Increased responsibility of EU operators to ensure that Russian companies under their control comply with restrictive measures

The concept of ‘best efforts’ is broadly defined in the Preamble to Council Regulation (EU) 2024/1745 of 24 June 2024[4] (recitals 27-30), but questions remain as to how it is to be applied. The European Commission recently issued a number of clarifications which help to gain a better understanding of the extent of additional obligations borne by EU companies that continue to do business in Russia. Below we present a brief summary of the key takeaways from those clarifications.

Сontrolled persons

The obligation imposed by Article 8a of Regulation 833/2014 on EU operators applies in relation to entities that are owned or controlled by EU operators and are based outside the EU – including in Russia.

Difference between the undermining and circumvention of sanctions: 

• The undermining of restrictive measures is defined in recital 29 of the Preamble as activities resulting in an effect that the restrictive measures seek to prevent.
• Circumventing involves activities that, under cover of a formal appearance that enables them to avoid the constituent elements of an infringement of a restrictive measure, have the aim or result of enabling their author to avoid the application of that measure.

Effect of factual circumstances on compliance with the ‘best efforts’ standard and correlation of an EU operator’s obligations with local restrictions imposed by the country in which a controlled entity operates

The best efforts of an EU operator depend on relevant factual circumstances and may differ on a case-by-case basis. Such circumstances include, in particular: 

• the absence of effective control for reasons beyond the control of the EU operator (a mitigating circumstance). However, loss of control as a result of the EU operator’s own actions would not be considered a mitigating circumstance;
• the existence of restrictions under local laws and the risk of prosecution of executives and employees of an entity controlled by the EU operator.

How to prove that best efforts were undertaken 

The extent of actions required to meet the ‘best efforts’ standard also depends on:

• the EU operator’s business sector (for example, the degree of sectoral regulation and level of compliance),
• its size (including the availability of compliance resources, i.e., staff) and relevant factual circumstances: level of control, level of requirements and regulation.

Practical recommendations on measures required of EU operators:

• ensuring that they remain aware of activities conducted by non-EU entities that they control
• ensuring that entities that they control are aware of types of activities that risk undermining EU sanctions.

Coupling of Article 8а with Articles 10 and 12 of Regulation 833/2014

It is important for Article 8a to be read in conjunction with Articles 10 and 12 of Regulation 833/2014. If an EU operator is aware that a non-EU entity that it controls conducts activities that undermine sanctions, this amounts to a breach of Article 8a of the Regulation. It may also amount to a breach of Article 12 of the Regulation.

The protection against liability provided for in Article 10 of Regulation 833/2014 cannot be invoked where an EU operator has failed to carry out due diligence. A failure to carry out even minimal due diligence of a transaction or counterparty by examining public and other readily accessible information indicates non-compliance with the ‘best efforts’ standard. EU law does not lay down specific standards for the conduct of due diligence. EU operators are themselves responsible for developing and implementing a compliance program and updating it for changes in the law. The European Commission recommends adopting a risk-based approach and conducting due diligence at several levels: in relation to all the parties to the transaction, in relation to the goods and services involved in the transaction, and in relation to the transaction itself (financial flows, logistics, etc.).

Territorial nature of EU sanctions

The European Commission has reiterated its position that sanctions are not extra-territorial in nature, asserting that Article 8a does not impose obligations on non-EU entities, but only on an EU operator that owns or controls such an entity.

Use of powers to terminate a breach as ‘best efforts’

If goods are produced using know-how/intellectual property rights supplied by an operator to a controlled entity, it must take measures to terminate such supply. The timing of the supply (whether it occurred in the past or in the current period) is not relevant as long as the operator has the power to block further use.

Application of Article 8а to intra-group transactions and transit

If goods covered by EU export restrictions which are produced in Russia ended up in Belarus, this would constitute an infringement by the EU operator of Article 8a of Regulation 833/2014 (if the goods in question are banned from export to Belarus).

If products covered by EU export restrictions are produced in/exported from Russia but are destined for another entity in another non-EU country, this may also constitute an infringement by the EU operator of Article 8a of Regulation 833/2014 (since it creates a source of revenue).

The B1 team is ready to assist in matters relating to the new sanction restrictions and to help minimize potential risks.