Sanction circumvention small businesses

Recent research by the Central Bureau of Statistics (CBS) and the University of Groningen (RUG) shows that a striking number of young, small businesses have emerged that trade in sanctioned products. In this blog post, you will read the main findings of the study.

Exporting sanctioned goods

Since 2022, the European Union has greatly increased sanctions against Russia following the invasion of Ukraine. You previously read about these periodic updates to the sanctions on our blogs. These include a long list of items and parts that can be used militarily (so-called dual-use goods, also known as dual-use goods). Their export is banned. As recently as October 2023, for instance, 18 months' imprisonment was imposed on anyone violating these sanctions. CBS and the RUG have conducted research on trade in these goods on behalf of the Ministry of Foreign Affairs.

They find that trade to seven countries in particular has exploded. It also now shows that the export value of sanctioned goods, which used to be mostly exported to Russia, has decreased 86%. Also, exports to Russia in goods not subject to sanctions have decreased by about 25%.

Circumvention

Yet this does not mean that the sanctioned goods can no longer reach Russia: a number of countries see a disproportionate increase in the trade of these products. It is therefore possible that exporters are trying to circumvent the sanctions through these countries, allowing the goods to still reach Russia. Such a surge in trade the researchers saw especially in Armenia, Kazakhstan, Kyrgyzstan, Mongolia, Serbia, Turkey and Turkmenistan. Probably not entirely coincidentally neighbours of Russia or countries with which Russia has relatively good ties.

Large multinationals, which mainly exported to Russia before the war, shifted their trade to other destinations, especially to countries they already traded with. This allowed them to absorb much of the economic blow. New destinations were also tapped, including those in countries that showed a notable increase in trade with Russia. This is also allowed; European sanctions measures only bar certain goods from being exported to Russia. However, companies do run the risk of violating the circumvention ban if it is subsequently found that the goods do end up in Russia via a roundabout route. In that case, there may be a criminal offence (under the Economic Offences Act).

It also shows companies that did not trade in the now-sanctioned goods at all before 2022, but are now doing so in abundance. These are often young, small SMEs with a relatively small export portfolio. They then act as intermediaries for, on the one hand, a Russian company and, on the other, a supplier of sanctioned goods. In general, it can be said that SMEs are more vulnerable to circumvention than multinationals.

Precautionary measures

To avoid violating sanctions rules, in this case in particular the prohibition of circumvention, EU-based companies must take action. If they fail to do so, they may be acting criminally. This is all the more true in relation to high-risk countries. This is because EU-based companies then must be aware that there is an increased risk of circumvention. Companies are responsible for ensuring that they are adequately informed about developments. Moreover, with regard to its subsidiaries (which are located outside the EU), an EU-based company has a ‘best efforts obligation’, which is stipulated in a European Regulation. The ‘best efforts obligation’ means that EU-established companies must undertake their best efforts to prevent undermining of EU sanctions by its subsidiaries located outside the EU. If EU-based companies do not comply, they can be held liable. To help companies, the European Commission has published a set of FAQ's (Frequently Asked Questions) and Guidances.

Risks

What risks does an entrepreneur face if he does break the rules? In extreme cases, he could face up to six years in prison and a fine of over a million euros. In addition, the profits made may be reclaimed and civil liability may follow for any damages incurred.

Want to know more?

Would you like to know more about the European sanctions against Russia and their consequences? Or do you have another legal question for your company? Then feel free to contact attorney John Wolfs, who has extensive experience in assisting entrepreneurs.