Earlier this year, the EU introduced various new restrictions as part of its sanctions packages targeting Russia (see our blog post on the 14th EU Russia sanctions package) and Belarus (see our blog post of the most recent EU Belarus sanctions package).
Among the notable and novel restrictions were:
- the new obligations for EU parents to undertake “best efforts” to ensure that activities undertaken by their non-EU subsidiaries do not undermine EU sanctions targeting Russia and Belarus; and
- additional diligence obligations for EU operators involved in the sales of identified Common High Priority Items, the effects of which will be significantly expanded before the end of this year.
Businesses should therefore review their current practices and consider whether any enhancements are necessary to comply with these measures.
Guidance on âbest effortsâ obligations
The “best efforts” obligations under the EU’s Russia and Belarus sanctions are set out in Article 8a of Council Regulation (EU) 833/2014 (the “EU Russia Regulations“) and Article 8i of Council Regulation (EU) 765/2006 (the “EU Belarus Regulations“) respectively.
The requirements for EU entities to undertake “best efforts” to ensure that activities undertaken by their non-EU subsidiaries do not undermine EU sanctions targeting Russia and Belarus raise complex questions about the scope of EU sanctions and their application to the activities of non-EU entities.
On 22 November 2024, the EU Commission published FAQs on the “best efforts” obligations for EU operators under EU Russia sanctions. While guidance on these novel â and not undisputed â restrictions will generally be welcomed by businesses, the FAQs largely build on the recitals to the implementing legislation. Key takeaways from the FAQs include:
- The FAQs confirm that EU sanctions do not directly impose obligations on entities in Russia or other third countries. Instead, obligations are imposed on the EU operators that own or control non-EU entities (whether in Russia or another third country).
- The scope of âbest effortsâ is not defined in the Regulation. With reference to the recitals to the relevant implementing legislation, the EU Commission suggests that âbest effortsâ include âall actions that are necessary and feasible to prevent the undermining ofâ relevant EU sanctions by non-EU entities owned or controlled by an EU operator.
- According to the EU Commission, the concept of âunderminingâ is separate from âcircumventingâ and involves activities âresulting in an effectâ that the relevant EU sanctions seek to prevent.
- What is considered ânecessary and feasibleâ requires a case-by-case assessment, based on the EU operatorâs nature, size and relevant factual circumstances, such as market sector, risk profile, turnover and number of staff.
- Another relevant consideration is the degree of effective control by the EU operator over the non-EU entity.
- The EU Commission suggests that, in practice, EU operators should seek to ensure that they are aware of the activities conducted by non-EU entities that they own or control, and that such non-EU entities understand the types of activities that risk undermining EU sanctions. According to the FAQs, this could, for example, be done through internal compliance programs, compliance standards, training and education, as well as reporting and escalation mechanisms.
- The EU Commission further suggests that an EU operator may breach its “best efforts” obligations by knowingly accepting continued activities of its non-EU subsidiary that undermine relevant EU sanctions. According to the EU Commission, such EU operator cannot be considered to have performed all actions necessary and feasible to prevent the undermining of EU sanctions by that non-EU entity. The FAQs suggest that this may, for example, be the case if an EU operator does not prevent supplies of goods covered by an EU export ban by its non-EU subsidiary to parties in Russia, or if a non-EU subsidiary continues to trade in goods that have been produced in Russia and are subject to an EU import ban.
Although the FAQs reflect the interpretation by the EU Commission, they are not legally binding, and national competent authorities in EU Member States may take different positions on the scope and application of these measures. The EU Commission’s guidance also indicates that the EU Commission will engage with EU Member States to develop a âclear set of expectations for EU operatorsâ to enable operators to comply with their obligations and facilitate a level playing field across the EU â suggesting that further guidance may be forthcoming.
At EU Member State level, the German Ministry for Economic Affairs and Climate Action (BMWK) also recently issued updated guidance to reflect these requirements, which does not appear to align in all respects with the positions taken by the EU Commission (as discussed above). Further insights and guidance from EU Member State authorities will also be important to assessing the impacts of these measures.
Enhanced due diligence obligations for EU operators
Alongside the “best efforts” restrictions discussed above, the EU has also imposed more specific requirements on EU operators involved in the supply of Common High Priority Items, under Article 12gb of the EU Russia Regulations (introduced in the 14th EU Russia sanctions package).
In summary, Article 12b requires that, as of 26 December 2024, EU operators must:
- take appropriate and proportionate steps to identify and assess risks of export of such items to or for use in Russia; and
- implement appropriate and proportionate policies, controls and procedures, to mitigate and manage such risks.
A carve-out is available for EU operators that only sell, supply or transfer such Common High Priority Items within the EU, or to Partner countries listed in Annex VIII (which currently includes the US, Japan, the UK, South Korea, Australia, Canada, New Zealand, Norway, Switzerland, Liechtenstein, Iceland).
Importantly, Article 12gb(3) requires EU operators to ensure that any non-EU entity that they own or control that sells, supplies or transfers such Common High Priority Items also complies with these requirements, as of 26 December 2024.
An equivalent obligation is set out under Article 8ga of the EU Belarus Regulations (with a corresponding implementation date of 2 January 2025). Businesses involved in the supply of Common High Priority Items (which includes various categories of common manufacturing and IT equipment) should ensure that they are prepared for these incoming requirements under Article 12gb.
