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Gazprom, Lukoil, Other Russian Energy and Defense Companies Targeted in Latest Round of U.S. Export Controls and Ukraine-related Sanctions

Last Friday, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) dramatically increased targeted economic sanctions and export controls against several Russian energy and defense companies, including Gazprom OAO, the largest gas extraction company in the world, and privately-owned petroleum company, Lukoil.  The BIS action is in addition to the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) issuing new Ukraine-related economic sanctions against Russia’s financial services, energy, and defense sectors, also announced on Friday.

BIS added the following major energy sector companies to the Entity List:

  • Gazprom OAO; Gazpromneft; Lukoil, OAO; Rosneft; and Surgutneftegas.

BIS maintains the Entity List to impose a specific license requirement for the export, reexport or foreign transfer of items subject to the Export Administration Regulations (EAR) on those parties – businesses, research institutions, government and private organizations, and individuals – named on the list.  These license requirements are in addition to any other requirements and restrictions imposed elsewhere in the EAR.  Often, the stated License Review Policy for parties on the Entity List is “Presumption of denial,” although certain parties have a stated License Review Policy of determining a license application on a “Case-by-case” basis.  Currently, the License Review Policy for nearly every Russian party on the Entity List is Presumption of Denial.  This License Review Policy applies to the newly added parties.

The five (5) Russian energy sector companies added to the Entity List are subject to a license requirement when the exporter, reexporter or transferor knows those items will be used directly or indirectly in:

  • exploration for, or production from, deepwater, Arctic offshore, or shale projects in Russia. License applications for such transactions will be reviewed with a presumption of denial when for use directly or indirectly for exploration or production from deepwater, Arctic offshore, or shale projects in Russia that have the potential to produce oil.

Notably, it appears that licenses for natural gas projects will be reviewed on a case-by-case basis; therefore, exporters, reexporters, and parties seeking in-country transfers to the listed companies should be sure to obtain specific end-use information and document the stated end-use for potential licensing application purposes.   It should be further noted that this latest action is in addition to and does not replace export controls imposed by BIS on August 1 that designated certain items used in used in Russia’s energy sector, including exploration and production from deepwater, Artic offshore, and shale projects.  In its 1 August rule, BIS designated those items by specific Schedule B (export classification) numbers and other by the Export Commodity Control Number (ECCN).  A prior post explains those controls, http://bit.ly/1y4s9JN.

The Russian defense sector parties added to the Entity List include:

  • Almaz-Antey Air Defense Concern Main System Design Bureau, JSC; Tikhomirov Scientific Research Institute of Instrument Design; Mytishchinski Mashinostroitelny Zavod, OAO; Kalinin Machine Plant, JSC; and Dolgoprudny Research Production Enterprise.

Similar export controls as those imposed on the energy sector companies apply to the defense sector companies, with a License Review Policy of “Presumption of Denial.”

BIS and OFAC action continue to be largely coordinated.  OFAC updated the Sectoral Sanctions Identifications (SSI) List by adding Russian energy sector and financial services companies (and other names by which the companies operate or are known), AK Transneft OAO, Lukoil OAO, OJSC Gazprom Neft, Gazprom OAO, Rostec, Sberbank of Russia, Surgutneftgas, Bank of Moscow, as well as other financial services companies.  Additionally, OFAC added each of the defense sector parties to the SSI List that BIS placed on the Entity List.

For assistance with understanding and complying with the latest BIS action, Ukraine-related and other economic sanctions laws, regulations, and Executive Orders, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.269.5138 (mobile). 

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U.S. Imposes New Export Controls on Russia’s Energy Sector and Adds Russian Shipbuilder to Entity List

On 1 August, Under Secretary of Commerce for Industry and Security, Eric L. Hirschhorn, signed a rule amending the Export Administration Regulations (EAR) to “impose additional sanctions implementing U.S. policy toward Russia,” and address the ongoing developments in Ukraine. Under the rule, the Bureau of Industry and Security (BIS) imposes export controls on items used in Russia’s energy sector, including exploration and production from deepwater, Artic offshore, and shale projects. The rule also adds state-owned shipbuilder, United Shipbuilding Corporation, to the Entity List. On 31 July, the Office of Foreign Assets Control (OFAC) added United Shipbuilding Corporation, to the Specially Designated Nationals and Blocked Persons (SDN) List.

The new rule adds 15 CFR § 746.5 to the EAR, “Russian Industry Sector Sanctions,” and imposes export, reexport, and transfer controls on items classified under the following Export Control Commodity Numbers (ECCNs): 0A998 (Oil/gas exploration equipment, software, and data ), 1C992 (Commercial charges and devices containing energetic materials ), 3A229 (Firing sets and equivalent high-current generators), 3A231 (Neutron generator systems), 3A232 (Detonators and multipoint initiation systems), 6A991 (Marine or terrestrial acoustic equipment ), 8A992 (Vessels, marine systems or equipment, “specially designed” “parts” and “components” therefor), and 8D999 (“Software” “specially designed” for operation of unmanned submersible vehicles used in oil/gas industry). These new controls apply “when the exporter, reexporter or transferor knows or is informed that the items will be used directly or indirectly in Russia’s energy sector” for exploration and production from deepwater (more than 500 feet depth), Artic offshore, and shale oil/gas projects. The rule goes on to identify, without limitation, examples of items that are specifically covered by the new Russian Industry Sector Sanctions, as follows: drilling rigs, parts for horizontal drilling, drilling and completion equipment, subsea processing equipment, Artic-capable marine equipment, wireline and down hole motors and equipment, drill pipe and casing, software for hydraulic fracturing (“fracking”), high pressure pumps, seismic acquisition equipment, remotely operated vehicles, compressors, expanders, valves, and risers. The rule makes clear that “[n]o license exceptions may overcome the licensing requirements under new § 746.5,” except for license exception GOV, and that the license review policy is a presumption of denial.

The rule also adds Supplement No. 2 to Part 746, Russian Industry Sector Sanctions List. This new supplement includes the ECCNs referenced above, but also includes more than 50 “Schedule B” numbers. Schedule B numbers are a commodity classification number used for exports, administered by the U.S. Census Bureau and used for reporting foreign trade data. The following main Schedule B numbers and items are listed: 7304, 7305, and 7306 (line pipe, drill pipe, casing), 8207 (rock drilling or earth boring tools and bits), 8413 (oil well pumps and elevators), 8421 (industrial gas cleaning and separation equipment), 8430 (offshore drilling and production platforms and boring/sinking machinery), 8431 (oil/gas field machinery parts), 8479 (oil/gas field wire line and downhole equipment), 8705 (mobile drilling derricks), and 8905 (floating or submersible drilling or production platforms and floating docks).

For U.S. companies and foreign companies that are subject to U.S. export controls and the jurisdiction of BIS, these new Russian energy sector sanctions pose new compliance challenges and risks. As with any economic sanctions and export controls, but particularly with the progressing multilateral Ukraine-related sanctions, companies are urged to exercise enhanced due diligence in their compliance efforts. U.S. and foreign companies that currently export, reexport, or transfer commodities, technology, and software covered by the ECCNs and Schedule B, should be alerted to this new rule and its compliance requirements. U.S. companies and foreign companies that are subject to U.S. export controls that might only sell or transfer such items domestically should also undertake additional due diligence and not “self-blind” on determining whether Russia is the ultimate destination of the items.

The new rule can be found at this link, http://1.usa.gov/1okGBSH.

For assistance with understanding and complying with this new BIS rule, Ukraine-related and other economic sanctions laws, regulations, and Executive Orders, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.269.5138 (mobile).

Yormick is Presenting on International Trade Issues this Month

International business and trade lawyer, Jon P. Yormick, will be giving 2 presentations this month on international trade issues. On June 10, at the National Association of Credit Management 118th Credit Congress & Expo in Orlando, he will present Navigating Economic Sanctions…Successfully.  Yormick’s presentation will be part of an Advanced level session, “International Export Compliance and Fraud Detection.”  Co-panelists include the Director of International Trade Compliance for DHL Express Americas Region, a Partner from Bingham Greenebaum Doll LLP, and the Senior Investigator at ConSec Investigations.

On June 19, at the 2014 Upstate New York Trade Conference & Expo in Rochester, Yormick will present on the “deemed export” rule, economic sanctions, FCPA/Antibribery, and antiboycott regulations as part of the Conference’s Export Controls (EAR/ITAR) Track.  He will join the U.S. Trade Compliance Manager from Idex Optics & Photonics to discuss these and other export control topics during the session, “Advanced Exporting Issues aka ‘A day in the Life of a Professional Exporter.’”  Yormick will then join with other panelists for the “ITAR & EAR Roundtable: Overview of Export Control Reform and Q&A/Forum.”  For more information and registration, visit http://bit.ly/LeKSuT.

Yormick is an experienced international business and trade attorney practicing in the areas Export Controls & Economic Sanctions, Customs & International Trade, and FCPA/Antibribery. He represents U.S. and foreign clients before the U.S. Department of Commerce, Bureau of Industry and Security (BIS), the U.S. Customs and Border Protection (CBP), the U.S. Department of Homeland Security, Immigration and Customs Enforcement (ICE), the U.S. Department of State, Directorate of Defense Trade Controls (DDTC), the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC), and the U.S. International Trade Commission (ITC) on import and export laws and regulations, including the Export Administration Regulations (EAR), and the International Traffic in Arms Regulations (ITAR).  His clients include those in the advanced manufacturing, advanced materials, aerospace and defense, distribution, electronics, energy, medical device, oil/gas, pharmaceuticals, professional services, steel, textiles and apparel, and transportation/logistics sectors.

In 2014, Mr. Yormick was appointed by the Secretary of the U.S. Department of Commerce as a member of the Northern Ohio District Export Council, and he was selected to serve on the LL.M. Advisory Board of Case Western Reserve University School of Law. He is also a member of the U.S. Small Business Administration International Trade Task Force – Buffalo District Office.  Since 2010, he has served as the Coordinator in Buffalo and Cleveland of the Export Legal Assistance Network, a nationwide network of attorney volunteers organized by the U.S. Department of Commerce, the SBA, and the Federal Bar Association to provide free initial consultations to identify key legal issues for exporting companies.

Lost in the Headlines about FCPA Violations, one Northeast Ohio Company Settles an Export Control Civil Penalty Case

On October 22, the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) announced they had reached an agreement with Diebold, Inc. to settle allegations that the company violated the Foreign Corrupt Practices Act (FCPA). The ATM manufacturer, headquartered in North Canton, Ohio, settled with the DOJ and SEC by agreeing to pay nearly $50 million to resolve allegations that it violated the FCPA by bribing government officials in China and Indonesia and falsifying records in Russia in order to obtain and retain contracts to provide ATMs to state-owned and private banks in those countries. According to the DOJ press release, the company made payments and provided gifts and non-business travel to bank employees, recording leisure travel for bank employees as “training.” The DOJ acknowledged that Diebold cooperated in the investigation, including making a voluntary disclosure regarding the FCPA violations.

A few weeks later, in mid-November Cleveland-based Park-Ohio Holdings, Inc. stated in its quarterly SEC filing that it received a subpoena from the SEC in August in connection with a third-party and that the DOJ was conducting a criminal investigation of the third-party. According to the company’s SEC filing, the third-party paid a foreign tax official on behalf of the company in 2007 and that the activity “implicates” the FCPA. The country where the payment was made was not identified.

In the middle of those reports, on October 25, the U.S. Department of Commerce, Bureau of Industry and Security (BIS), released a settlement agreement and order relating to GrafTech International Holdings, Inc., with global headquarters in the Cleveland suburb of Parma. The company settled 12 proposed charges that it exported without required licenses, agreeing to pay $300,000.00 and complete an external audit of its export controls compliance program and those of three overseas operations. While the case did not result in eye-catching multi-million dollar penalties, it is noteworthy nonetheless.

BIS alleged that on four occasions between 2007 and 2009, GrafTech violated the export control regulations when it exported CGW grade graphite to China without an export license. The graphite was classified under ECCN 1C107.a and controlled for missile technology reasons. The shipments had a value of approximately $276,000.00. BIS also alleged that on eight occasions between 2007 and 2010, GrafTech exported CGW grade graphite to India, without required export licenses. The value of those shipments totaled approximately $248,000.00. The settlement agreement stated that GrafTech made a voluntary self-disclosure regarding the violations. Notably, in April 2010, BIS, Office of Technology Evaluation, issued Critical Technology Assessment: Fine Grain, High Density Graphite which addressed U.S. export controls, among other key topics. That report can be found here.

As mentioned, in addition to the $300,000.00 penalty, GrafTech agreed to complete an external audit export controls compliance program and the compliance programs’ three subsidiaries, located in France, Italy, and South Africa. The settlement agreement and BIS order did not detail the involvement of the subsidiaries in the violations, if any, but it can be presumed that the company’s export controls compliance program at each location were a concern to BIS.

According to the terms of settlement, GrafTech must hire a third-party consultant with expertise in U.S. export control law to conduct the audit with respect to all exports and re-exports of items on the Commerce Control List (CCL). The audit must cover a twelve-month period preceding the date of the order and must be delivered to BIS within eighteen (18) months. The order also requires the company to identify actual or potential violations by any of the four entities being audited, including the directive that GrafTech “promptly provide copies of the pertinent air waybills and other export control documents and supporting documentation” to BIS.

Why there is an apparent recent rash of enforcement actions involving Northeast Ohio companies doing business globally is a mystery. Certainly, these revelations should be a “wake-up call” for companies in the region that conduct business globally and have global operations. More broadly, of course, these reports emphasize the need for all U.S. companies to re-double their FCPA and export control compliance efforts in order to avoid costly civil and criminal penalties, additional enforcement expenses, and the reputational harm that violations can cause.

For assistance with understanding and complying with the Export Administration Regulations (EAR) or other export controls and economic sanctions, as well as representation before BIS in investigations, civil penalty, and voluntary self-disclosure matters, please contact Jon P. Yormick, Esq., jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.

Upcoming Export Control Reform Presentations in Cleveland and Rochester

This month, international business and trade attorney, Jon Yormick, will discuss Export Control Reform (ECR) in Cleveland and Rochester.

On October 10, Jon will speak at the monthly luncheon meeting of the Cleveland Foreign Credit Group, the group’s 300th meeting.  The Cleveland Foreign Credit Group is made up of international credit managers from leading publicly-traded companies in Northeast Ohio, including Babcock & Wilcox, Lincoln Electric, Lubrizol, Materion, OMG Americas, Parker-Hannifin, and several others. In addition, regional and international banks are well represented in the membership, including Fifth Third Bank, HSBC, KeyBank, and PNC Bank.  Half the member companies have annual turnover of at least $500 million.  At each meeting, the companies have a presentation on a topic relating to international trade or credit, followed by a discussion of payment terms and experiences regarding customers in countries around the world.  In 2007, Jon was recognized as the group’s Member of the Year.

Jon’s presentation on Preparing for Compliance and Enforcement Under Export Control Reform, will focus on the impact of ECR on a company’s sales opportunities and how international credit professionals play a key role in a company’s export compliance program.

One week later, on October 17, in Rochester, New York, Jon will participate on a panel at an ITAR & EAR Expert Roundtable Lunch presented by the Greater Rochester Enterprise, International Business Council.  This sold-out event is the second time this year that the panel of experts will gather at the GRE to answer questions and discuss ECR with area companies.  Joining Jon on the expert panel be export compliance leaders from Harris Corporation, Mohawk Global Trade Advisors, Qioptiq Defense, Inc., Redcom Laboratories, Inc., and Spectracom Corp.