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Commerce Department Expands End-User Controls Against Certain Specially Designated Nationals

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On March 21, 2024, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) published a final rule (the “Rule”) to expand the end-user controls of the Export Administration Regulations (“EAR”) to cover certain individuals and entities designated on the Specially Designated Nationals and Blocked Persons List (“SDN List”) maintained by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). This Rule will likely have the greatest impact on non-U.S. persons who deal in items subject to the EAR outside of the United States and will now need to ensure that they conduct SDN List screening as part of their customer due diligence protocols.

The Rule is designed to complement OFAC’s blocking sanctions applicable to persons designated on the SDN List.  Under Secretary of Commerce for Industry and Security Alan Estevez stated that this “action will further our already strong coordination with the Treasury Department to prevent foreign actors from obtaining the items and financing they seek to conduct activities that threaten U.S. national security and foreign policy interests.”

Under the Rule, persons blocked under any of fourteen OFAC sanctions programs will automatically be subject to stringent export, reexport, and in-country transfer controls under the EAR.  Thus, a BIS license is required for the export, reexport, or in-country transfer of any item subject to the EAR in which a person blocked under any of the fourteen OFAC sanctions programs is a party to the transaction as a purchaser, intermediate consignee, ultimate consignee, or end-user.

The fourteen OFAC sanctions programs and corresponding sanctions authorities are as follows: 

Related to Russia’s invasion of Ukraine:

  • Belarus Sanctions Regulations, 31 C.F.R. part 548; Executive Order 13405;
  • Executive Order 14038;
  • Russian Harmful Foreign Activities Sanctions Regulations, 31 C.F.R. part 587; Executive Order 14024;
  • Executive Order 13660;
  • Executive Order 13661;
  • Executive Order 13662; and
  • Executive Order 13685.

Related to terrorism:

  • Foreign Terrorist Organizations Sanctions Regulations, 31 C.F.R. part 597; and
  • Global Terrorism Sanctions Regulations, 31 C.F.R. part 594.

Related to weapons of mass destruction:

  • Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. part 544.

Related to narcotics trafficking or other criminal networks:

  • Executive Order 14059;
  • Narcotics Trafficking Sanctions Regulations, 31 C.F.R. part 536;
  • Foreign Narcotics Kingpin Sanctions Regulations, 31 C.F.R. part 598; and
  • Transnational Criminal Organizations Sanctions Regulations, 31 C.F.R. part 590; Executive Order 13581.

OFAC has jurisdiction over virtually all transactions by U.S. persons or that take place in the United States. Generally, non-U.S. persons are only subject to OFAC jurisdiction where the transaction involves a nexus to the United States, such as through U.S. person involvement or when the transaction occurs in the United States. However, OFAC regulations for many sanctions programs do not provide whether jurisdiction extends to a transaction that takes place outside of the United States solely because the transaction involves a transfer of an item subject to the EAR. In other words, OFAC sanctions programs typically do not address whether the involvement of an item subject to the EAR is a sufficient U.S. nexus to bring a transaction under OFAC jurisdiction.

Conversely, the EAR explicitly apply to transfers of items subject to the EAR, regardless of where the transaction takes place and whether U.S. persons are involved. Therefore, because the EAR’s restrictions focus primarily on the export of items, the Rule is intended to complement OFAC’s blocking measures targeting financial dealings, especially for transactions that involve items subject to the EAR but do not otherwise have a nexus to the United States.  In this way, the new license requirements act as a backstop for activities over which OFAC does not exercise jurisdiction, such as deemed exports and deemed reexports, and for reexports and in-country transfers that would otherwise not involve U.S. persons.  

The Rule includes a general prohibition on the use of any EAR license exceptions. Moreover, such license applications will be reviewed under a presumption of denial, which means that BIS’s default position will be to deny the license application. In other words, unless compelling reasons to grant a license exist, BIS will assume that the license application should be denied.

To avoid imposing a duplicative license requirement, the Rule does not require a separate EAR license for transactions that are authorized under an OFAC specific or general license or are exempted under OFAC’s regulations. However, a license from BIS is still required where the EAR impose a licensing requirement separate and apart from the Rule. For example, a separate BIS and OFAC license would generally still be required for the export, reexport, or in-country transfer of goods to an entity that is designated on both BIS’s Entity List and OFAC’s SDN List under one of the fourteen covered sanctions programs.

In addition, the Rule makes structural and technical changes to consolidate existing SDN-related EAR restrictions so that all SDN-related provisions are in the same section of Part 744 (Control Policy: End-User and End-Use Based) of the EAR.

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