This article was last updated on October 8, 2024, but originally published on March 27, 2024, and updated on June 6, 2024.
On March 21, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) significantly expanded its end-user restrictions under the Export Administration Regulations (“EAR”), 15 C.F.R. Part 744, in coordination with the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) in relation to 14 OFAC-administered sanctions programs and its Specially Designated Nationals and Blocked Persons (“SDN”) List. These specific end-user restrictions—many of them new in relation to OFAC’s Russia- and Belarus-related sanctions programs—have all been consolidated into a single section under § 744.8 of the EAR (a.k.a., the “crossover rule”). The cross-over rule is intended to serve as a “…force multiplier and complement OFAC’s blocking sanctions…” according to BIS, by acting as a backstop for activities over which OFAC does not exercise jurisdiction. More specifically, the BIS license requirement in § 744.8 essentially expands U.S. controls on reexports and transfers (in-country) of items subject to the EAR outside of the United States—which may include foreign-made commodities, software, and technology—that would not otherwise involve U.S. persons (e.g., U.S. financial institutions) and invoke relevant OFAC prohibitions.
This article examines the scope of § 744.8 and relevant compliance considerations.
The Crossover Rule of § 744.8 of the EAR
Prior to March 21, 2024, part 744 of the EAR imposed licensing requirements for exports, reexports, and transfers (in-country) to persons designated on the SDN List under OFAC’s terrorism, non-proliferation (“WMD”), and Iraq-related sanctions programs. In addition, § 746.10(a)(2) of the EAR’s embargo controls imposed a licensing requirement for “luxury goods” identified in Supplement No. 5 of Part 746, to persons designated under OFAC’s Russia- and Belarus-related sanctions programs. These licensing requirements were all removed, except for the WMD- and terrorism-related SDN licensing requirements that were consolidated under new § 744.8. The reason for removing § 746.10(a)(2) was that § 744.8 significantly expanded the EAR’s licensing requirement in relation to persons designated under OFAC’s Russia- and Belarus-related sanctions programs—as detailed below—no longer just covering “luxury goods,” making it redundant.
In addition to any other EAR license requirements that may be applicable, pursuant to § 744.8, a BIS license is required to export, reexport, or transfer (in-country) any item “subject to the EAR” when a person on OFAC’s SDN List is a party to the transaction as either a purchaser, intermediate consignee, ultimate consignee, or end-user (i.e., as defined in § 748.5(c)-(f)), and is designated on OFAC’s SDN List with any of the following identifiers (organized by applicable OFAC sanctions programs):
1. Belarus Sanctions, Russian Harmful Foreign Activities Sanctions, and Ukraine-/Russia-related Sanctions programs
A. [BELARUS–EO14038];
B. [BELARUS];
C. [RUSSIA–EO14024];
D. [UKRAINE–EO13660];
E. [UKRAINE–EO13661];
F. [UKRAINE–EO13662]; or
G. [UKRAINE–EO13685].
2. Counter Terrorism Sanctions Program
A. [FTO]; or
B. [SDGT].
3. Non-Proliferation Sanctions
A. [NPWMD].
4. Counter Narcotics Trafficking Sanctions Program
A. [ILLICIT DRUGS—EO14059];
B. [SDNT];
C. [SDNTK].
5. Transnational Criminal Organizations Sanctions Program
A. [TCO].
It is important to consider how broad the scope of § 744.8 is, covering any “item subject to the EAR.” That term includes U.S.-origin items, wherever located, as well as foreign-made items exceeding certain defined thresholds of U.S.-origin parts, software, or technology, as set forth in § 734.3 of the EAR and in consideration of any applicable de minimis rules in § 734.4.
Although no BIS license exceptions apply to the foregoing licensing requirement in § 744.8, a BIS license is not required where the transaction would otherwise be authorized under an OFAC specific or general license, or otherwise exempt, pursuant to applicable OFAC regulations. Where a BIS license is required, it will be subject to a presumption of denial license review policy by the agency.
Notwithstanding the foregoing, BIS’s licensing requirements for the Entity List take precedence over the requirements of § 744.8. In other words, where a person is identified on the Entity List in Supplement No. 4 to Part 744 of the EAR, and also designated on the SDN List with one of the relevant identifiers above, the licensing requirements in the person’s Entity List entry and § 744.11 must be complied with, not the § 744.8 requirements. Therefore, if a license exception is applicable to the Entity List entry, it may be used, and if not, the noted licensing review policy of the entry will be applied by BIS. Furthermore, any relevant OFAC license authorization or exemptions would not be applicable where the OFAC designated person is also identified on the Entity List.
For any transactions that violate the licensing requirement in § 744.8, BIS considers it to be a violation of the EAR regardless of whether the transaction was also subject to any applicable OFAC regulations, as set forth in paragraph (e) to that section.
Although you and/or your organization may not be the exporter to a transaction invoking the licensing requirements of § 744.8, it is important to consider the broad scope of General Prohibition (“GP”) 10 of the EAR. In pertinent part, GP 10 states in pertinent part that no person may sell, transfer, export, reexport, finance, order, buy, remove, conceal, store, use, loan, dispose of, transport, forward, or otherwise service, in whole or in part, any item subject to the EAR and exported, reexported, or transferred (in-country) or to be exported, reexported, or transferred (in-country), with knowledge that a violation of the EAR has occurred, is about to occur, or is intended to occur in connection with the item.
Applicability of OFAC’s 50 Percent Rule to § 744.8 of the EAR
It is not entirely clear from the language of § 744.8 itself if the scope of the new crossover rule extends to entities that are constructively blocked under OFAC’s 50 Percent Rule—which I’ve defined and covered more deeply in a prior article—for any of the covered sanctions programs. There is no reference in § 744.8 to entities that are not themselves designated on the SDN List but otherwise blocked because of their ownership interests invoking OFAC’s 50 Percent Rule. Although BIS has not published any public guidance to clarify the issue, it indicated in response to my relevant queries in June 2024 that § 744.8 does not apply to persons that are not specifically identified on the SDN List, and therefore does not apply to entities that are otherwise constructively blocked pursuant to OFAC’s 50 Percent Rule. BIS also published a relevant Frequently Asked Question (Q2) on August 23, 2024 confirming in relation to applicability of OFAC’s 50 Percent Rule to § 744.8’s restrictions, that it does not apply to persons that are not specifically identified on the SDN List.
Although the 50 Percent Rule does not apply to § 744.8, there is heightened risks for exports, reexport, or transfers of items subject to the EAR involving subsidiaries or affiliates of an SDN. This is because such subsidiaries or affiliates may be acting as an agent, a front, or shell company for the SDN in order to facilitate transactions that may otherwise be controlled under the EAR. See additional BIS guidance on these issues in the foregoing FAQ (Q2).
Compliance Considerations
First, assess your organization’s respective sanctions and export controls risks in dealing with persons designated or blocked under OFAC’s SDN List, especially under the foregoing sanctions programs, and in dealing with items that may be subject to the EAR. For example, no matter where your organization is located in the world, if you deal in items subject to the EAR and you’re engaging in transactions related to their export, reexport, or transfer (in-country) to or within Russia, or with countries that are at a higher-risk of unauthorized diversion to Russia (e.g., U.A.E., Turkey), then you have an elevated risk profile in dealing with a sanctioned party under OFAC’s Russia-related sanctions program, and in invoking the licensing requirement in § 744.8 of the EAR.
Relevant controls to consider to best ensure compliance with the new licensing requirement in § 744.8, especially if there’s an elevated risk profile, are as follows:
- Ensure that your restricted party screening procedures and third-party applications include screening against OFAC’s SDN List and the BIS Entity List (if they aren’t already).
- Ensure that you are obtaining relevant identification details on all purchasers, intermediate consignees, ultimate consignees, and end-users (to the extent possible)—as defined in § 748.5—including their affiliation with any SDNs, for screening purposes.
- Even if you’re a non-U.S. organization and dealing in foreign-made items, keep in mind that foreign-made commodities and software that incorporate, commingle, and/or are “bundled” with U.S.-origin commodities software may be subject to the EAR if they exceed relevant de minimis thresholds. Confirm whether or not any items you export, reexport, or transfer (in-country) are subject to the EAR.
- Implement stop/hold procedures for any transactions where an OFAC designated or blocked party is identified, to subject them to proper escalation, review, and adjudication by relevant company officials and/or outside counsel. To the extent that your organization may decide to engage in the underlying export, reexport, or transfer activity involving an SDN under the above OFAC sanctions programs, first confirm for purposes of compliance with the EAR that they are not also identified on the Entity List, as superseding BIS licensing requirements may apply. Ensure strict compliance with the terms of any OFAC or BIS licenses that may be applicable.
- Exercise heightened caution and enhanced due diligence procedures if engaging in transactions with entities that are not identified on the SDN List, but subject to OFAC’s 50 Percent Rule.
Keep in mind that U.S. export controls and economic sanctions programs are constantly evolving, which may impact the scope of § 744.8 of the EAR, your organizational risks, and the adequacy of your compliance-related controls. Also, even if your organization has no U.S.-nexus in a transaction with an SDN designated under any of the relevant programs—including any items subject to the EAR—there are so-called “secondary sanctions” authorities to consider. For example, such authorities enable OFAC to impose blocking sanctions on persons who materially assist, sponsor, or provide financial, material, or technological support for, or goods or services to or in support of, SDNs, even outside of U.S. jurisdiction. See e.g., E.O. 14024.
The author of this blog post is Kian Meshkat, an attorney specializing in U.S. economic sanctions and export controls matters. If you have any questions please contact him at [email protected].
