On October 17, 2024 the Office of Foreign Assets Control (“OFAC”) of the US Department of Treasury imposed sanctions on two private companies based in the People’s Republic of China (“China”) for working in collaboration with Russian firms on the production and development of the Garpiya drone series. These sanctions, imposed pursuant to Executive Order (“EO”) 14024, represent an ongoing effort to punish and deter such behavior even when the underlying activities have no U.S. nexus.
Sanctions against Chinese entities collaborating on complete weapons systems for Russia
According to OFAC’s press release, two China-based private entities, Xiamen Limbach Aircraft Engine Co., Ltd. (“Limbach”) and Redlepus Vector Industry Shenzhen Co. Ltd. (“Redlepus”), work in partnership with US-designated Russian defense firm TSK Vektor OOO (“TSK Vector”). TSK Vektor operates as an intermediary between these China-based suppliers and another US-designated Russian firm, Joint Stock Company Izhevsk Electromechanical Plant Kupol (“AO IEMZ Kupol”), to assist in the production of the Russian Garpiya drones. Russian national Artem Mikhailovich Yamshchikov is the General Director and beneficial owner of TSK Vektor.
Limbach produces the L550E engine for input into the Garpiya UAV weapon. Redlepus produces and ships to Russia various electronic and mechanical components that have UAV applications, “including aircraft engines, parts of automatic data processing machines, and other electrical components.” TSK Vektor assists in the shipment and import of these aforementioned components for contribution to the Russian UAV systems.
EO 14024 authorizes OFAC to designate as an SDN any person, including any non-US person, who is determined to have materially assisted any person designated as an SDN under EO 14024. Thus, such non-US persons may be at risk of exposure to US secondary sanctions, which is a discretionary determination by OFAC as to whether and when to use SDN designation authority on a non-US person engaging in activities targeted by EO 14024. The two Chinese entities and Russian individual “are being designated pursuant to EO 14024 for operating or having operated in the defense and related materiel sector of the Russian Federal economy.” The Russian entity “is being designated pursuant to EO 14024 for being owned or controlled by, or having acted or purported to act for or on behalf of, directly or indirectly” with the individual. All three entities and the individual are designated “secondary sanctions risk[s]” pursuant to Section 11 of Executive Order 14024.
This is the first time the US imposed sanctions on China-based entities for collaborating with Russian firms to develop and produce complete weapons systems. The US Department of the Treasury acknowledged that “while the United States previously imposed sanctions on PRC entities providing critical inputs to Russia’s military-industrial base, these are the first US sanctions imposed on PRC entities directly developing and producing complete weapons systems in partnership with Russian firms.” According to the US government, this recent series of sanctions aims to stymie Russian entities’ collaboration with Chinese and other third-party entities to acquire advanced weapons technology and components. The sanctions attempt to punish as well as deter such behavior in the future, particularly with regard to contributing to the production and final development of complete weapon systems and other military equipment for US-sanctioned Russian firms. They further illustrate the breadth and scope to which sanctions can be applied as a tool, as they are Russian sanctions applied to entities based in China.
Sanctions implications
These SDN designations will block all property and property interests of the aforementioned parties that are in the United States or in the possession or control of US persons. Any entities of which these blocked persons own 50 percent or more are also blocked by these sanctions and prohibited from engaging in any activities with a US nexus. Additionally, any initiation or receipt of transactions, including but not limited to the provision of funds, goods, or services, to or from any one of these blocked persons is prohibited if the activity has any US nexus, unless authorized by a general or specific license issued by OFAC, or exempt. Moreover, even if the activities with these newly designated SDNs have no US nexus and thus do not implicate primary US sanctions, any non-US persons who continue to transact with these SDNs in China will themselves face secondary sanctions risks under EO 14024. As a result, the SDN designation of these companies may make it harder for them to engage in any cross-border activities.
Next steps
Companies should continue to review their business activities and trade compliance procedures regularly to confirm they are in compliance with applicable new restrictions. Hogan Lovells lawyers can assist you with assessing the potential impact of these and other trade restrictions on the global operations of your company.
Please contact any of the listed Hogan Lovells lawyers for further information or assistance.
Authored by Nicki Ghazarian-Foye, Ajay Kuntamukkala, Aleksandar Dukic, and Andrea Fraser-Reid.
