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The wide reach of the prohibition against circumventing EU sanctions

October 31, 2022 Sanctions

Against the background of Russia’s invasion of Ukraine, the EU has imposed a number of sanctions, which include a prohibition for companies within the EU to take certain measures in relation to Russia, as well as designated Russian people and entities on the sanction lists. Furthermore, a prohibition to circumvent the sanctions has been introduced in order to ensure that the sanctions are effective also in practice. When it comes to this circumvention prohibition, it is important to be aware of its wide interpretation, as established by the Court of Justice of the European Union and the European Commission.

Article 12 of Regulation 833/2014,[1] concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine, stipulates that it is “prohibited to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent the prohibitions [set out in this Regulation].”. The same type of prohibition is to be found in article 9 of Regulation 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine,[2] as well as in other regulations imposing sanctions on third countries.[3] These provisions aim to crack down on actions and businesses that, on the surface, do not infringe the imposed prohibitions but nevertheless has as their object or effect to circumvent the prohibition. A typical example of a circumvention is the exportation of sanctioned goods to Russia via a country which is not subject to sanctions.

In its judgment in Afrasiabi,[4] the Court of Justice of the European Union held that “the terms ‘knowingly’ and ‘intentionally’ imply cumulative requirements of knowledge and intent, which are met where the person participating in an activity having such an object or such an effect [to directly or indirectly circumvent the prohibition] deliberately seeks that object or effect or is at least aware that his participation may have that object or that effect and he accepts that possibility.”

Consequently, the prohibition to circumvent covers not only direct and intended circumventions, but also situations where a company understands that their participation in a business may have the object or effect of circumventing, directly or indirectly, a prohibition, and accepts that possibility. The prohibition to circumvent thus substantially strengthens the EU sanctions regime and can, to some extent, be considered to provide an extension of the sanctions.

This is for example the case with regard to the freezing provisions in the EU sanctions regime, which stipulate that designated entities’ financial assets must be frozen. Banks within the EU that receive such funds are consequently obligated to freeze them. In order not to circumvent these provisions, funds received from an entity that is not designated should also be frozen if other parts of the transaction involve a designated entity in some capacity. The circumvention prohibition thus extends the freezing provisions in the sense that funds that once were in the possession of a designated entity risk being considered as “infected” and therefore have to be frozen by recipients further down the line.

Further, the European Commission has argued that in some situations, receiving funds from a non-designated entity may also amount to a circumvention of the freezing provisions, if this entity is designated at a later stage. The Commission considers that if a certain structure has been created to help a person avoid the effects of its future potential designation, a current and ongoing participation in that structure may amount to a circumvention, if it occurs knowingly and intentionally (within the meaning set out in Afrasiabi).[5]

In light of the above, due diligence is recommended before every transaction that could involve a designated entity at one point or another, in order to avoid the risk of being considered to circumvent the sanctions. According to the Commission, every EU enterprise should prepare and implement an EU sanctions compliance programme ensuring that it is compliant with the EU sanctions regime.[6]  In particular, the end recipient of a product, as well as, in certain situations, the original provider, should be identified. The Commission recommends a risk-based approach, multi-level due diligence and ongoing monitoring. Considering the fact that the circumvention prohibition has to be interpreted broadly, it will be difficult for an entity to claim that they lacked knowledge that certain actions may be considered to circumvent the prohibitions. Due diligence therefore becomes an important aspect of the handling of transactions that risk being regarded as involving sanctioned actions.

It should furthermore be noted that the eighth sanctions package related to Russia’s invasion of Ukraine, which entered into force on 6 October 2022, adds a new designation criterion in Article 3 of Regulation 269/2014.[7] Under the new criterion, persons (whether natural or legal), entities and bodies that facilitate infringements of the circumvention prohibition may be designated. This is also applicable to EU citizens. Such a designation means that the person in question is considered a sanctioned person, which inter alia results in their assets being frozen under Article 2 of Regulation 269/2014. This new criterion substantially extends the types of actions which may lead to designation, in particular in light of the fact that the circumvention prohibition is to be interpreted broadly, as explained above. As President von der Leyen has highlighted, the new criterion is to be regarded as a further step in the Commission’s efforts to crack down on circumvention of sanctions.[8] Moreover, the Commission is planning to take further action to ensure proper implementation in order to prevent circumvention. These measures include organising a structured and comprehensive mechanism allowing the exchange of best practices and information between the Member States. Additionally, a workstream on circumvention with an Experts’ Conference will be set up to increase EU coordination regarding circumvention of sanctions.[9] It should finally be noted that, according to reports in the press, there are plans to make unlawful circumvention of EU sanctions a criminal act under EU law and, if this is decided, to task the European Public Prosecutor’s Office (EPPO) with enforcing EU sanctions. At the time of writing, this is yet to be confirmed by EPPO and the European Commission. It should be noted that, under Swedish law, sanctions breaches (including unlawful circumvention) is already a criminal act.

 

Please contact Anders Leissner or Martin Johansson if you have questions regarding the EU sanctions regime.

 

 

[1] Council Regulation (EU) 833/2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine, OJ L 229, 31.7.2014, p.1.

[2] Council Regulation (EU) 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ L 78, 17.3.2014, p. 6.

[3] For example, Regulation 267/2012 on the restrictive measures against Iran.

[4] Judgment of the Court of 21 December 2011 in case C-72/11, Afrasiabi and others, paragraph 68, EU:C:2011:874; see also judgment of the General Court of 6 September 2013 in case T-434/11, Europäisch-Iranische Handelsbank v the Council, paragraph 134, EU:T:2013:405.

[5] See the European Commission’s FAQ regarding Regulations 833/2014 and 269/2014, question 6, p. 13: https://finance.ec.europa.eu/publications/consolidated-version_en

[6] See the European Commission’s FAQ regarding Regulations 833/2014 and 269/2014, question 1, p. 12: https://finance.ec.europa.eu/publications/consolidated-version_en

[7] Council Regulation (EU) 2022/1905 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine, OJ L 259, s. 76, article 1(1).

[8] See the press statement from president von der Leyen concerning the new package of sanctions against Russia: https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_22_5856; see also the Commission’s press release concerning the eight package of sanctions against Russia: https://ec.europa.eu/commission/presscorner/detail/en/IP_22_5989.

[9] See the press statement from Commissioner McGuinness concerning the outcomes of the high level meeting on sanctions implementation: https://finance.ec.europa.eu/news/statement-commissioner-mcguinness-outcomes-first-meeting-high-level-meeting-sanctions-implementation-2022-10-24_en .  

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