Expanding Russia Sanctions and Export Restrictions Present Additional Risks for US Businesses
Recent actions by both the Treasury Department’s Office of Foreign Assets Control (OFAC) and the Commerce Department’s Bureau of Industry and Security (BIS) continue to expand the scope of products and services covered by U.S. sanctions and export restrictions against Russia. The result is a widening net of risk for U.S. businesses that will require increased vigilance and compliance efforts.
Washington D.C. (May 12, 2022) - Recent actions by both the Treasury Department’s Office of Foreign Assets Control (OFAC) and the Commerce Department’s Bureau of Industry and Security (BIS) continue to expand the scope of products and services covered by U.S. sanctions and export restrictions against Russia. The result is a widening net of risk for U.S. businesses that will require increased vigilance and compliance efforts.
Restrictions on Providing Accounting, Trust and Corporate Formation, and Management Consulting Services to Russian Persons
Recent OFAC “determinations” expand the reach of U.S. sanctions imposed against Russia to include accounting and management consulting services. On May 8, 2022, OFAC issued a determination on the scope of section 1(a)(ii) of Executive Order 14071 of April 6, 2022, which prohibited new investment and provision of certain services to Russia, (14071 Determination). The May 8 determination prohibits U.S. persons from providing “accounting, trust and corporate formation, and management consulting services to any person in the Russian Federation” after June 7, 2022.
In a second determination also released on May 8, 2022, OFAC took steps to implement Executive Order 14024 of April 15, 2021, which blocked transfer of or other dealings with certain property in the U.S., in response to Russia’s efforts to undermine the free and fair democratic elections and democratic institutions of the United States (14024 Determination). The 14024 Determination directed that relevant provisions of Executive Order 14024 “shall apply to the accounting, trust and corporate formation services, and management consulting sectors of the Russian Federation economy.” The definitions of the services prohibited in the two determinations are similar, but not identical, and require close attention.
Further, unlike the 14071 Determination, the 14024 Determination does not contain a list of exceptions. Additionally, the restrictions related to the 14024 Determination are effective immediately (May 8, 2022). Therefore, given the intertwined nature of the two Determinations, the lack of clear definitional distinctions, and the breadth of the prohibitions, businesses should consider implementing the new directives immediately.
The ban on accounting, management, and trust and corporate formation services appears to be the first time U.S. sanctions laws targeted such industries and services. As such, there is little to no precedent, including prior enforcement actions, that can serve as helpful guardrails for those in the industry to analyze. And while the Determinations include a carve out for legal services, to ensure “due process” is available to Russians fighting legal battles in the U.S., this provision carries risk. Services provided by a lawyer or law firm could extend into the type of corporate and consulting services banned by the latest sanctions, and those in the legal industry should also be mindful of the risks posed by the new Determinations.
Expansion of Export Restrictions to Russian Industries
On May 9, 2022, BIS released a final rule imposing new export restrictions on U.S. goods to Russia, effective May 11, 2022. The final rule expands export controls on a wide range of items covered by Export Administration Regulations and includes restrictions on:
- Industrial machinery and engines;
- Machine tools;
- Certain off-highway vehicles;
- Hydraulic valves;
- Ventilation equipment; and
- Certain communication equipment.
The new BIS ruling encompasses goods that are broader than those that aid Russia’s military activity in Ukraine – the normal focus of export restrictions – and this new focus may present challenges for U.S. businesses. As such, any businesses or individuals involved in the sale of industrial equipment and goods should be aware of the heightened level of risk in transactions involving Russia. To view the updated list of EAR restrictions prior to BIS’ recent publication of its final rule, view pages 10 through 38 of this Commerce Department document. The full list of restrictions is maintained here.
Lewis Brisbois’s attorneys are advising clients on these increasingly complex and quickly-evolving issues, providing assistance on compliance and management of business and legal risks. For more information contact the authors of this alert. Visit our Ukraine Conflict Response Practice page for more alerts in this area.
David Michael Robbins, Associate
Sean P. Shecter, Partner
Jane C. Luxton, Managing Partner - Washington, D.C.