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Russian Research Institute Added to Entity List is Just the Tip of the Iceberg

09/25/19 5 minute read

A Russian research institute was added to the U.S. Department of Commerce’s Entity List last month for its ownership by a Russian defense company that the United States sanctioned in 2014. The research institute is just one of several such entities majority owned by the defense firm, an investigation by Sayari found.

Nine subsidiaries of the defense firm, known as Joint-Stock Company Concern Radio Electronic Technologies (KRET), now appear on the Entity List. Several others identified by Sayari have not been publicly named by the Department of Commerce or Department of the Treasury, however.

This case highlights the utility of using public records to uncover subsidiaries of Russia’s major defense conglomerates. Just because an entity does not appear on U.S. government blocked lists does not mean that it is exempt from restrictions. This is especially true in the context of Russia’s highly stratified defense industry.

KNIRTI Added to Entity List

The U.S. Department of Commerce added Kaluga Scientific Research Institute of Radio Engineering (KNIRTI) to the Entity List on Aug. 14. U.S. companies are prohibited from exporting to companies on the Entity List without a special license from the Commerce Department.

KNIRTI was added on the basis of § 744.11 of the Export Administration Regulations (EAR), which applies to entities acting contrary to the national security or foreign policy interests of the United States.

According to BIS’s End-User Review Committee (ERC), KNIRTI was added to the list because it is majority owned by U.S. Treasury sanctioned entity Joint-Stock Company Concern Radio-Electronic Technologies (KRET).

The U.S. Department of the Treasury sanctioned KRET in 2014. The company is a leader in developing radio technologies and electronic warfare devices for Russian military aircraft and ground-based systems.

KRET is also subject to sanctions per the State Department’s Countering America’s Adversaries Through Sanctions Act, signed into effect in October 2017.

Besides KNIRTI, eight other KRET subsidiaries are also on the Department of Commerce’s Entity List.

KRET Subsidiaries Not on Entity List

Sayari has identified 20 additional entities that are majority owned by KRET but have not been sanctioned by the U.S. Department of the Treasury or added to the Commerce Department’s Entity List.

Despite the lack of sanctions, licensing information for many of these entities indicates their clear involvement with the Russian military industrial complex.

For example, Sayari’s investigation found that at least four of the identified entities hold a Russian government license to engage in “activities related to protecting state secrets” for Russia’s Federal Security Service, Foreign Intelligence Service, and Ministry of Defense.

At least five other KRET subsidiaries Sayari identified hold licenses for the development, production, and sale of weapons and military equipment.

In addition to the four research institutes identified on the Entity List as majority owned by KRET—including the most recent addition of KNIRTI—there are at least three other research institutes majority owned by KRET.

And this is only the tip of the iceberg—there are also dozens more downstream companies beneficially owned by KRET or jointly owned by KRET and other Russian defense firms.

None of the above-mentioned entities have been officially sanctioned by the United States or added to the Entity List.

OFAC’s 50 Percent Rule

Just because a company does not appear on the Entity or SDN lists does not mean that U.S. companies are permitted to export to it. Under the U.S. Department of the Treasury’s “50 percent rule,” entities that are majority owned by one or more entities sanctioned in the aggregate by Treasury are also considered sanctioned.

The 50 percent rule dictates that sanctions apply not only to companies and individuals sanctioned by the U.S. Treasury, but also to companies they majority own.

This means that all entities majority owned by KRET are blocked. While some of these, such as KNIRTI, are clearly identified on the Entity List, many identified by Sayari are not.

Risk Factors

This example demonstrates that simply checking government blocked entity lists—such as the SDN or Entity lists—is an insufficient measure in assessing the level of risk associated with an entity. Official public records fill this gap by allowing analysts to comprehensively identify all of the subsidiaries of sanctioned entities.

Depending on a company’s corporate structure, current ownership of Russian companies is indicated on either its federal tax registry filing or in its public disclosure documentation.

Russia Federal Tax Registry filings are available, up-to-date, and fully text searchable on the Sayari Search platform. These filings also indicate what licenses a company obtains and what its main activities are.

The Russian defense industry is highly stratified. It is vitally important for observers, compliance professionals, and government regulators alike to understand the ownership structure and activities of Russian defense firms through the exploitation of official public records.

The public records data used to power this research is available through Sayari Search! If you’re curious how this data could drive insights for your team, please reach out here.

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