Harmonization of liability for violations of sanctions against Russia and Belarus through indirect activities and due diligence requirements to prevent sanctions circumvention

published on 8 October 2024 | reading time approx. 3 minutes

Circumvention of sanctions and third countries involved in circumvention schemes remain a major issue and this is a great concern not only for the European Union but also for other leading countries such as the United States, the United Kingdom, Germany, France and others.

The implementation of sanctions could be difficult if there is a lack of harmonization between countries in terms of their sanctions regimes. Moreover, the extraterritoriality of sanctions makes it difficult to comply. For example, EU economic operators may find it difficult to comply with EU sanctions legislation when operating outside the EU. Most of the prohibitions in the EU Sanctions Regulation involve the indirect provision of services or other indirect activities. Therefore, the clarity and applicability of prohibitions on indirect activities could also become an issue when doing business in third countries through EU subsidiaries. These prohibitions on indirect activities could be considered as sanctions against third countries and it is not always clear how companies should act to avoid these prohibitions or even being involved in sanctions evasion.

In response to these sanctions-related concerns, leading countries are now reacting and taking the same approach to preventing evasion of export controls and sanctions imposed on Russia. On 24 September, the G7 countries, including the United States, Canada, France, Germany, Italy, Japan, the United Kingdom and the European Union, issued their first-ever joint guidance to industry on Russia-related export controls and sanctions (G7 Industry Guidance).

It is worth recalling that in April, an EU Directive was adopted to criminalize the circumvention of EU sanctions – that is an important development by the EU to harmonize sanctions and make them more effective. The G7 Industry Guidance is another sanctions tool that now further harmonizes sanctions due diligence and anti-circumvention standards.

As a result, the G7 Industry Guidance can now help companies understand the essential due diligence steps they need to take when dealing with complex issues related to global business operations and a wide range of regulatory requirements - from international sanctions to export and import controls.

The G7 Industry Guidance document includes

A list of items that pose an increased risk of diversion to Russia,
Updated red flag indicators of potential export control and/or sanctions evasion,
Best practices for industry to address these red flags; and
Screening tools and resources to support due diligence.

Crucially, according to this guidance, all parties in the supply chain (e.g. exporters, re-exporters, manufacturers, distributors, resellers and service providers such as financial institutions, logistics companies, transport providers, freight forwarders, warehouse operators and customs brokers) must be aware of the diversion risks posed by Russia's illicit procurement efforts and take appropriate measures to mitigate these risks. Therefore, the following steps should be taken:

Review of The Common High Priority List (CHPL). This list shall aid industry in conducting necessary due diligence. The CHPL includes 50 tariff lines that Russia seeks to procure for its war effort. The 50 tariff lines are identified by six-digit Harmonized System (HS) Codes, a standardized numerical method of classifying goods, known to every exporter, shipper, and freight forwarder around the world.
Identifying Red Flag Indicators. It is essential to rely on the red flag indicators listed in the Guidelines to carry out the necessary pre-export due diligence. Also be aware of other possible indicators not listed in the Guidance.
Carry out additional risk-based customer and transaction due diligence. Where listed or other red flag indicators are identified, the Guidance provides a further list based on best practice for sanctions screening, additional due diligence measures and analysis of potential circumvention. If all these measures have been taken and there are still concerns, it is recommended to refrain from the transaction. Another option is to disclose the information to the appropriate export control/compliance/customs authorities in the country.

In light of Article 12 of Council Regulation (EU) No 833/2014, which prohibits knowingly and intentionally participating in activities the object or effect of which is to circumvent prohibitions, it is recommended, especially for EU operators, to use this guidance and apply sanctions compliance due diligence measures where necessary to avoid participation in sanctions circumvention schemes and the negative consequences thereof.

For assistance in resolving sanctions-related issues in the application of the G7 Industry Guidance, please contact our Sanctions Compliance Team. Our team is ready to assist your business with general legal advice or individual sanctions compliance steps such as sanctions screening, risk assessment or enhanced due diligence.

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