The G7 announced the creation of a new Enforcement Coordination Mechanism “to bolster compliance and enforcement of our measures and deny Russia the benefit of G7 economies” on the one-year anniversary of Russia’s invasion of Ukraine. The International Group of Seven (“G7”) is an intergovernmental forum whose members include the US, UK, Germany, France, Italy, Canada, and Japan, with the European Union as a “non-enumerated” member. As such, Germany, France and Italy are EU Member States as well as independent members of the G7.
So far, we have published two blog posts in this series. Our introductory post last week covered the US position (here), and our second post last week shared the position from a UK perspective (here). This blog post will be considering sanctions enforcement and the Enforcement Coordination Mechanism from the perspective of the EU, as the EU is a “non-enumerated” member of the G7. As the EU does not itself carry out sanctions enforcement activities, this post will take a broad view of sanctions enforcement across the EU. Over the next three weeks, we will turn to the “enumerated” EU members of the G7 (Germany, Italy, and France), before rounding out the series with the view from Canada and Japan.
1. What are the recent sanctions enforcement trends in the EU?
Currently, the EU has over 40 sets of various sanctions in place. Some of these implement sanctions adopted by the United Nations; others are adopted autonomously by the EU. In addition, some EU Member States have imposed their own national sanctions.
Due to Russia’s military aggression against Ukraine, the EU has adopted a large number of sanctions against Russia, including both financial sanctions and trade sanctions. However, until this day, violations of EU sanctions do not count as one of the serious EU crimes. For this reason, a breach or violation of EU sanctions is not of a criminal nature yet and does not entail criminal sanctions at the EU level. Consequently, currently the national systems in Member States differ significantly with regards to the criminalisation of sanctions. In addition, the criminal penalty systems in Member States differ.
In this context, in order to enhance EU coordination in sanctions enforcement, the European Commission (“the Commission“) set up a ‘Freeze and Seize’ Task Force. This Task Force ensures coordination among Member States and EU agencies such as Europol and Eurojust. Furthermore, the EU has regularly discussed the need for a common criminal law approach in order to hold accountable natural and legal persons involved in the violation of the EU sanctions.
Against this background, the Commission proposed on 25 May 2022 that the European Council (“the Council“) should add “violation of restrictive measures” to the list of EU crimes. The proposal sets out common EU rules and aims to make it easier to investigate, prosecute and punish violations of EU sanctions in all Member States alike. Please see our previous blog posts on the proposal here and here.
However, the proposal will have to go through the European Parliament and the Council before it gets adopted. After that, Member States will have two years for implementation. Until then, EU Member States’ own systems for sanctions enforcement will remain in place. Some enforcement trends in EU countries which are not independently part of the G7 follows:
- In the Netherlands, violations of EU Russia sanctions are dealt with under criminal law pursuant to the Dutch Sanctions Act 1977 and the Economic Offenses Act. Dutch court cases on sanctions violations convictions have historically led to high fines. In addition, the Dutch Public Prosecution Service currently has 45 pending criminal investigations in relation to potential violations of EU Russia sanctions. Furthermore, additional enforcement actions may be expected, in light of the low standard of proof for establishing international EU sanctions violations under Dutch law, as recently confirmed by the Dutch Supreme Court (please see our previous blog post on this here).
- As for the Czech Republic, until now the Czech authorities have not been very active in relation to enforcement of EU sanctions. In the beginning of 2023, the Czech Republic adopted a new Sanctions Act, which implements the process for including entities on the Czech national or EU sanctions lists and the rules for adopting national restrictive measures against certain entities for actions sanctionable under the relevant EU regulation. Nevertheless, as of today, there have been no persons or entities added to the national sanctions list.
- In Spain, the enforcement of sanctions violations has historically been low. The only cases of Russia sanctions enforcement we are aware of in Spain are:
- Seizure of oligarchs’ assets, such as yachts; and
- A case where the Magellan, a Singapore-flagged vessel, was refused entry to the Port of Tarragona last month because it was carrying diesel that originated from another vessel that had sailed under a Russian flag until 1 July 2022. This action was taken to comply with the prohibition of access to EU ports by Russia-flagged vessels and vessels that changed their Russian flag or registration to that of any other state after 24 February 2022.
- In the Nordics the enforcement of sanctions violations has historically been rather low with a handful of criminal enforcement cases. However, during the past 18 months enforcement has been increased on multiple levels, including a number of criminal convictions and an increased scrutiny by Customs and other Nordic authorities. Recent information from the various enforcement authorities indicates a clear increase of ongoing investigations throughout the region.
Generally, which is also indicated by the above, enforcement of EU sanctions in the various EU Member States have been low but varies depending on the jurisdiction. However, there is a clear trend that enforcement in the EU is on the rise and we expect a substantial increase on enforcement actions taken by EU member state authorities in the near future. We are also expecting the Commission’s proposal on a harmonisation of criminal defences and penalties to enhance sanctions enforcement on the EU side, particularly in relation to EU sanctions against Russia.
2. What are the maximum penalties for violations?
Penalty systems differ substantially across Member States. In fourteen Member States, the maximum length of imprisonment is between two and five years. In eight Member States, maximum sentences between eight and twelve years are possible. The maximum fine that can be imposed for the violation of EU sanctions– either as a criminal or as an administrative offence – varies greatly across Member States, ranging from EUR 1 200 to EUR 5 000 000.
Fourteen Member States provide for criminal liability of legal persons for the violation of EU sanctions. In addition, twelve Member States provide for administrative penalties, notably fines, which may be imposed on legal persons when employees or management violate restrictive measures. Maximum fines for legal persons range from EUR 133 000 to EUR 37.5 million.
The Commission’s proposal on harmonisation of criminal defences and penalties includes common basic standards for penalties: depending on the offence, the individual person could be liable to a maximum penalty of at least five years in prison and companies could be liable to penalties of no less than 5% of the total worldwide turnover of the legal person in the business year preceding the fining decision.
3. Is there a mechanism by which countries can submit a voluntary self-disclosure of possible violations to mitigate penalties?
As of now, there is no mechanism to submit a voluntary self-disclosure of possible violations to mitigate penalties on EU level. As previously mentioned, this will vary in between the different EU Member States depending on their national systems for sanctions violations. Also, the Commission’s proposal to harmonise violation of EU sanctions include no proposal to introduce such a mechanism.
However, a future proposal to introduce a mechanism to voluntary self-disclose sanctions violations on EU level should not be ruled out given that the US and the UK, both being at the forefront of sanctions-related enforcement, have well developed voluntary self-disclosure mechanisms in place providing for mitigated penalties, which are commonly utilised.
4. What do you think the G7 Enforcement Coordination Mechanism means for your jurisdiction?
The G7 Leaders have stated that the purpose of the Enforcement Coordination Mechanism is to prevent and respond to evasion and circumvention of Russia-related sanctions measures and to bolster compliance with such measures, with a specific focus on third countries.
EU is in the process of harmonising enforcement of the EUs sanctions in order to streamline enforcement on EU level. The aim of the proposal is to make it easier to investigate and prosecute individuals in a uniform manner in all Member States. The Russia-related sanctions and the risks of circumvention of the sanctions have brought us to a phase were enforcement efforts are essential for an effective implementation of the sanctions.
The complexity that has followed the Russia related sanctions require coordination not only on EU level but also with international counterparts. We believe that the creation of the G7 Enforcement Coordination Mechanism and other multi-national enforcement efforts will facilitate this transition to increased international cooperation and increased sanctions enforcement against those not complying with the sanctions or attempting to circumvent them.
5. What is one thing that you would recommend companies do now to get ready for increased enforcement in your jurisdiction and increased coordination with the other G7 members?
Companies should prepare for a sanctions environment with increased enforcement on a multi-jurisdictional level. Not complying with the sanctions will be costly for companies and in many cases a matter of personal liability for management and the Board of Directors. In particular, companies need to be aware of risks that may give rise to circumvention of the sanctions given that G7 jurisdictions will focus on trade occurring via third countries.
Companies should ensure that they have proper trade compliance clauses in place so that they may suspend businesses in the event that performance is hindered by the sanctions, also in relation to third countries potentially used for circumvention. Companies carrying out trade in neighbouring countries to Russia may consider audit right-clauses as well as actual in-person audits in order to mitigate circumvention and enforcement risks.
Furthermore, our recommendation is to regularly conduct screenings of all business partners, including banks, when conducting business that may have connections to Russia. In addition, companies should review their supply chains to determine whether there are any connections to sanctioned regimes such as Russia, and if such connections are identified, it is important to evaluate changes to the supply chain in order to stay compliant with the sanctions.
Lastly, companies should carry out a pre-emptive investigation into their business and/or exits out of Russia and Belarus, to identify possible issues and especially if decisions and actions taken have been properly documented. Based on our recent experience, there have been a lot of urgent and critical decisions taken during the previous 12 months and these decisions have often not been properly documented which in case of an regulatory investigation would pose a significant risk to the company and the individuals whom took such decisions.