OFAC Tightens Russia Sanctions; BIS Cracks Down On Diversion

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Sheppard Mullin Richter & Hampton

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On June 12, 2024, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) announced new measures targeting Russia's financial infrastructure, including...
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On June 12, 2024, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) announced new measures targeting Russia's financial infrastructure, including:

  1. Expanding the scope of financial sanctions: Extending prohibitions to include information technology (IT) consultancy, design services, and IT support services for enterprise management and design/manufacturing software, effective September 12, 2024, under the authority of Executive Order 14071 (See Determination)
  2. General Licenses: New or renewed general licenses, authorizing certain transactions, as follows:
    • Transactions involving agricultural commodities and medical items (GL No. 6D)
    • Energy-related transactions (GL No. 8J)
    • Telecommunications and internet-based communications (GL No. 25D)
    • Wind-down of activities with certain entities and individuals designated on June 12, 2024 (see point 3 below) (GL No. 98)
    • Wind-down of certain contracts and activities with the Moscow Stock Exchange, the National Clearing Centre, and the National Settlement Depository of Russia (GL No. 99 and GL No. 100). All of the three institutions have broad implication in Russia corporate finance:
      • Moscow Exchange (MOEX): Operates Russia's largest public trading markets for equity, fixed income, derivatives, foreign exchange, and money market products. MOEX also encompasses Russia's central securities depository and the largest clearing service provider. Recent measures approved by Russian President Vladimir Putin aim to attract capital through MOEX from both domestic and foreign investors, particularly from countries deemed "friendly," facilitating investments in Russian sovereign debt and leading defense entities.
      • National Settlement Depository (NSD): A subsidiary of MOEX, the NSD acts as Russia's central securities depository and the paying agent for most Russian corporate debt. It provides bank account services, registration of over-the-counter trades, and liquidity management. The NSD was sanctioned by the European Union in June 2022.
      • National Clearing Centre (NCC): Another MOEX subsidiary, the NCC serves as the central counterparty and clearing agent for financial transactions. It is responsible for Ruble forex operations and is supervised by the Central Bank of the Russian Federation (CBR).
  3. SDN List Additions: Designating individuals and entities involved in Russia's financial and defense sectors, such as NS Leader Shipping Incorporated and the company known as Oil Tankers SCF MGMT FZCO.
  4. Secondary Sanctions Risk for Foreign Financial Institutions: The OFAC actions included issuing New FAQs and an updated compliance advisory for foreign financial institutions. Importantly, OFAC has updated its definition of Russia's military-industrial base to include all persons blocked pursuant to E.O. 14024. OFAC will now treat any foreign financial institution transacting with a sanctioned Russian entity as though it is working directly with Russia's military-industrial base (and therefore face secondary sanctions risks under E.O. 14114)
  5. Related BIS Action: Separately, the Bureau of Industry and Security (BIS) added five entities and eight addresses to the Entity List (See Final Rule). The designation on the Entity List targets Chinese companies that provide dual-use goods to Russia's defense industrial base. The export restrictions include a crackdown on diversion through shell companies.

As we assess the new announcements we will publish additional analysis of the new restrictions as soon as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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