A Violation of EU Sanctions Against Russia Could Soon Become an EU Crime

Here is why companies outside the EU are (equally) affected and what steps you must take to protect your business.

The term “sanction” is a serious contender for the word of the year 2022: ever since Russia’s invasion of Ukraine at the end of February 2022, an alliance of mainly Western countries has been consistently increasing the pressure on Russia to withdraw from Ukraine through sanctions. As of early December 2022, the European Union (EU) is in the process of preparing yet another “sanctions package,” in addition to the USD 60/barrel of oil price cap that the EU will implement from early December 2022. According to newspaper reports, this ninth package will among others target the drones and mining sectors.
On top of these measures, the European Commission, the executive of the European Union, has just put forward a proposal to harmonise criminal offences and penalties for the violation of EU restrictive measures:
More restrictive sanctions and new harsh consequences for those violating the sanctions on the rise
The EU’s sanctions against Russia are unprecedented insofar as they have been more much more far-reaching than any other sanctions package the EU has ever imposed. Yet, Ursula van der Leyen, the EU Commission’s President, recently announced that the EU was pressing ahead with a ninth sanctions package on Russia.
This came only a few days before the EU Commission escalated the violation of EU measures to being an EU crime: the EU Commission proposal sets out common EU rules, which will make it easier to investigate, prosecute and punish violations of restrictive measures in all Member States alike. The EU considers this process of harmonisation necessary because setting forth the consequences of a violation of EU sanctions has so far been a matter of national law for individual Member States.
The proposed EU Directive, if adopted, will standardise penalties in all Member States. As the EU Commission made it clear, it will thereby “close existing legal loopholes and increase the deterrent effect of violating EU sanctions in the first place.”
More drastic fines for violations
Violating EU sanctions has already been a crime – but so far, each EU Member State could decide on the consequences individually. In some countries, the minimum fines are currently “only” as low as EUR 10,000 per violation. This amount is so low that it is often not a real deterrent.
The new proposal by the EU Commission foresees penalties of no less than 5% of the sanctions-violator’s annual turnover of the business year preceding the decision to impose the penalty fine. And in case you are wondering whether it would be worthwhile to set up a subsidiary, no, that’s 5% of the annual turnover worldwide. This will easily be several billion dollars (or rather Euros) for the largest companies; but even for small companies, the 5% would be a very painful reminder of the “long arm of the (EU) law.”
But financial penalties are not the only consequence a perpetrator faces: EU citizens found in violation of EU sanctions are already subject to prison sentences under the national laws of each EU Member State. But as was the case for the fines against companies, the prison sentences are sometimes short and thus are not a deterrence to more lucrative sanctions violations transactions. Therefore, the EU Commission’s new proposal foresees harsher prison sentences, set to penalties of at least five years in prison.
Companies outside the EU, including from Malaysia, are (equally) affected
There is a common myth that EU sanctions only apply to companies and individuals within the territory of the EU. As long as you are incorporated or operating from outside the EU, you are safe, so the myth goes. This could hardly be further from the truth:
EU sanctions also apply to

  • EU nationals in any location, including those who work for fully owned Malaysian companies, like Petronas, Maybank and others;
  • companies and organisations incorporated under the law of a EU Member State – thus including the branch office or representative office of EU companies in Malaysia, as well as the subsidiaries of foreign companies in an EU Member State; and
  • aircrafts or vessels under Member States’ jurisdiction. 

Further it is also an offence to circumvent EU sanctions. In other words, a company or person may not give directions to an entity or person which is not subject to the EU sanctions to evade EU sanctions prohibitions. To highlight this with a practical example, an EU company cannot instruct its subsidiary outside the EU, including in Malaysia, to conduct business with a Russian company so that they can keep doing business with that Russian companies, which would otherwise be prohibited under the EU sanctions.
Doing business with Russia is still possible, but has become much more difficult
The EU sanctions have not brought all business transactions between the EU and Russia to an end. Above all, as of December 2022, the EU still imports large quantities of oil and gas from Russia (although only a fraction of the amounts it used to import). However, after eight sanctions packages against Russia – and the ninth one expected soon – a very large number of products can no longer be exported to Russia. In equal fashion, many services can no longer be provided to a Russian company.
The EU sanctions target numerous industry sectors and the sheer scope of the EU sanctions currently in place makes it impossible to succinctly indicate which industries are affected. To highlight this further, prohibitions range from machinery for working rubber or plastics, to beauty or make-up preparations and preparations for the care of the skin as well as to textile wallcoverings.
Companies based outside the EU must protect their employees and themselves
The prison sentences EU citizens face for violating the EU sanctions, including for acts committed when they work outside the EU, is the biggest risk for companies based outside the EU, including particularly companies based in Malaysia, which to date has determined not to impose any sanctions on or prohibitions on dealing with Russia. As mentioned above, these prison fines are set to become more severe.
Companies are under a duty to protect their employees. Companies which do not protect their employees not only run the risk of lawsuits from employees; they also risk protests, reputational damage and a fall-out with their entire staff if an employee were to face a prison sentence because they did not take the necessary precautions (in other words: failed to protect that employee).
Financially, the 5% of worldwide annual turnover fines the EU intends to implement can threaten the very existence of a company. This applies to low-margin industries as much as it does to any company, which is already in financial difficulties or operating on a low cash turnover.
Skrine’s three-stage action plan
We have developed a three-stage action plan for our clients, which allows them to fully understand the risks of being in violation of EU sanctions so that they are in a position to limit those risks and, more generally, take the necessary consequences based on this understanding: 

1. Conduct a thorough due diligence: any prudent company in Malaysia with ties to the EU – be it through an employee or because it is a subsidiary/affiliate of an EU company – but also any Malaysian company with a subsidiary or operations in the EU, should undergo a thorough due diligence compliance exercise with qualified experts to make sure that the activities they are engaged in do not contravene EU sanctions laws.

Keep in mind that the EU sanctions laws are constantly evolving and are a live issue. The EU sanctions regime has undergone over a dozen changes this year alone. It is very likely that it will change further in the coming months. You must therefore repeat the due diligence process every time there is a change to the sanctions framework or where you anticipate business opportunities with any Russian individual or entity.

2. Control contractually what happens after your sale to Russia: in several instances where trade exceptions or exemptions were permitted to authorised distributors in Russia, the European sellers of goods were not aware that their distributor in Russia was on-selling their products to sanctioned entities or combining them with another product, which would fall foul of the EU sanctions. While such actions do not necessarily mean that the seller is in violation of the sanctions, you will want to reduce your risks by both contractually obliging your business partner in Russia to commit to not do anything that could imply that you were in breach of EU sanctions, as well as to reserve the right to audit or perform post-sale due diligence on the exports made to protect your company.

3. Undergo a risk-benefit analysis: the risks of a violation of EU sanctions are significant – and with violations set to become an EU crime, these risks will only grow further in the future. After you have undergone the due diligence and looked into the possibility of getting and undertaking from your Russian business partners, your lawyer should provide you with a full assessment of the risks you are facing. Compare them to the benefits of your Russia business so that you can undergo a risk-benefit analysis appropriate to your business risk appetite: if your Russia activities do not contribute substantially to your bottom line, it could be the better decision business-wise to terminate your Russia business altogether or put any such activities on hold whilst the EU sanctions are in place. 

Source: Skrine | For more information, please visit: https://www.skrine.com/insights/alerts/december-2022/a-violation-of-eu-sanctions-against-russia-could-s 

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