Trade Compliance Flash: Biden Administration Expands Import Prohibitions and Authorizes Secondary Sanctions Targeting Russia's Military-Industrial Base
On December 22, 2023, President Biden issued Executive Order (E.O.) 14114, "Taking Additional Steps With Respect to the Russian Federation's Harmful Activities," which amends E.O. 14024 and E.O. 14068. The new E.O. authorizes secondary sanctions to be imposed on foreign financial institutions (FFIs) engaging in certain dealings with or involving Russia and expands the scope of items subject to the import prohibition imposed by the U.S. with respect to Russia.
Amendments to E.O. 14024: Secondary Sanctions Authority
Among other things, E.O. 14114 amends E.O. 14024 by adding a new section 11(a), which authorizes secondary sanctions to be imposed on FFIs determined to have:
- Conducted or facilitated any significant transaction or transactions for or on behalf of any person designated pursuant to section 1(a)(i) of this order for operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy, or other such sectors as may be determined to support Russia's military-industrial base by the Secretary of the Treasury, in consultation with the Secretary of State; or
- Conducted or facilitated any significant transaction or transactions, or provided any service, involving Russia's military-industrial base, including the sale, supply, or transfer, directly or indirectly, to the Russian Federation of any item or class of items as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce.
On the same day as the new E.O. was issued, the Department of the Treasury's (Treasury) Office of Foreign Assets Control (OFAC) issued a determination listing the items that may trigger these secondary sanctions under E.O. 14024, as amended. The items fall into the following general categories:
- Machine tools and manufacturing equipment
- Manufacturing materials for semiconductors and related electronics
- Electronic test equipment
- Propellants, chemical precursors for propellants and explosives
- Lubricants and lubricant additives
- Advanced optical systems
- Navigation instruments
The secondary sanctions that may now be imposed on FFIs may either take the form of blocking sanctions or prohibitions on the opening of, or prohibitions or the imposition of strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the U.S. (CAPTA sanctions). OFAC simultaneously issued General License (GL) 84, a time-limited GL which authorizes certain wind down related activity with FFIs sanctioned under this authority.
To assist the financial sector in navigating these new sanctions, OFAC also published "Guidance for FFIs on OFAC's Sanctions Authorities Targeting Support to Russia's Military-Industrial Base" (FFI Guidance), which includes recommendations to FFIs for mitigating risk under E.O. 14024, as amended, and describes the kinds of activities that could expose an FFI to this new secondary sanctions risk.
Amendments to E.O. 14068: Expanded Import Prohibitions for Certain Russian Commodities
E.O. 14114 also amends E.O. 14068, which prohibits the importation into the U.S. of Russian-origin fish, seafood, and preparations therefor; alcoholic beverages; non-industrial diamonds; and gold, or any other products as may be determined by Treasury. E.O. 14068, as amended, expands the scope of items that are prohibited from being imported into the U.S. (including foreign trade zones (FTZs) located in the U.S.) to include both certain Russian-origin items and certain items that incorporate Russian-origin items or are shipped through Russia, but may not themselves qualify as "Russian-origin."
E.O. 14114 revises E.O. 14068 by:
- Stating that fish, seafood, and preparations thereof, and diamonds that were mined, extracted, produced, or manufactured wholly or in part in the Russian Federation, or harvested in waters under the jurisdiction of the Russian Federation or by Russia-flagged vessels, notwithstanding whether such products have been incorporated or substantially transformed into other products outside of the Russian Federation are also prohibited from importation into the U.S.
- Adding a new section which states that, following a determination by Treasury, products containing any of the products subject to the import ban may themselves become subject to an import prohibition.
- Adding a new section which states that, following a determination by Treasury, products subject to the import ban that "transit through or were exported from or by the Russian Federation" may also become subject to the import prohibition.
Concurrent with E.O. 14114, OFAC issued a determination, with immediate effect, that the import prohibitions apply to salmon, cod, pollock, or crab that was produced wholly or in part in the Russian Federation or harvested in waters under the jurisdiction of the Russian Federation or by Russia-flagged vessels "notwithstanding whether such fish, seafood, and preparations thereof have been incorporated or substantially transformed into another product outside of the Russian Federation." In order to allow for wind down activities related to this amended seafood import prohibition, OFAC also issued GL 83, which authorizes, through February 21, 2024, all transactions "that are ordinarily incident and necessary to the importation into the United States of seafood derivative products, pursuant to written contracts or written agreements entered into prior to December 22, 2023."
Notably, OFAC also issued FAQ 1154, stating that it intends to issue a determination "in the near term" that would apply the import prohibitions to "certain Russian diamonds processed in third countries" as well. This would be to purportedly align with the European Commission Council's 12th package of sanctions with respect to Russia, which includes a prohibition on the direct or indirect import, purchase, or transfer of diamonds from Russia, and includes Russian diamonds processed in third countries.
- The amendments under E.O. 14114 represent the first set of true secondary sanctions authorized under OFAC's Russian Harmful Foreign Activities Sanctions program and significantly raise the sanctions risk facing FFIs that continue to undertake certain types of dealings in Russia. While there have been no designations yet under this new authority, we can expect to see developments from OFAC in the near future, given the FFI Guidance and mitigation measures (in the form of GL 84) that OFAC has already issued.
- As noted in OFAC's FFI Guidance, to minimize vulnerability to these new secondary sanctions, FFIs continuing to operate in Russia should, among other things, consider reviewing their customer base, evaluate their degree of risk exposure given these new sanctions authorities, and implement measures to address these risks. This may involve collecting additional information or, in some cases, attestations from customers in certain sectors and implementing enhanced trade finance controls for particular items targeted by U.S. sanctions. This may also involve incorporating the military-related items listed in OFAC's determination into financial institution screening systems, or lookback investigations performed by financial institutions.
- U.S. financial intermediaries may also need to reexamine their relationships to FFIs known to support Russian economic activity to ensure they do not increase overall exposure to FFIs that could potentially become sanctioned.
- The new secondary sanctions authority under E.O. 14024 does not cover all the Russian economic sectors that have been targeted by E.O. 14024 to date. Thus, secondary sanctions are not explicitly authorized to be imposed on FFIs conducting significant transactions with an entity sanctioned for operating in any of the following Russian economic sectors: financial services, electronics, marine, accounting, trust and corporate formation services, management consulting, quantum computing, metals and mining, architecture, engineering, and transportation. Still, OFAC may subsequently target these sectors, or others, with secondary sanctions in the future.
- The import prohibitions imposed under E.O. 14068, as amended, while only applying currently to a limited set of items, may present significant challenges, particularly for both U.S. and non-U.S. persons involved in Russian commodity supply chains. Depending on the nature and complexity of a product's supply chain, it can be extremely difficult to determine or guarantee that products being imported into the U.S. do not contain prohibited Russian-origin products or inputs that may have been substantially transformed by intermediaries or suppliers in third countries.
If you have any questions about how these new sanctions may impact you or your business, please contact:
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