Extraterritorial effect of sanctions

The European Union has imposed many sanctions on Russia and sometimes other countries over the years. There are companies that do not want to comply with those sanctions. Therefore, there is also a ban on circumventing the sanctions. One of the articles that is part of these anti-circumvention measures is Article 8a of the European Sanctions Regulation (Regulation 833/2014). This article requires EU companies and individuals to make their best efforts to ensure that non-EU legal persons they own or control do not engage in activities that undermine sanctions. This section is therefore known as the "best efforts” provision. There is also a general circumvention prohibition for EU (legal) persons themselves (Article 12).

The European Commission has published a list of frequently asked questions. Its latest version also addresses Article 8a. For example, what should be understood by “making th best efforts” and “undermining”? These questions are addressed in this blog.

Undermining/circumvention

Undermining within the meaning of Article 8a consists of those activities that result in a consequence that the sanctions are precisely intended to prevent. This could include receiving financing (prohibited under Regulation 833/2014) from a legal entity based in Russia.

Undermining can be contrasted with the prohibition of circumvention under Article 12 in that circumvention involves a concealment that enables the party concerned to avoid the material elements of a violation of the sanctions measure. It may also involve a concealment that has the purpose of doing so or a concealment that has the effect of doing so.

An actual act or omission may in certain cases constitute both a violation of Article 8a, and a violation of another article - for example, Article 12.

Best efforts

The obligation to “make their best efforts to avoid undermining the sanctions” (hereinafter: the best efforts obligation) includes, in any case, all actions that are appropriate and necessary to achieve the result of avoiding undermining the sanctions measures. These include changing policy, reducing risks, considering whether or not to engage with a third country that may have ties to Russia, etc. However, best efforts do include only those that are also feasible. Several factors are important here, such as the size of the legal entity, the degree of control one has, as well as the nature of the business and the other facts and circumstances of the case. Third-state laws are also important in this regard (see below).

Application in relation to third countries

Article 8a is addressed to companies established within the EU. However, Article 8a is indirectly addressed to legal entities established outside the EU, which are owned or controlled by the EU legal entity. Where the foreign legal entity is established outside the EU is irrelevant. This could, for example, include Russia itself. The best efforts obligation should be understood to mean that only those steps should be taken by EU legal entities that are actually feasible. If the EU legal entity in question does not have any influence/control over its situation, for example because national legislation of a third state prevents steps to be taken, this legal entity cannot be blamed for not complying with the sanctions. The latter does not apply to legal entities that have not themselves done enough to comply with this sanction measure or have contributed to the inability to comply.

Incidentally, the best efforts obligation also applies, for example, in a chain of suppliers or a chain of users of intellectual property (rights). In those chains, EU legal entities must also make the necessary efforts to prevent Russian entities from being able to undermine the sanction provisions.

Proof of compliance

Proof that a legal entity has complied with the best-efforts obligation must be based on the circumstances of the case. This includes the nature of the company, the size of the company and other circumstances. Consideration must also be given to - for example - the resources available to the company. If it operates within a well-regulated sector with many tools as far as compliance is concerned, a greater effort may also be expected from a small company.

The EU legal entity should ensure that it is aware of the activities of the entity under its control, as well as the type of activities of this subordinate entity that might undermine the sanctions measures. It can do this in several ways, for example: training of staff through courses, a reporting requirement for the subordinate legal entity, newsletters and setting up procedures to deal quickly with possible breaches of the sanctions measures.

Liability

Where an EU legal entity is aware of and acquiesces in activities of a non-EU legal entity owned or controlled by it that violate Article 8a, it violates Article 8a and is liable.

Consequences of violations

Meanwhile, the first consequences for violating the sanctions legislation have become visible. For example, the Dutch court has sentenced a director of a company that exported aircraft parts to Russia, thereby circumventing sanctions, to a 18 month-long unconditional prison sentence. Or more recently, the FIOD raided a wholesale ship supplies business in Schiedam, the Netherlands. The suspicion is that the company supplied goods and services to the Russian shadow fleet, which are subject to EU sanctions. This is a network of ships used by Russia to circumvent sanctions. You can think of ships sailing under non-Russian flags, transponders disabled and routes designed to avoid ports. It is not always easy to recognize whether a ship has been sanctioned precisely because its identity is deliberately concealed. Nevertheless, the legal responsibility lies with the exporting party. Therefore, companies do well to err on the side of caution in such matters. It is obvious that heavy penalties will also be imposed for undermining Article 8a sanctions.

More information

Do you have a question related to sanctions? Or do you have another question in the area of international trade or corporate law? If so, feel free to contact attorney John Wolfs, who has years of experience in these fields.n.