Under the Russian encryption regulations, notification to, or registration with, the Russian Federal Security Service (the FSB) is required in order to import and distribute foreign products (hardware and software) with encryption functions or features in the Russian Federation. Although the FSB is a sanctioned party, listed on the Office of Foreign Assets Control (OFAC) list of specially designated nationals and blocked persons (the “OFAC SDN List”) pursuant to the Cyber-Related Sanctions Regulations, 31 C.F.R. Part 578, US Persons (i.e., entities organized under US laws and their non-US branches; parties physically located in the United States; US citizens and permanent resident aliens wherever located or employed) are authorized to interact with FSB for the purpose of qualifying their products for importation and distribution in the Russian Federation, under OFAC General License No. 1B.
By an order dated March 2, 2021, OFAC designated the FSB as a blocked party under the Weapons of Mass Destruction Sanctions Regulations, 31 C.F.R. Part 544 (NPWMD and Executive Order 13382). Concurrently, OFAC updated General License No. 1B, confirming that United States persons may continue to interact with the FSB for purposes of qualifying their products for importation and distribution in Russia. We summarized these sanctions in our recent blog post here. Nonetheless, the designation of the FSB under the NPWMD sanctions creates a further compliance issue for United States (and foreign companies) that: (i) are subject to SEC reporting requirements under section 13(a) of the Securities Exchange Act of 1934, 15 U.S. C. sec. 78m(a) (“issuers”); and (ii) need to obtain the approval of the FSB (through notification or registration) in order to supply and distribute their encryption products in Russia.
Section 219 of the Iran Threat Reduction Act of 2012 amended section 13(r) of the Securities Exchange Act to impose a disclosure requirement in filings to the US Securities and Exchange Commission by issuers, where those issuers, or any of their affiliates, “knowingly conduct any transaction or dealings with” persons and entities that are subject to certain OFAC economic sanctions. Importantly, section 219(a)(1)(D)(ii) of the Iran Threat Reduction Actapplies that SEC disclosure requirement to transactions and dealings with “any person the property or interests in property are blocked pursuant to Executive Order No. 13382.”
Thus, when an issuer or its affiliate files a notification with respect to its encryption products with the FSB, or registers its encryption products with the FSB, the issuer will be required to disclose those “dealings with” the FSB in its SEC filings. The fact that filing of such a notification or registration with the FSB is authorized under OFAC General License No. 1B does not exempt the transaction from the SEC disclosure requirement. Although section 219 of the Iran Threat Reduction Act does exempt transactions with certain sanctioned parties which are authorized under OFAC general or specific licenses, that exemption does not apply to transactions or dealings with a blocked party that has been designated under the NPWMD sanctions and Executive Order 13382.
Author: John F. McKenzie.