Russia's invasion of Ukraine on 24 February 2022 represented an escalation of the Russo-Ukranian war that began in 2014. In response, a series of sanctions have been imposed by the EU, the most recent of which was on 6 October 2022 following Russia's illegal referenda and illegal annexation in Ukraine, with implications for businesses across the world. This summer, the European Commission, the Council and the Parliament triggered procedures which will add violations of European Union sanctions to the list of 'EU crimes'. This represents a significant milestone in the development of an EU criminal policy under the Lisbon Treaty and is designed to achieve a harmonised standard across the EU Member States. Equally noteworthy is the fact that this is to apply, not only against Russia, but in relation to any restrictive measures imposed by the EU against regimes, territories, persons and entities across the globe. This development will encompass common criminal standards and penalties, whistleblower protection, reinforced asset recovery and confiscation options and possibly prosecution by the European Public Prosecutor's Office.
Sanctions as an EU Foreign and Security Policy Tool
Sanctions are an essential tool in the EU's common foreign and security policy. The recent war in Ukraine brought into sharp focus a growing tension between, on the one hand, the power of an international coalition to unite and respond peacefully to a violation of international law and, on the other, the limitations of sanctions. In the context of limitations, we explore questions as to how sanctions are effectively enforced.
Development of EU Sanctions
Until the late 1980s, the European Community did not adopt its own sanctions. EU Member States took measures at national level to implement UN Security Council resolutions. Since 1992, EU sanctions have assumed a pivotal role in the EU’s Common Foreign and Security Policy. The EU has implemented four thematic sanctions regimes which allow the EU to target individuals responsible for certain conduct as opposed to more classical sanctions regimes that address specific country crises. First, as part of its response to the terrorist attacks of 11 September 2001, the EU established a list of persons, groups and entities involved in terrorist acts (the EU Terrorist List). Sanctions applicable to listed persons include asset freezes and the prohibition on making any funds or economic resources available to such persons. Second, on 15 October 2018, the EU adopted a sanctions regime to address the use and proliferation of chemical weapons, supporting the Convention on the Prohibition of Chemical Weapons (27 June 2018). Third, the cyber sanctions regime, established in May 2019, targets malicious cyber activities from outside the EU that threaten the Union or its Member States. The sanctions also cover malicious cyberattacks towards third states and international organisations. The fourth and most recent thematic sanctions regime was adopted by the Council on 7 December 2020. This regime establishes a global human rights sanctions regime, in line with the EU Action Plan on Human Rights and Democracy 2020-2024. This framework allows the EU to target individuals, entities and bodies, including state and non-state actors, responsible for, involved in or associated with serious human rights violations and abuses worldwide, no matter where they occurred.
Sanctions and the Specific Case of Russia
Up to the most recent sanctions package, the sanctions imposed against Russia fell broadly into six different categories. The first category is aimed at the Russian leadership and elites through 'blocking' sanctions. This involves full asset freezes that have been imposed individually against Russia's President Putin and other members of the Russian business and political elite. In late March 2022, the US announced it was considering imposing secondary sanctions, which would prohibit foreign companies that do business with sanctioned Russian entities from accessing the US market. It convened a taskforce to trace assets of Russian designated individuals and entities, recognising that sanctions may not be effective because those assets are difficult to reach. The effect of such US secondary sanctions, if implemented, may extend to individuals and entities operating in Europe. Although the US Energy Secretary, Jennifer Granholm, said on 20 May 2022 that the imposition of secondary sanctions on buyers of Russian oil is "certainly not off the table" this threat has not materialised.
The second type of sanction targets the Russian financial system. This includes blocking sanctions against major Russian banks and financial institutions, limitations on transactions with others, and the removal of certain financial institutions from the Swift financial messaging system. The US and the EU have banned all transactions with the Central Bank of the Russian Federation. This measure is designed to prevent Russia from undermining the impact of sanctions by accessing its sizable foreign reserves or trading in sovereign debt in primary and secondary markets. These sanctions have impaired Russia's ability to pay its debts using overseas foreign currency reserves which resulted in a default in June 2022, a first since 1918.
The third category relates to energy. Following some initial hesitancy, the US soon banned the import of Russian oil, liquefied natural gas, and coal, as well as any new US investment in Russia's energy sector. The EU followed suit in early April 2022. As evidence of atrocities in Ukraine mounted, and despite internal opposition from EU Member States that rely on Russian energy supplies, the Council adopted a package of sanctions on 3 June 2022. These sanctions prohibit the purchase, import or transfer of crude oil and certain petroleum products from Russia to the EU. The restrictions will apply gradually and will be in force within six months for crude oil and within eight months for other refined petroleum products. They will cover nearly 90% of Russian oil exports to Europe by the end of the year.
A fourth category captures other controls on international trade. In March 2022, the US, Canada, the EU, and other G7 countries committed to revoking Russia's most-favoured-nation status with respect to tariff treatment, which would effectively erase the benefits of Russia's World Trade Organization membership with respect to trade in goods. These measures were coupled with restrictions on investment, with Germany suspending certification of the Nordstream 2 gas pipeline, and the US setting up further restrictions on investment in Russia.
The fifth category is transportation. Among other restrictions, Russian airlines are now banned from large swathes of the world. And the US and EU have required leasing companies to repossess planes lent to Russian airlines. In retaliation, the Russian government has moved to seize commercial jets owned by Western leasing companies.
Finally, these measures have been accompanied by an exodus of private actors. BP, Apple, McDonald's, Mastercard, and Visa, among others, have suspended operations in Russia. The cost of managing sanctions-related legal risk has an effect on the benefit of doing business with Russia. Market factors add force to a system of sanctions.
Underlying these six measures, the EU has suspended the broadcasting activities in the EU of five Russian state-owned outlets. The restrictions against Sputnik and Russia Today (together with their subsidiaries, such as RT English, RT Germany, RT France and RT Spanish) have been in place since 2 March 2022. The restrictions on the other three entities have been in place since 4 June 2022. They cover all means of transmission and distribution in, or directed at the EU Member States, including cable, satellite, Internet Protocol TV, platforms, websites and apps. In line with the EU Charter of Fundamental Rights, these measures will not prevent those media outlets and their staff from carrying out activities in the EU other than broadcasting, such as research and interviews.
The sanctions imposed on 6 October 2022 respond directly to Russia's continued escalation and illegal war against Ukraine, including by illegally annexing Ukrainian territory based on sham referenda, mobilising additional troops, and issuing open nuclear threats. Specifically, this package contains eight different elements.
First, additional individuals and entities have been sanctioned. This targets those involved in Russia's occupation, illegal annexation, and sham referenda in the occupied territories/oblasts of Donetsk, Luhansk, Kherson, and Zaporizhzhia regions. It also includes individuals and entities working in the defence sector, such as high-ranking and military officials, as well as companies supporting the Russian armed forces. The EU also continues to target actors who spread disinformation about the war.
Second, the geographical scope of the restrictions introduced on 23 February 2022, including the import ban on goods from the Donetsk and Luhansk oblasts, will be extended to Zaporizhzhia and Kherson.
Third, additional export restrictions have been introduced which aim to reduce Russia's access to military, industrial and technological items, as well as its ability to develop its defence and security sector. This includes the banning of the export of coal including coking coal, specific electronic components, technical items used in the aviation sector, as well as certain chemicals. A prohibition on exporting small arms and other goods under the anti-torture Regulation has also been added.
Fourth, almost €7 billion worth of additional import restrictions have been agreed. It includes, for example, a ban on the import of Russian finished and semi-finished steel products, machinery and appliances, plastics, vehicles, textiles, footwear, leather, ceramics, certain chemical products, and non-gold jewellery.
Fifth, this package marks the beginning of the implementation within the EU of the G7 agreement on Russian oil exports. This involves a price cap, which, once implemented, will allow European operators to undertake and support the transport of Russian oil to third countries, provided its price remains under a pre-set “cap”. This element is designed to reduce further Russia's revenues, while keeping global energy markets stable through continued supplies. It will take effect after 5 December 2022 for crude and 5 February 2023 for refined petroleum products, after a further decision by the Council.
Sixth, the package bans EU nationals from holding posts in the governing bodies of certain state-owned enterprises. It also bans all transactions with the Russian Maritime Register, adding it to the list of state-owned enterprises which are subject to a transaction ban.
Seventh, the existing prohibitions on crypto assets have been tightened by banning all crypto-asset wallets, accounts, or custody services, irrespective of the amount of the wallet (previously up to €10,000 was allow). The package widens the scope of services that can no longer be provided to the government of Russia or legal persons established in Russia. These now include IT consultancy, legal advisory, architecture and engineering services.
Finally, the EU has introduced a new listing criterion, which will allow it to sanction persons who facilitate the infringements of the prohibition against circumvention of sanctions.
Sanctions Enforcement, Asset Recovery and Confiscation
The European Commission issued a number of proposals on 25 May 2022 regarding sanctions and their enforcement in criminal law. Although the Commission states that it aims to address violations of sanctions following Russia’s invasion of Ukraine, the published proposals extend beyond the case of the Russian invasion. For any business with an EU connection, ensuring compliance with EU sanctions is now more important than ever. On 30 June 2022, the Council made a request to the European Parliament to consent to a decision to add the violation of restrictive measures or sanctions to the list of ‘EU crimes’ included in the Lisbon Treaty. The proposed legislation will require unanimity from all EU Member States but, if adopted, would be another significant step in the EU’s increased role in criminal law and procedure, an area that was traditionally within the exclusive remit of the national legislature. The European Parliament gave its consent to the draft Council decision on 7 July 2022. The final adoption of the decision by the Council will, however, only take place in autumn, as Germany needs to pass domestic legislation before it can vote on the measure. The core objective of this sanctions regime is to bring about a change in policy or behaviour by targeting countries, entities and individuals responsible for violating human rights, waging war or endangering international peace and security.
Enforcement of sanctions is crucial to ensuring the effectiveness of these measures. The EU currently recognises 10 areas of crime that are considered so serious and cross-border in nature that they require harmonisation in accordance with one minimum standard across all EU Member States. The current list of matters subject to harmonising EU directives includes terrorism, trafficking in human beings and the sexual exploitation of women and children, illicit drug trafficking, illicit arms trafficking, money laundering, corruption, counterfeiting of means of payment, market abuse, computer crime and organised crime.
There are three main reasons for the proposal to add sanctions violations to the list of EU crimes. First, the European Commission considers that sanctions violations are a particularly serious crime and have an inherently cross-border dimension, necessitating a harmonised approach. Second, the actual prosecution of individuals or legal entities responsible for sanctions violations remains rare. Whilst published data on this topic is sparse, the European Commission considers that there are only a few EU Member States that have initiated judicial proceedings relating to the violation of EU restrictive measures. Third, the European Commission considers that the existing national laws are fragmented, with EU Member States having “very different definitions and penalties” and “different enforcement levels”; 13 EU Member States, including Ireland, punish sanctions evasion both as a criminal and administrative offence, another 12 EU Member States as a criminal offence, and the two remaining EU Member States just as an administrative offence.
The extent to which Community law can determine criminal behaviours and the boundaries of criminality is evident in these recent developments. Paragraph 1.4 of the Communication from the European Commission to the European Parliament and the Council provides that "[t]he Articles on the offences to be approximated by the Directive would include precise definitions of various criminal offences related to violations of Union restrictive measures". The text goes on to list various violations ranging from deliberately making funds and economic resources available, to failing to freeze funds and economic resources, and on to positively engaging in trading or commercial activity. It also includes violations which broadly amount to obstruction including actions which circumvent the restrictive measures or the non-reporting of violations.
The European Commission would also require the imposition of minimum and maximum criminal penalties on natural and legal persons, including fines (possibly linked to a certain percentage of the legal person’s total worldwide turnover); their temporary exclusion from access to public funding, including tender procedures, grants and concessions; their temporary or permanent disqualification from practicing business activities; the withdrawal of their permits and authorisations; or even their subjection to judicial supervision, temporary or permanent closure, or judicial winding up.
On the matter of the standard of criminal intent, the European Commission’s position is that the offences would require intent, or at least gross negligence based on knowledge or wilful blindness. This issue is complicated by differences across EU Member States as to how criminal intent is attributed to legal persons. Whilst the prosecution of sanctions violations would continue to fall within the remit of national prosecutors in each of the EU Member States, the possibility exists that this will be elevated to the level of prosecution by the European Public Prosecutor's Office.
Taken together, the proposal to criminalise the aiding and abetting of sanctions violations as well as the subsequent concealment, conversion or transfer of any proceeds as money laundering, and the requirement for EU Member States to bring sanctions violations within the scope of their national legislations transposing the EU Whistleblowing Directive (2019/1937), make it even more important that businesses adopt their own, robust and up-to-date sanctions compliance measures.
Proposal to Reinforce EU Minimum Standards on Asset Recovery and Confiscation
The European Commission has also issued a proposal to reinforce the current EU minimum standards on asset recovery and confiscation. Similarly, this proposal is not limited to the confiscation of Russian oligarchs' assets, but will extend to anyone suspected of having committed a financial crime. In a legislative proposal that would extend to any EU crimes, including sanctions violations (if added to the list), the European Commission has set out a number of far-reaching rules in relation to asset recovery and confiscation. In particular, EU Member States would be required to make substantial changes to their national laws and put in place an extended confiscation regime allowing for:
- non-conviction based confiscation, including in cases where the facts are time barred so that conviction has become impossible; and
- the confiscation of unexplained wealth without a conviction.
The European Commission recognises the possible implications of this new confiscation model for due process, fundamental rights and property rights but it considered the measures justified by the need to confiscate illicit assets. These are considerations that will undoubtedly have to be determined by the national courts in due course.
Financial Sanctions Enforcement in the UK, Ireland and Germany
In the UK, progress with the Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") was slow but Russia's invasion of Ukraine led to its acceleration. A key driver was the need to make it easier to identify and trace illicit wealth following the invasion. Principal features of the Act include the lowering of the liability threshold for imposing a civil monetary penalty for breaching financial sanctions; the expansion of the range of circumstances in which an Unexplained Wealth Order can be issued (these are court orders provided for under s 362 A of the Proceeds of Crime Act 2002 which compels an individual to explain sources of wealth); and the establishment of a registry of beneficial owners of foreign entities which own property in the UK. Additionally, these changes give new powers to the Office of Financial Sanctions Implementation. The UK government has not announced concrete details for an equivalent scheme to the enhanced asset recovery and confiscation rules proposed by the EU, but there have been discussions around introducing a similar scheme. These proposals include plans to seize UK land and property owned by certain Russian oligarchs that have been targeted with UK asset freezes, without paying any compensation in return.
Apart from signalling a shift in focus on the part of the UK, the Act will also have implications for certain businesses in Ireland. The Act requires an overseas entity that owns, or is entitled to own, UK property to register on the UK's new Companies House register, which was launched on 1 August 2022, unless an exemption applies. Overseas entities will then have an ongoing responsibility to update their registration within a 14-day annual update period. The overseas entity must also notify Companies House when a beneficial owner and/or managing officer is required to be removed from the new Register. Criminal penalties are proposed for those who fail to comply, including custodial sentences. These latter provisions will have implications for Irish entities that own or are entitled to own UK property and have been commented on previously by us.
These developments reverberate in another way in Ireland, albeit not under the recent EU sanctions enforcement regime. The Screening of Third Country Transactions Bill 2022 completed Dáil Éireann First Stage on 2 August 2022. In January 2021, we published an article noting our response to the public consultation on investment screening. It is concerned primarily with considering the impact of an investment on security or the public order, and, as noted in this previous insight, represents an implementation of Regulation (EU) 2019/452. Reference is made there to the related National Security and Investment Act 2021(UK).
Further resonances can be found in Germany where the First EU Sanctions Enforcement Act is now in force. It amends a number of relevant German laws, including the German Foreign Trade and Payment Act (or the German Anti-Money-Laundering Act), the German Banking Act and similar financial regulations. The legislation contains provisions allowing for investigations, house searches, the securing and confiscation of funds and economic resources as well as detailed provisions on how to comply with the notifications requirements already established under the EU sanctions regimes.
However, even before the Sanctions Enforcement Act came into force, economic operators were required to conduct regular screenings to verify whether business partners, employees or shareholders of the company were subject to sanctions. Although the threat of criminal punishment did not exist, most companies provided information on frozen funds and other economic resources to the relevant German authorities in accordance with the cooperation obligations standardised in the EU sanctions. Now that criminal punishment for violations is a reality, it remains to be seen how well the cooperation between the relevant authorities will be implemented, whether searches of business premises actually take place, and whether violations of the duty to report will actually be prosecuted and punished under criminal law. A Second Sanctions Enforcement Act is expected to be enacted in the future. This aims at setting up a national register for assets of unclear origin and for sanctioned assets, instituting an independent administrative procedure for investigating assets of unclear origin and a special whistleblower office.
In a different vein, but also related to Russia's invasion of Ukraine, the Central Bank of Ireland has confirmed in a notice published on 16 May 2022 that "side-pocketing arrangements" will be permitted only for Russian, Belarussian or Ukrainian assets that are either directly or indirectly impacted by either Russia’s invasion of Ukraine or the sanctions imposed as a result of the invasion. We commented on this development in a previous article Sanctions Sanctions and use of side pockets by UCITS: Central Bank Guidance.
This is a fast-evolving and multifaceted area of law. A further link to an earlier piece we wrote can be found here. We will provide further insights as events unfold.
Co-Authors: Irene Lynch Fannon and Juliette Casey, Knowledge Management Team