Circumvention of sanctions in the context of the new 11th EU sanctions package, secondary sanctions, and importance of sanctions compliance

published on 7 August 2023 | reading time approx. 4 minutes

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

The 11th sanctions package includes the following key restrictions:

Trade measures. New sanctions anti-circumvention tool. This is an exceptional and last resort measure, targeted against third countries with high risk of sanctions circumvention; transit prohibition for certain sensitive goods; addition of 87 new entities to the sanctions list and other trade measures.
Transport measures. Includes restrictions related to trucks with Russian trailers, also related to accessing EU ports by certain vessels.
Energy measures. Related to import and export of oil.
Additional listings. Over 100 additional individuals and entities subject to asset freezes.
Additional clarifications. These measures include certain sanctions criterions for listing, derogations, clarifications, exemptions.
Other measures. Extension of media ban, additional provisions on information exchange and reporting, additional derogations.

This is a strong move towards the prevention of sanctions circumventions and the deterrence of individuals, companies and countries which do not comply with sanctions or help financing and supporting Russia's aggression. The last package, the 10th EU sanctions package, was adopted in February 2023, and has expanded the sanctions regulations by adding new sanctions listings, trade, and financial sanctions, including further export bans, worth more than 11 billion Euros. It also has emphasised the sanctions anti-circumvention measures by reaching out to third countries, "to ensure strict implementation of sanctions and prevent circumvention". However, no specific measures were declared. Now, comparing the 11th sanctions package to the previous one, it should draw even more attention to business operators, dealing with high-risk sensitive goods, industries, and jurisdictions friendly to Russia, as the new package indicates the exact and specific measures to eliminate the sanctions circumvention.

However, it also might cause new international discussions or even political and trade conflicts as the concept of sanctions circumvention and the extraterritorial applicability of EU laws might be interpreted in different ways. In particular, the topic of secondary sanctions has to be discussed. Secondary sanctions are targeted against those who are not sanctioned by primary sanctions but does business with the sanctioned persons. Now, when dealing with sanctioned persons or assisting them to circumvent the EU sanctions, businesses risk to be also included into sanctions lists or face other economic or legal consequences. This means EU sanctions are applied extraterritorially – outside the EU and against persons from third countries. Then, the counter measures against EU (countersanctions) from the third countries are possible as well. Diplomatic relations, treatment of international law and foreign affairs policy across the globe could change significantly. The consequences specifically for businesses may be, e.g., more uncertainties in the international market, new risks of sanctions violations for non-EU subsidiaries of EU companies. Worth to mention that in the recent years the US already used secondary sanctions effectively as the rest of the world strongly depends on the US financial system and by access to US dollar.

International trading was another key aspect for strengthening the sanctions restrictions and paying attention to the circumvention. According to the latest trade statistics – EU trade with Russia significantly decreased since the Russian war in Ukraine, however, EU trade with third countries and trading between third countries and Russia grew up statistically high. According to German Federal Statistical Office (Destatis), Germany's exports to Commonwealth of Independent States (CIS) countries (excluding Russia) rose strongly from January to April of 2023, compared with January to April of 2021. Goods to the value of 2.9 billion Euros were exported to the CIS countries from January to April of 2023. Exports to these countries rose by 1.5 billion Euros and therefore more than doubled (+106.4 per cent) compared with the same period of the pre-war year of 2021 (1.4 billion Euros). Therefore, we might see that businesses transfer their operations to the third country markets instead of Russia. Russia still can get its way to adapt to restrictions and avoid sanctions by importing the goods the country needs to maintain the economy not directly from the EU but from third-neighbour countries. For EU based businesses this means that the risk of doing business with third countries is growing and must be properly assessed.

Recommendations

As the 11th sanctions package is already adopted, businesses must be prepared and understand the sanctions circumvention to fully comply with the new EU regulations. It is extremely important for business operators from the third countries as the new sanctions package targets them firstly. In addition, one of the important practical aspects might be that dealing with some certain goods could become a sanctions violation if suddenly, e.g., the goods appear to be listed as sanctioned during the transportation, but it was not sanctioned at the time of purchase. Then, it could cause a risk of goods to be detained during the transportation in other country or similar case might happen. The sanctions breach could be constituted if circumvention was performed knowingly and intentionally. The most important action might be an evaluation of company’s business partners, clients, suppliers, other related counterparties by checking whether they are already on the sanctions lists which are constantly expanding and/or whether the business activities could be possibly held as intentional circumvention of sanctions. Implementation of company’s internal compliance systems, regular monitoring of sanctions lists, updates of internal policies, performance of sanctions risk assessments and spreading the compliance culture within the company are additional key factors to successful sanctions compliance. As the European Commission has already emphasized, compliance with trade-related sanctions (e.g., dual-use exports, oil exploration equipment, high tech goods and technology) is not limited to banks processing the payments but is also the responsibility of operators initiating such trade (e.g., exporters, brokers).