U.S. Further Expands the Extraterritorial Nature of Sanctions and Export Controls

On 12 June 2024, the Office of Foreign Assets Control of the United States Department of Treasury (OFAC) and the United States Department of State jointly issued a series of implementation determinations, interpretations, and expansions of sanctions lists, which have the effect of expanding the extraterritorial nature of sanctions and export controls targeting Russia.

The 12 June actions are not new regulations. Rather, they implement existing executive orders, regulations, and directives, by further expanding their reach to third countries and third parties, in an effort to remove the use of intermediaries to facilitate trade with Russia that the U.S. has sanctioned.

Clarity on Potential Secondary Sanctions on Non-U.S. Financial Institutions

On 22 December 2023, President Biden issued the “Executive Order on Taking Additional Steps With Respect to the Russian Federation’s Harmful Activities”, which amended prior executive orders to expressly allow the U.S. to impose secondary sanctions^[1] on non-U.S. financial institutions who facilitate transactions prohibited by the U.S. (e.g. semiconductors, machine tools, optical and navigation systems, turbine oil). A precondition for potential secondary sanctions is the requirement for the trade to be with the “technology, defense, and related material, 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”. In a new FAQ, OFAC determined “military-industrial base” to include all entities that have been sanctioned by OFAC, “as well as any person operating in the technology, defense and related materiel, construction, aerospace, and manufacturing sectors of the Russian Federation economy”. This FAQ interpretation provides certainty that sanctioned entities will always be covered under this executive order.  

The FAQ interpretation formed a part of a new sanctions advisory guidance issued by OFAC^[2], which highlighted the need for non-U.S. financial institutions to ensure compliance in order to avoid potential secondary sanctions.

Export Controls Enforcement under the Foreign Direct Product Rule

Although not contained in any official announcements or releases, various business reports quoted U.S. officials on the expansion of export controls enforcement to target third party re-sellers, in particular of semiconductors to Russian end users.^[3]

Through the “Implementation of Sanctions Against Russia Under the Export Administration Regulations” issued on 24 February 2022, the U.S. has applied extraterritorial restrictions on the flow of items subject to the Export Administration Regulations (EAR) to designated entities and individuals under the “entity list”.^[4] Through the application of the EAR’s foreign direct product rule to “footnote 3” designated entities on the “entity list”, the U.S. applies its export control restrictions to third parties in third countries who incorporate U.S. items into the goods or services it transfers to such “footnote 3” designated entities. 

The Bureau of Industry and Security (BIS) of the U.S. Department of Commerce is responsible for enforcing U.S. export controls. If the reports are to be believed, BIS will increase its scrutiny of third party producers and resellers when applying the foreign direct product rule as to Russia. It should be noted that the BIS is currently actively enforcing the foreign direct product rule as to the PRC in connection with the sale and production of advanced semiconductors and semiconductor equipment. This includes applying blanket controls on “D:5 countries” (mainly in the Middle East) in addition to the PRC, with the concern being that these jurisdictions are being used as intermediaries for the transfer of restricted items to PRC end users.