Sanctions Update: new US guidance for overseas sanctions enforcement, the impact of the EU's "no Russia" clause for certain businesses, the EU's new liability directive and some notable sanctions de-listings and challenges

On 6 March 2024, the US Department of the Treasury's Office of Foreign Assets Control ("OFAC"), the Department of Justice ("DOJ") and the Department of Commerce ("DOC") released a Tri-Seal Compliance Note (the "Note") on “Obligations of Foreign-Based Persons to Comply with US Sanctions and Export Control Laws.”

In the US, OFAC is responsible for administering and enforcing certain economic and trade sanctions in support of US national security and foreign policy objectives. Whilst OFAC states in the Note that US sanctions apply primarily to US persons, it also outlines the ways that non-US persons can potentially breach US sanctions. This includes by evading, conspiring to breach or causing a US person to breach US sanctions.

Whilst the note does not ultimately reflect any policy change from a US sanctions enforcement perspective, it highlights the potential applicability of US sanctions and export controls to individuals and entities outside of the US – and the corresponding enforcement mechanisms that the US Government has at hand to hold non-US persons accountable. The Note is effectively a 'warning shot' aimed at non-US entities and natural persons who might be considered to be circumventing US sanctions, reminding them of the potential extraterritorial reach of US sanctions and export controls.

• The Note gives some examples of this type of conduct, including when a non-US person obscures or omits references to sanctioned parties in financial transactions (that involve a US person), misleads a US person into exporting items ultimately destined for a sanctioned jurisdiction or routes a prohibited transaction through the US financial system.
  
  
• A non-US person who violates US sanctions can be subject civil penalties by OFAC on a strict liability basis. This means the person does not technically need to be aware that it was violating US sanctions at the time.

The Note goes on to highlight the potentially far-reaching scope of US export controls and the Export Administration Regulations ("EAR"). The Note emphasises to non-US persons that the EAR covers the re-exporting of goods from one foreign country to another, as well as the transfer of goods within a country. Since the US export control regime follows where the goods go, it means that it effectively applies globally – stressing that attempts to circumvent export controls through the initial export to a non-controlled destination or person does not provide an entirely safe harbour. This is particularly interesting within the context of the EU's attempts at shoring up anti-circumvention measures for certain high-priority industries, as discussed in relation to the aviation sector below.

The Note also emphasises the DOJ's power and readiness to bring criminal cases for any wilful violations of US sanctions and export controls by non-US persons, which could result in a maximum penalty of 20 years imprisonment and a fine. The Note points to several examples of past DOJ enforcements, such as a $4.3 billion penalty for Binance Holdings Limited, who pled guilty to violating (amongst other matters) US sanctions related to Iran.

Overall, it is clear from the Note that the US expects foreign entities to identify when US sanctions and export controls apply to them and take effective measures to ensure compliance. This highlights the need for organisations involved in global trade or finance to continually assess and review the rules they are subject to, and to have procedures in place to keep them on the right side of those rules – such as implementing a risk-based sanctions compliance program, integrating know-your-customer information into sanctions screening protocols and taking immediate and effective action when sanctions issues are identified. It also stresses again the long-arm nature of US sanctions and US Government policy in this area.

In December 2023, the EU published its 12th package of sanctions, which contained a new commitment to "combat the circumvention of EU export bans and more specifically the situation where goods exported to third countries are re-exported to Russia" through the use of an explicit contractual obligation between commercial counterparties when dealing with certain 'sensitive goods'.

Art 12g of Regulation (EU) 2023/2878 requires all EU exporters of firearms and ammunition, aviation goods (including aircraft and spacecraft), jet fuels and common high priority items when "selling, supplying, transferring or exporting to a third country" to "contractually prohibit re-exportation to Russia and re-exportation for use in Russia", from 20 March 2024 onward.

The obligation to include the “no re-export to Russia" clause depends on the contract’s date of conclusion, the nature of the products and the country of import:

• Any contracts entered into as of 19 December 2023, or any new contract going forward, were required to contain a "no Russia" clause as of 20 March 2024 (although this naturally excluded any one-off sale agreement that was entered into and completed prior to 20 March).
  
  
• For contracts entered into prior to 19 December 2023, a one-year transition period applies until 19 December 2024 (included) or until the contracts' expiry, whichever is earliest. For any continued provision of goods or services, or other commitments under these agreements from 20 December 2024, they will need to be amended to include a "no Russia" clause. How this will work in practice where a counterparty is unwilling to agree such amendment remains unclear, and may result in a difficult negotiation or potentially termination.

The obligation to include the clause applies to contracts with operators based in any non-EU country, with the exception of certain partner countries which, as at the time of this article, include the UK, the US, Australia, Japan, South Korea, Canada, New Zealand, Norway and Switzerland. These are all countries that are considered to have substantially similar export restrictions, which reduces the potential risk of re-export to Russia.

In addition to including the contractual restriction on re-exportation to Russia and re-exportation for use in Russia, Article 12g also requires EU exporters to:

• Include 'adequate remedies' in the event of a breach of a contractual obligation; and
  
  
• Notify the Member State's competent authority where they are resident or established if they become aware of a breach of the "no Russia" clause.

It is made clear in the EU's guidance that was published that the remedies "should be reasonably strong and aim to deter non-EU operators from any breaches. They can include, for instance, termination of the contract and the payment of a penalty".

For longer term leasing arrangements, it may be easier to amend existing agreements to include these requirements, but for one-off sale arrangements, both of these requirements are considered to potentially be difficult to satisfy, given that (i) oversight over goods sold as part of a one-off arrangement is often limited and the relevant contractual counterparty may be reluctant to make the EU operator aware of any actual or potential breach post-sale and (ii) quantifying and enforcing a contractual penalty in such a scenario may be difficult and, in some cases, may not be legally enforceable.

While there is technically no proscribed form that the "no Russia" clause must take (i.e. as long as it fulfils the high level requirements of Article 12g then it may be considered sufficient), the EU has provided some template language as part of its guidance that suggests the clause should be formulated relatively widely – including post-close monitoring obligations on the counterparty, which again are likely to be strongly resisted in many cases. Ultimately, in scope EU exporters will need to take a risk-based approach when deciding as to the additional contractual assurances they should seek.

As set out in relation to the Note described above, this is another example of sanctions authorities thinking about export related restrictions in a more global sense and seeking a way of enforcing sanctions through commercial counterparties. While the US and UK have not adopted similar restrictions at this time, if the Russian invasion and occupation of Ukraine continues throughout this year and into 2025 – sanctions authorities might start looking at restrictions of this nature as the next way of increasing pressure from a sanctions and export control perspective. 

On 24 April 2024, the EU adopted Directive (EU) 2024/1226 on the definition of criminal offences and penalties for the violation of EU restrictive measures.

This directive is the next step in the EU's commitment to ensuring the effectiveness of its sanctions and defines the criminal offences and penalties for violating EU sanctions, bringing the EU's sanctions enforcement regime into closer alignment with its allies (such as the UK and the US). This directive lays down the minimum requirements for all Member States when enforcing wilful violations of EU sanctions and sets out the enforcement framework for all Member States to follow, which includes a requirement for Member States to impose criminal liability on corporate entities and natural persons. This is notable as corporate criminal liability has not always historically been a feature of many domestic legal frameworks.

Art 3 of the directive sets out the acts which now constitute a criminal offence, when intentionally committed in breach of EU sanctions. These include:

• making funds or economic resources available to designated persons, entities or bodies;
  
  
• failing to freeze funds or economic resources belonging to or owned, held or controlled by a designated person, entity or body;
  
  
• providing prohibited or restricted financial services or any other prohibited or restricted services;
  
  
• enabling the entry of designated people into the territory of a Member State or their transit through the territory of a Member State;
  
  
• entering into transactions with third countries, which are prohibited or restricted by EU sanctions;
  
  
• trading, importing, exporting, selling, purchasing, transferring, transiting or transporting of restricted goods, as well as providing brokering services, technical assistance or other services relating to those goods;
  
  
• circumventing EU restrictive measures; and
  
  
• breaching or failing to fulfil conditions under authorisations granted by competent authorities.

Inciting, aiding and abetting the commission or attempting any of these acts is also an offence. Whilst the offences must be intentionally committed, the directive states that if any of the offences are committed through serious negligence in relation to goods on the Common Military List or dual-use items, then this will also be a criminal offence.

The directive also provides Member States the discretion to say that violations will not constitute a criminal offence if they are under a €10,000 value threshold – which is not the approach taken in the UK (where there is no financial threshold that must be met for a criminal breach to occur).

The directive also prescribes the penalties for both natural and legal persons that violate EU sanctions:

• Natural persons that commit any of the offences will be punishable by 1 to 5 years imprisonment, as well as non-criminal penalties, such as, temporary bans on running for public office.
  
  
• Legal persons that are liable because an offence has been committed on its behalf can be fined between 1% and 5% of its total world turnover or an amount €8 million up to €40 million, depending on the offence.

Member States will have until 30 April 2025 to transpose the directive into national legislation. 

In further news coming out of the EU, on 10 April 2024 the European Court of Justice (the "Court") annulled certain sanctions imposed on two Russian businessmen, Petr Aven and Mikhail Fridman, that had been imposed between February 2022 and March 2023.

The two men were initially sanctioned by the EU in February 2022 on the basis that they allegedly supported policies and actions that undermined or threatened the territorial integrity, sovereignty and independence of Ukraine. However, the Court ruled that the European Council had not provided sufficient evidence to support this. The Court considered that, whilst the European Council may have shown evidence of a degree of proximity between the businessmen and the Kremlin, this did not by itself equate to support for actions and policies aimed at destabilising Ukraine.

The Court's decision only applies to the period between February 2022 and March 2023 – and therefore both individuals remain on the EU sanctions list as a result of further designations imposed after March 2023 (which are currently also being challenged). While the European Council still has the opportunity to appeal the decision, the de-listing emphasises that sanctions must be properly justified if they are to stand-up to judicial scrutiny.

In the UK, the Supreme Court has recently granted permission to Eugene Shvidler to appeal against a February 2024 Court of Appeal judgment upholding sanctions against him. Mr Shvilder was initially sanctioned by the UK in March 2022 as a result of his business links to Roman Abramovich. The Supreme Court case will be an interesting opportunity for the UK Courts to reflect upon the approach taken by the Government to the UK sanctions regime and how other designated individuals might attempt to challenge their designations in the future.

The above acts as another timely reminder that companies must remain ever vigilant as to the sanctioned status of their contractual counterparties, emphasising that ongoing monitoring in this area is key to ensuring compliance.