Head of Financial Crime David Savage has written the EU Sanctions Enforcement chapter of the second edition of Global Investigations Review’s Guide to Sanctions. The full guide is split into three sections: Sanctions and Export Control Regimes Around the World; Compliance Programmes; and Sanctions in Practice.

David’s chapter falls under the first part, and in it, he gives an overview of the EU enforcement framework and looks at the criticism of it. David also looks at how it investigates suspected breaches as well as its approach to reporting, professional secrecy and legal professional privilege under the framework. Lastly David looks at the future of EU sanctions enforcement.

GIR say about their guide:

“We live in a new era for sanctions. More states are using them, in more creative (and often unilateral) ways. This creates ever more complication for everybody else. Hitherto no book has addressed all the issues raised by the proliferation of sanctions regimes and investigations in a structured way. GIR’s The Guide to Sanctions addresses that. Written by contributors from the small but expanding field of sanctions enforcement, it dissects the topic in a practical fashion, from every stakeholder’s perspective, providing an invaluable resource.”

The first part of David’s chapter, looking at the EU enforcement framework and criticism of it, is set out below.

Introduction

The use of trade and financial sanctions by the European Union (EU) has become an increasingly important element of the bloc’s foreign policy. There are currently in operation 44 sanctions programmes – known as restrictive measures in the EU – in respect of 34 jurisdictions, representing a significant increase during the past decade. When considering the applicability of EU sanctions regimes to businesses operating within the bloc, as well as sanctions implemented by the United States (US) and specific regulations enacted by individual states, the scope for inadvertent breach is considerable and the consequences severe.

It is imperative, therefore, that businesses based in or operating within the EU have an understanding of the various regimes with which they may need to comply, including those implemented by the United Nations (UN), the EU and the United Kingdom (UK), as well as the US, which has expanded the scope of its sanctions to apply to companies and individuals throughout the world.

While there has historically been limited appetite for enforcement within EU Member States, notwithstanding the impact of the covid-19 pandemic, certain jurisdictions are beginning to identify, investigate and subsequently prosecute individuals and companies for breaching the various EU sanctions regulations and there remains considerable appetite across the EU to enforce anti-money laundering breaches (sanctions and anti-money laundering [AML] requirements within the EU share many objectives and characteristics. Considering AML enforcement actions, particular in the context of commentary on a company’s systems and controls framework, can be useful in informing the direction of a sanctions compliance programme). Compliance, therefore, has never been more important.

The EU enforcement framework

The European Commission (the Commission) stated in 2018 that:

Any rule, no matter how carefully drafted and prepared, is only as effective as its implementation. In driving forward its policy priorities, the Commission, therefore, pays attention not only to proposing new legislation but also to ensuring that it is properly applied and enforced.

Foreign policy within the EU has traditionally been viewed as a national competence. However, over the years, the EU has developed a common foreign and security policy (CFSP) that enables the 27 Member States to present a united front on key issues, including sanctions.

The adoption of the 1992 Maastricht Treaty introduced a legal basis for the EU’s competence for sanctions, by creating the CFSP, which is governed by Chapter 2 of Title V of the Treaty on European Union. EU sanctions are enacted as part of the CFSP either to implement UN Security Council (UNSC) Resolutions (also known as derived sanctions within the EU) or with a view to pursuing autonomous EU foreign policy objectives independently of any UNSC Resolution. Autonomous sanctions are normally introduced when the EU opts to pursue stricter measures than those required by the UNSC or if the UNSC is unable to agree to measures against a particular country. All EU restrictive measures are then published in the Official Journal of the European Union, whereupon they automatically become enshrined in EU law and are binding and directlyapplicable throughout the EU.

A key strand of the EU’s sanctions policy was stated by the Council of the EU in 2018:

The effectiveness of EU restrictive measures – and also the EU’s credibility – hinges to a large degree on restrictive measures being implemented and enforced promptly and without exceptions in all Member States.

Role of Member States

The day-to-day administration and enforcement of sanctions is delegated to the competent authorities of each Member State within the EU. Put succinctly, the competent authorities of Member States are responsible for:

• determination of penalties for violations of the restrictive measures;
• the granting of exemptions;
•  receiving information from, and cooperating with, economic operators (including financial and credit institutions);
• reporting upon their implementation to the Commission;
• for UN sanctions, liaison with Security Council sanctions committees, if required, in respect of specific exemption and delisting requests.

Each Member State must determine, therefore, the penalties that it considers to be sufficiently robust to deter transgressions, and draft and issue guidance designed to provide clarity for natural and legal persons as to their sanctions compliance obligations. Thus, depending on (1) the jurisdiction or jurisdictions in which the potential transgression has occurred, (2) the nature of the breach, and (3) the authority or authorities within the jurisdiction, or jurisdictions, that consider themselves seized, the potential offence may be criminal or civil in nature, and the penalties range from fines to custodial sentences. This lack of uniformity across the bloc is not without its critics (this is dealt with further below – see section titled ‘Criticism of the EU enforcement framework’).

The delegated authority for sanctions administration and enforcement is supported by an EU-wide system of checks and balances. The European Council has stated:

The uniform and consistent interpretation and effective implementation of the restrictive measures is an essential element ensuring their effectiveness in order to achieve the desired political objectives. Member States shall inform each other of the measures taken under the relevant legal acts and shall supply each other with any other relevant information at their disposal in connection with these acts, in particular information in respect of violation and enforcement problems and judgments of national courts.

This information-sharing requirement is enshrined in each Regulation and is designed to ensure that there is some form of consistency of approach as regards enforcement of sanctions across the bloc. For example, Council Regulation (EU) No. 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine, mandates the following at Articles 8 and 9:

Article 8

1. 1. Member States shall lay down the rules on penalties applicable to infringements of the provisions of this Regulation and shall take all measures necessary to ensure that they are implemented. The penalties provided for must be effective, proportionate and dissuasive.
2. 2. Member States shall notify the rules referred to in paragraph 1 to the Commission without delay after the entry into force of this Regulation and shall notify it of any subsequent amendment.

Article 9

1. 1. Member States shall designate the competent authorities referred to in this Regulation and identify them on the websites listed in Annex I. Member States shall notify the Commission of any changes in the addresses of their websites listed in Annex I.
2. 2. Member States shall notify the Commission of their competent authorities, including the contact details of those competent authorities, without delay after the entry into force of this Regulation, and shall notify it of any subsequent amendment.

The expectation of information sharing is expanded in a Note of the Council of the European Union, which states:

Member States should also exchange information with, inter alia, other Member States, the Commission, the EEAS, Europol, Eurojust, FATF, Sanctions Committees established by the UN Security Council (including the Committee established pursuant to Resolution 1267 (1999) concerning Al-Qaida) and the UNSC Counter-Terrorism Committee, as appropriate.

Role of the European Commission

The Commission ensures that Member States implement domestic rules on enforcement and penalties in a proper and timely manner, and take appropriate action to apply and enforce these regulations. If a Member State fails to adopt the necessary implementing rules, an infringement procedure can be started by the Commission against that Member State. In its role as guardian of the Treaties, the Commission oversees the implementation of sanctions by Member States under the TFEU.

Role of the Council of the EU

Sitting within the Council of the EU, the Working Party of Foreign Relations Counsellors (RELEX) deals with ‘legal, financial and institutional issues of the [CFSP]’, with sanctions being a priority. RELEX’s mandate includes: ‘[e]xchanging information and experiences on the implementation of specific restrictive measures regimes imposed by the EU’; ‘[c]ontributing to developing best practices among Member States in implementation of restrictive measures’; and ‘[e]xamining all relevant technical issues relating to the implementation of EU restrictive measures’.

Role of the EU courts

As enforcement of EU financial and economic sanctions takes place predominantly at the Member State level, there is a limited role for the EU supranational courts in the enforcement of restrictive measures. However, both Regulations and Council Decisions are subject to judicial review by the European Court of Justice and the General Court in Luxembourg.

Criticism of the EU enforcement framework

It has been noted that: ‘Effectiveness should be the central objective of any country’s sanctions framework, and can be measured according to a range of factors, including their economic impact, whether sanctions achieve a change of behaviour in the sanctioned target, or how widely they are implemented.’ It is this final aspect that, as regards the EU, courts the most controversy.

Lack of consistency

Historically, enforcement throughout the EU has not been consistent. What is agreed to be implemented at an EU level is not necessarily implemented as required at the Member State level. There are a number of reasons for this inconsistency of approach:

• Some Member States have specific departments dedicated to monitoring and gathering information, investigating breaches of the EU sanctions regimes and subsequently enforcing in appropriate cases, while in others the subject of enforcement is a more convoluted matter.
• In some countries, there may be a lack of political impetus to pursue stringent enforcement, while in others the issue may simply be one of resourcing.
• There may be domestic legal constraints or an inclination to protect the economic interests of domestic operators regarding the enforcement of sanctions.

The result is an uncoordinated and, arguably, weak EU sanctions regime, which undermines the single market, as EU companies, including EU subsidiaries of foreign companies, have ample opportunity for sanctions evasion. Even when there are clear examples of breaches of the EU sanctions regime, enforcement has not always occurred. One example of this failure is a complaint by the European Centre for Constitutional and Human Rights that a secret meeting took place between a senior military adviser to Syria’s president, Bashar al-Assad, and top Italian officials and for which no action has been taken to date.

To compound the issue, the publicised penalties for sanctions violations as between Member States are also extremely inconsistent, as are the disjointed licensing regimes throughout the bloc. The fact that there are very few Member States that release information regarding sanctions investigations or enforcement activity creates further uncertainty, particularly for corporates looking for guidance on the creation of an effective systems and controls environment designed to minimise the potential for sanctions breaches.

Scope for evasion

EU sanctions are narrow in application, broadly requiring compliance only by those with a clear EU nexus, jurisdiction, nationality or incorporation. Given the importance of the EU’s economy to international trade, this limited application of sanctions presents innumerable opportunities for those seeking to use EU products or financial services with a view to evading the broader application of US sanctions (US sanctions can have extra-territorial application, including through the use of US dollars in transactions. Furthermore, certain other US sanctions regimes are ‘secondary sanctions’, which can apply absent any nexus with the US). At present, the only tool for coordination between the Member States consists of exchanging experience and developing best practices, which, given the scope for sanctions violations without a co-ordinated EU effort, is problematic. This lack of uniformity in terms of implementation across the bloc needs to be addressed (see further, below, in the section entitled ‘The future of EU sanctions enforcement’).

Following the departure of the UK from the EU, there is scope for this type of criticism to increase. Historically, the UK was a vocal proponent of EU sanctions, (this was particularly so with respect to sanctions against Russia in 2014, following the illegal annexation of Crimea (and Sevastopol), and played a key part in their design, implementation and direction, as well as providing valuable intelligence on which the Council of the EU has historically relied. Its departure is likely to have a detrimental effect on both UK and EU sanctions policy, implementation and enforcement going forward.

An extract from the second edition of GIR’s The Guide to Sanctions. The whole publication is available here.

The full EU Sanctions Enforcement chapter can be found here.

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