EU significantly strengthens Russia sanctions

Authors: Dr. Tobias Caspary, Romain Girard

Introduction

On 24 June 2024, the European Union ("EU") issued its 14^th package of sanctions against Russia. At close to 600 pages, the 14^th package is also one of the most comprehensive to date. There are over 30 new measures,[1] though four are truly ground-breaking innovations by the European Commission ("EC"). These are as follows:

A. Expanding the reach of EU sanctions

The 14^th package introduces an obligation for EU operators to use "best efforts" to ensure their "controlled"[3] non-EU subsidiaries do not participate in activities that undermine the EU's Russia sanctions[4] (referred herein as the "Best Effort Obligation").

The Best Effort Obligation is a detour from the EC's previous position. The EC's 2018 guidelines[5] had still clarified that there is no duty for EU parents to "impose" EU sanctions on their non-EU subsidiaries; rather, the guidelines merely noted that it is "appropriate" (rather than "necessary") to "inform" (rather than "impose") controlled subsidiaries of EU sanctions and for these to be "taken into account" (rather than "enforced").[6]

The EC's prior stance clearly aimed to distinguish itself from a perceived extra-territorial overreach of certain US sanctions in relation to Iran and Cuba.[7] The EC has repeatedly criticised such jurisdictional reach, for instance noting in 2021 that "the EU considers that the extra-territorial application by third countries of measures against EU operators is contrary to international law."[8] While there is no EC statement that its jurisdictional position has changed, the 14^th package clearly aims to extend the reach of EU sanctions:

• Best Efforts Obligation to "export" EU sanctions: The 14^th package notes that best efforts comprise "all actions that are suitable and necessary" to prevent undermining the sanctions. That can include "the implementation of appropriate policies, controls and procedures to mitigate and manage risk effectively...."[9]
• Limits to the Best Efforts Obligation: Notably, the Best Efforts Obligation does not outright compel EU operators to instruct non-EU subsidiaries to follow EU sanctions. Also, the Best Efforts Obligation explicitly excludes measures that are not "feasible for the [EU] operator in view of its nature, its size and the relevant factual circumstances, […], [including] where the Union operator, due to reasons that it did not cause itself, such as the legislation of a third country, is not able to exercise control over a legal person, entity or body that it owns."[10] The EC likely had in mind to exculpate EU parents of Russian subsidiaries that have to adhere to Russian counter-sanctions. It remains to be seen if this carve-out will also become relevant in case of subsidiaries of EU parents located in other non-EU jurisdictions.

B. Towards harmonised (but lower) thresholds for circumvention

The 14^th package amended, for the first time, the standard wording[11] used by the EU to describe the circumvention offence, specifically adding that circumvention includes "participating in such activities without deliberately seeking that object or effect but beingaware that the participation may have that object or effect and accepting that possibility."[12]

In effect, this test now includes the lowest levels of intent (i.e., being aware that participation may have the effect of circumvention and accepting that possibility).

Whilst such threshold for "intent" (occasionally referred to as "dolus eventualis" in civil law) is not completely novel in EU law:[13] (i) the change essentially codifies the court's position in Afrasiabi which was otherwise limited to the specific issue referred to it,[14] and (ii) it potentially signals that the EU is encouraging Member States to pursue less overt instances of circumvention. However, the codification and EU-wide alignment of the intent degree relevant for a circumvention notion is helpful as it will set a clear standard for EU operators to use in their compliance policies.

C. New compensation mechanism for Russian expropriation

The 14^th package also introduces a new compensation mechanism for EU operators to claim damages against various entities (including (i) listed entities (and their non-EU subsidiaries), (ii) any Russian entity, or (iii) their proxies) which benefited from Russian expropriation measures.[15]

Russian President Vladimir Putin issued Decree No. 302, "On Temporary Management Over Certain Assets" on 25 April 2023 ("Decree 302"), authorising the Russian federal agency for state property management to exercise external management over such assets held by foreign persons associated with the so-called "unfriendly states" as listed in the decree. To date, a number of EU assets have been nationalised in this manner.[16]

Given that not all expropriations in Russia follow a clear legal route, but are said in some cases driven by through threats and coercions, compensation is also afforded for measures that are equivalent to legal expropriation measures. It remains to be seen what evidentiary requirements a claimant will need to satisfy in this context, but in any event potential victims are well-advised to document any "Russian overtures" inducing a sale of their Russian operations.

One area that is not explicitly included in the compensation scheme are the so-called Russian exit taxes that western investors now face when attempting to sell their Russian assets. It would be desirable that the compensation mechanism unequivocally also cover damages that EU operators might incur in this context.

Importantly, the mechanism provides standing not only against entities based in Russia, but also their non-EU subsidiaries and proxies. This leaves room for the possibility that independent third parties abroad could become defendants to such claims, with greater odds of recovery (compared to claims against Russian companies).

D. Introduction of new US-style mechanisms

Greater emphasis on voluntary self-disclosure

The 14^th package amends, for the first time, the generic and standard rule that Member States must set down rules for enforcement and penalties.[17] It introduces a discretionary rule for Member States who "may take the voluntary self-disclosure of infringements of the provisions of this Regulation into account as a mitigating factor, in accordance with the respective national law."[18] Voluntary self-disclosure ("VSD") is a common feature of the US sanction system. In contrast, the concept is generally foreign to the enforcement process of most EU Member States.[19]

Although the new rule on VSD is discretionary, the fact that the EC is providing more explicit guidance to Member States on their enforcement practice is in itself novel. It is likely influenced by the recent EU directive on the definition of criminal offences and penalties for the violation of Union restrictive measures (in force since May 2024), which foresees that VSD should be regarded as a mitigating circumstance.[20]

The express inclusion of VSD is also likely a signal that EU authorities are gearing up for greater enforcement of sanctions-and are therefore providing incentives for EU operators to come forward with information. That said, until the directive is fully transposed (expected by May 2025), the enforcement process remains at the discretion of Member States, and therefore EU operators will need to undertake a jurisdiction-specific assessment to assess whether VSD will be helpful.

Quasi-secondary sanctions

In addition, the 14^th package introduces prohibitions on non-Russian/non-EU operators.[21] These mean that non-EU operators may be faced with sanctions where they are seen to be facilitating Russian access to goods and services which are otherwise prohibited for EU operators.

Whilst these new measures signal a stronger convergence with the US's approach to sanctions, at present the mechanisms (i) are limited to sanctions on vessels and the Russian SWIFT replacement (called SPFS) and (ii) have yet to be used in practice (they require the EC to actively designate entities, and as at the time of writing no designations have been made).

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