to the activity by emailing a copy of the UN Security Council (“UNSC”) 1718 Committee exemption or why the activity does not fall under the UNSC sanctions restrictions. If the UN exemption is pending or is not needed, additional information must be provided to the State Department. The State Department will have 2 weeks to notify a NGO that 31 CFR 510.512(a) authorization for NGOs does not apply and thus cannot proceed with the activity.
Lastly, the new NKSR adds a general license for journalistic activities which exist in other U.S. sanctions programs such as for Cuba, Syria, or Russia.
With these welcomed changes, what are the key takeaways for NGOs and others active with North Korea?
NGOs can now procure from a broader list of non-US origin commodities in third countries that fall within the definition of agricultural commodities, medicine, medical devices and spare parts to be shipped to North Korea without needing an OFAC license. However, NGOs will need to ensure that the items fall within those definitions and would be classifiable as EAR99 if U.S. origin. Beyond those commodities, an OFAC license would still be required. Furthermore, just because OFAC exempts them does not mean that you do not have to obtain the UNSC 1718 Committee Humanitarian Exemption for items such as machinery that may also be a medical device subject to UNSC sanctions or a water drilling machine made of steel.
NGOs no longer need an OFAC license to partner with the Government of North Korea or the Korean Workers Party to conduct humanitarian activities unless they are part of the military, intelligence or law enforcement entities. Even with those entities, partnering with them only for exporting or importing items that are authorized by the regulations or licenses do not require an OFAC license. This still avoids OFAC providing a regulatory definition of a “partnership” in the context of NKSR, but practically reduces the need for such a definition by the NGOs.
Generally, NGOs also no longer need an OFAC license to hold Track 2 meetings with North Koreans on authorized topics such as DDR as long as other conditions are met, such as reporting to the State Department at least 30 days prior.
NKSR exemption for NGOs now authorizes more than just the export of services, but includes all transactions ordinarily incident and necessary to the authorized NGO activities. This presumably could include transacting with Air Koryo which is a SDN to get to Pyongyang, which was not clear in the past.
Luxury goods ban and the need to obtain BIS licenses for U.S. origin goods (other than for food and medicine) still apply.
While the new regulatory revisions appear to lock in development projects as authorized (and not just for basic human needs), it is unclear what statutory authority the State Department has in interpreting OFAC regulations as it relates to whether an NGO’s activity qualifies for the 31 CFR 510.512(b) list of activities in the reporting process. Hopefully, objections will occur only in blatant cases and it will confer with OFAC. Regardless, it raises interesting legal questions and gives the State Department a more prominent role in the sanctions compliance process.
The restriction on the use of U.S. passports to travel to North Korea and the need to obtain a Special Validated Passport (SVP) for humanitarian assistance activities still remain.
De-risking by financial institutions, logistics providers, and other service providers will probably not be impacted by these changes because commercial realities often override regulatory authorizations.
In conclusion, these changes to the NKSR are helpful for NGOs to be able to carry out their activities in or with North Korea. It provides more flexibility, greater clarity, and a broader scope of authorized activities. However, there is now more reporting requirements and submission of information to the U.S. Government for NGO activities. News agencies also will not need to obtain specific licenses from OFAC. Better late than never, but we will have to see the practical impact or benefits of these changes given North Korea’s pivot away from the U.S. humanitarian community in recent years and with its continued border restrictions.
This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with LMD Trade Law PLLC or its affiliates.