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

  • Legal Development 19 June 2024 19 June 2024
  • Asia Pacific, North America

  • Regulatory & Investigations - Geopolitical Risk

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. 

Blanket Prohibition on the Provision of Software and IT Services by U.S. Persons

Using its authority under Executive Order 14071 “Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression”, OFAC issued a determination prohibiting U.S. persons from providing to Russian customers IT consultancy and design services, as well as IT support services and cloud-based services for enterprise software and design and manufacturing software.

New SDN Sanctions

The remainder of the 12 June directives add new entities and individuals to the SDN list, summarize below.[5]

Financial Institutions: Adding the Moscow Stock Exchange, the National Clearing Centre, and the Non-Bank Credit Institution Joint Stock Company National Settlement Depository, the effect of which is to deny them of trading in U.S. dollars.

Insurance Companies: Adding Gas Industry Insurance Company Sogaz and Joint Stock Company Russian National Reinsurance Company.

LNG Gas Projects and Associated Infrastructure: In addition to the comprehensive sanctions already placed on the Arctic LNG 2 project and its associated vessels for the transport of LNG produced from that facility, the Obsky LNG, Arctic LNG 1, and Arctic LNG 3 projects are now sanctioned. In addition, there are now sanctions on seven vessels, as well as entities that operate in the construction of LNG infrastructure.

Penglai Jutal Offshore Engineering Heavy Industry Co, a PRC shipyard operator is now sanctioned on the grounds that it “constructed and shipped critical natural gas liquefaction technology, aboard previously blocked vessels…to LLC Arctic LNG 2”.


For more information on how we can help you with U.S. corporate and compliance matters, please contact Charles Wu at Charles.Wu@clydeco.com


[1] A secondary sanction is a sanction imposed by the U.S. on a non-U.S. party who transacts business that would otherwise be prohibited were such non-U.S. party a U.S. party. 

[3] See Bloomberg report, “U.S. Expands Russia Sanctions to Target LNG Projects, Chips”, 12 June 2024

[4] The “entity list” is maintained under the EAR, and is separate from the specially designated nationals (SDN) list maintained by OFAC under its sanctions authority.

[5] U.S. persons are prohibited from transacting with those placed on the SDN list. 


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