Circumvention of Sanctions in the Context of the New 11th EU Sanctions Package, Secondary Sanctions and Importance of Sanctions Compliance

published on 3 June 2024 | reading time approx. 4 minutes

On 23 June 2023, the European Council adopted the 11^th package of economic and individual sanctions against Russia. The focus of this package is on more effective enforcement and implementation of sanctions, as well as on further combating and preventing the circumvention of sanctions.

In summary, the 11th sanctions package includes the following points:

Trade Restrictions: A new anti-circumvention instrument is created, which is now directly targeted at third countries that pose a high risk of sanctions circumvention. In addition, bans on the transit of certain sensitive goods through Russia and further tightening of various goods-related restrictions have been adopted;
Transport restrictions: Include restrictions on trucks with Russian trailers and access of certain ships to EU ports;
Energy policy measures: Related to the import and export of oil, in particular it will no longer be possible for Germany and Poland to import Russian oil via pipelines;
Additional listings. More than 100 additional individuals and entities added to EU sanctions lists;
Additional clarifications. In particular, the criteria for inclusion in the sanctions list and exemptions and waivers for various restrictions have been adjusted and clarified;
Other measures. Extension of bans on certain media to five additional channels and further restrictions on information sharing and reporting.

It is precisely the introduction of new ways of combating sanctions evasion that is an important step towards more effectively addressing individuals and companies whose actions contribute to financing and supporting Russian aggression and who have not been deterred by previous sanctions regulations. Already the last EU sanctions package of February 2023, in addition to new entries on sanctions lists and trade and financial sanctions worth more than 11 billion euros, announced measures to combat the circumvention of sanctions by involving third countries. However, as a result, no concrete measures were mentioned in this context. This has now been made up for by the creation of the new "Instrument to Combat Circumvention of Sanctions" in the 11^th sanctions package and should by no means be ignored, especially by entrepreneurs who have so far conducted business in countries closer to Russia, such as Kazakhstan or the United Arab Emirates.

Furthermore, the new sanctions package could potentially also lead to new international discussions or even political and trade-related conflicts, as the concept of circumvention of sanctions and the extraterritorial applicability of EU laws could be interpreted in different ways. In particular, the issue of secondary sanctions is fundamentally critical from a legal and political point of view. Unlike "ordinary" primary sanctions, secondary sanctions are not directly directed against designated persons, but against all those who do business with the directly sanctioned persons. Companies that deal with sanctioned individuals or help them evade EU sanctions risk also being placed on sanctions lists or subjected to other economic or legal sanctions. This means that EU sanctions can be applied quasi-extra-territorially - outside the EU and against third-country individuals who assist EU-sanctioned individuals or sanctions evaders. Extraterritorial application of regulations, however, has long been viewed as questionable under international law. Thus, not only countermeasures by the third countries against the EU (counter-sanctions) are conceivable, but also a general impairment of foreign policy and diplomatic relations with many states. Such a development would not be without consequences for private actors such as companies: More uncertainty on the international market and new risks of sanctions violations for non-EU subsidiaries of EU companies are only two of the conceivable consequences. However, it is also worth noting that the U.S. has been applying the principle of secondary sanctions for many years. This is also viewed critically and creates considerable uncertainty in connection with U.S. sanctions. However, since the rest of the world is heavily dependent on the U.S. financial system and access to the U.S. dollar, these have been de facto accepted so far.

The practical developments of international trade were another important reason for the tightening of sanctions restrictions and the focus on preventing circumvention: According to the latest trade statistics, while EU trade with Russia has declined significantly since the Russian war in Ukraine, EU trade with third countries and trade between third countries and Russia has increased sharply, statistically speaking. According to the Federal Statistical Office (Destatis), German exports to the Commonwealth of Independent States (CIS) countries (excluding Russia) increased sharply from January to April 2023 compared with January to April 2021. Goods worth 2.9 billion euros were exported to the CIS countries from January to April 2023. Exports to these countries increased by 1.5 billion euros, more than doubling (+106.4 percent) compared to the same period in pre-war 2021 (1.4 billion euros). It is therefore now unmistakably obvious that some companies have shifted their activities in relation to former Russian business to Russia-related third countries. This benefits Russia, which can continue to source from third countries the goods it needs to sustain its economy and which originally came from the EU. For EU-based companies, this means that the risk of doing business with third countries should not be underestimated, and the potentially lucrative supply of sanctioned goods to Uzbekistan, for example, can hardly be considered a wise business decision.

Recommendations

Although the contents of the 11^thsanctions package were announced only with a short lead time, as with the previous packages, it has nevertheless entered into force and must be complied with by companies. Accordingly, it is crucial to know the most important contents and to be prepared to adjust business operations if necessary. This is particularly important for companies from third countries, as regulations of the new sanctions package directly target them for the first time. One of the important practical aspects of the short-term changes in the legal situation brought about by the sanctions packages is that trade in certain goods can suddenly become a sanctions violation if, for example, the goods are classified as sanctioned during transport even though they were not sanctioned at the time of purchase. In this case, there is a risk that the goods will be detained in a transit country during transport, which can lead to corresponding financial losses and also criminal proceedings.

It is also crucial to comply with the existing due diligence obligations in order to avoid accusations of involvement in sanctions evasion. It is essential to regularly check one's own business partners, customers and suppliers for entries in the constantly expanding sanctions lists. However, legal analyses of whether business activities could possibly be regarded as evading sanctions should not be neglected. The implementation of internal compliance systems, the regular review of sanctions lists, the updating of internal guidelines, the performance of sanctions risk assessments and the promotion of an actual compliance culture within the company are key factors for successful and risk-minimized navigation through the current complex legal situation. As the European Commission has already emphasized, compliance with trade-related sanctions is not limited to banks and financial institutions that may process payments in violation of sanctions prohibitions, but is the responsibility of all economic operators.