- Publication type
- Article
- Types of sanctions
- Export controls
- Import controls
- Thematic area
- Sanctions compliance & due diligence
Introduction
Since June 2024, EU individuals, businesses, and other entities that own or control entities outside the EU are required to use best efforts to ensure that EU sanctions concerning Russia or Belarus are not undermined by those entities.
While this legal obligation applies only in the context of sanctions on Russia and Belarus, EU operators are encouraged – as a matter of good practice – to seek to ensure that all entities they own or control do not undermine EU sanctions anywhere in the world. Many businesses already require their foreign affiliates to comply with EU sanctions as a matter of policy.
Read on to discover some of the important considerations of these policies and how they apply. And, of course, you can always check out the EU Sanctions Helpdesk’s Support Service if you need free, personalised support with how EU sanctions apply to your business.
What does undermining sanctions mean and how is it different to breaching or circumventing?
Breaching
A breach or violation of sanctions is when, for example, an exporter in the EU sells machine tools to Russia, directly or indirectly. That is prohibited. Undertaking such a transaction, whether intentionally or unintentionally, is a breach of the export ban and leads to administrative penalties or (in the case of intentional or particularly serious breaches) criminal penalties.
Circumventing
Circumvention (sometimes referred to as ‘evasion’) is when someone tries to find a way around sanctions by structuring a transaction to give the formal appearance of compliance, but in doing so still frustrates the underlying prohibition. For example, if a third-country buyer of EU machine tools declares itself as the end-user but then quietly transfers the goods to Russia, this is circumvention. When an EU operator, knowingly and intentionally, takes part in activities that circumvent the sanctions – or merely aim to do so – that leads to criminal penalties.
Undermining
The meaning of ‘undermining’ is a bit different. It refers to actions that weaken the effect of the sanctions, even if they don't directly break the rules. For example, if our imaginary EU exporter has a subsidiary outside the EU and that subsidiary sells machine tools to Russia, then the sanctions are being undermined. This is because Russia is acquiring machine tools, and that is precisely what the EU’s sanctions on Russia are designed to prevent.
While the foreign subsidiary is not covered by EU legal jurisdiction, the EU-based owner must still use its best efforts to ensure that its affiliates outside the EU do not undermine EU sanctions. This means the EU owner may be subject to legal penalties, even if the foreign subsidiary is not.
In summary:
- Breaching (violating): Undertaking an activity that the sanctions prohibit.
- Circumventing: Disguising a transaction to get around the sanctions.
- Undermining: Undertaking an activity that weakens the effect of sanctions.
What are best efforts?
‘Best efforts’ means a high degree of effort – it is a higher standard than ‘reasonable efforts’, which you may be familiar with in legal contracts. The European Commission, in its FAQs, has clarified that best efforts comprise “all actions that are necessary and feasible” to prevent the undermining of sanctions.
What ‘best efforts’ means for a business or other operator is very situation-specific. When authorities assess whether or not best efforts have been made, they will take a close look at your business and the third-country affiliate, including their size, business sector, and the type of activity undertaken. As with any aspect of a sanctions compliance programme, your best efforts need to be calibrated to the sanctions risk your business is exposed to. The higher your risk or the larger your business, the more you are expected to do.
The Commission’s FAQs on “Best Efforts” Obligations (particularly question 5) provide useful examples of what actions could be used to demonstrate best efforts have been made.
What if I cannot control my foreign affiliate?
There may be occasions when the EU operator has lost control of an overseas business or that business is prohibited by local law from complying with EU sanctions. This can happen, for example, when a country subject to EU sanctions imposes countermeasures to neutralise the local effect of those EU sanctions. This is the case in Russia. In these circumstances, the Commission has made clear that it might not be feasible for the EU business to exercise such control over the overseas business.
However, in its FAQ the Commission also stated that where control of an affiliate is lost due to the fault of the EU operator (even if this arose before the sanctions), the EU operator may be liable under the “best efforts” requirements. Therefore, it is advisable that EU businesses take steps to develop EU sanctions compliance within affiliates they own or control before a crisis situation develops – not in response to it.
How can EU operators ensure they are protected?
Firstly, if these ‘best efforts’ requirements affect your business, you must take action as soon as you can. Even if you are not potentially exposed, via your affiliates, to trade involving Russia or Belarus, you should consider what action you need to take now to ensure that your business would be protected should similar requirements be introduced into other sanctions regimes in the future.
The EU Sanctions Helpdesk recommends the following 3-step approach:
- Undertake a risk assessment of your business, including any entities in which you have an ownership (or control) interest.
- Implement a sanctions compliance programme that addresses these risks as much as you can. For instance, you can take steps to share information, provide training, impose reporting obligations, or retain control of sanctions matters at your EU Head Office, among others.
- Plan ahead – ‘best efforts’ requirements currently affect activity targeted under Russia and Belarus sanctions. If such requirements are adopted in respect to other countries in the future, what do you need to do now to protect your business?
Ultimately, to protect yourself, you should build sanctions compliance best practices into your business – including any overseas interests you may own or control – before a crisis.
What should EU operators do if they are concerned about such activities?
This article is intended to help you understand your obligations under EU law. If you or your business are affected by these ‘best efforts’ requirements, you should:
- Read the regulations regarding Russia (Article 8a), and Belarus (Article 8i), as well as those on “Ukraine Territorial Integrity” (Article 15a), Crimea (Article 8a) and Oblasts (Article 13a).
- Read the European Commission FAQs on “Best Efforts”.
- Consider seeking legal advice from a suitably qualified lawyer specialising in sanctions law or ask for advice or guidance from your National Competent Authority, which has the responsibility for implementing and enforcing EU sanctions in your country.
How the EU Sanctions Helpdesk can help you
The EU Sanctions Helpdesk is an initiative funded by the EU to help SMEs and other organisations comply with EU sanctions. We can:
- Answer your questions on the applicability of EU sanctions
- Offer you guidance on performing sanctions due diligence
- Undertake sanctions due diligence for you, free of charge, if you encounter red flags or you simply need the support
If you have a question on a transaction, find out how to get support.