In response to the war of aggression waged by Russia against Ukraine in violation of international law, the European Union and its international partners have imposed strict sanctions on Russia (cf. FAQs on the website of the Federal Ministry for Economic Affairs and Climate Action, here). These sanctions are unprecedented in terms of scope, reach and degree of international coordination. They are set out mainly in Regulation (EU) no. 269/2014 (lists and prohibited actions) and in Regulation
(EU) no. 833/2014 (sector-specific and goods-specific sanctions). The EU sanctions against Russia comprise the freezing of assets owned by listed individuals, as well as restrictions on travel, economic cooperation, and imports and exports.
Sanctions-related criminal law
Parallel to this, the European Union is working to further improve the effectiveness of the implementation and enforcement of the EU sanctions within the Member States. The measures proposed by the European Commission in this regard include a harmonisation of sanctions-related criminal law. The same minimum standards for the definition, the penalty range, and with regard to whether or not violations of EU sanctions can be prosecuted are to apply across all Member States, as soon as possible.
Acts designed to enforce sanctions
In May 2022, Germany adopted the ‘First Act for more effective sanctions enforcement’ (Sanctions Enforcement Act I), thereby taking an important initial step towards more effective sanctions enforcement in Germany. The reporting obligation of this Act, which applies to property subject to sanctions (yachts, real estate, company shares) served as a role model for the EU reporting obligation that was created as part of the EU sanctions regime against Russia.
The ‘Second Act for more effective sanctions enforcement’ (Sanctions Enforcement Act II) of 19 December 2022 has been in force since 28 December 2022. This Second Act delivered a structural reform of the enforcement procedure for individual financial sanctions (blacklisting) as well as a number of ambitious measures to prevent money laundering. These include the creation of a Central Office for Sanctions Enforcement, a new federal authority within the remit of the Federal Ministry of Finance. The Central Office for Sanctions Enforcement is tasked with investigating and overseeing the freezes and the bans following from the EU lists and is to coordinate the work of Germany’s authorities involved in sanctions enforcement. Beyond this, a register for property potentially subject to sanctions is to be created, parts of which are to be public. A new contact point for whistle blowers is to collect information about the potential and actual infringement of sanctions measures and about the infringement of sanctions-related reporting obligations. This information is to be made available to the investigative authorities and the prosecutions services. The First Act already created a comprehensive new legal basis for the detection and confiscation of property, for data exchange and for cooperation between different authorities. This has been broadened under the Second Act. In the interest of preventing money laundering, the Second Act notably bans cash payments in property transactions, stipulates that real estate data is to be combined with the transparency register, and provides for further reporting obligations for associations that are based abroad, but own property in Germany.
Circumvention of sanctions
Despite all of these measures, listed persons are still trying to use loopholes to disguise assets. Likewise, Russian importers are involved in activities designed to circumvent sanctions. Another way to evade EU sanctions is to operate via third countries where no sanctions against Russia apply. Export sanctions will only have full impact if they are supported or at least respected by as large a group of partner countries as possible. However, the foreign trade data suggests that goods subject to sanctions against Russia are being exported to certain third countries on a significant scale, and that they are then exported on to Russia, including through complex Russian procurement networks. Companies exporting goods that are important for the Russian war machine should therefore always be vigilant as to whether a given deal could actually be used as camouflage for Russian procurement.
The Federal Government is working within the EU and with the G7 states and other partner countries to counteract circumvention activities. Further measures under the sanctions regime are designed to put an effective stop to such activities. Most importantly, Russia is to be stopped from finding new ways to access innovative materials, technologies and military equipment that can be used to continue the violations of international law. On 22 February 2023, the Federal Ministry for Economic Affairs and Climate Action proposed ten measures for more effective ways of counteracting the circumvention of sanctions. Some key aspects of these proposals were fed into the 11th EU sanctions package adopted in June 2023. These include measures to increase the traceability of exports and to address the circumvention of sanctions via third countries more effectively. At the heart of the 11th sanctions package is the Anti-Circumvention Instrument, which – as had been proposed by the Federal Ministry for Economic Affairs and Climate Action – is based on close cooperation with third countries, blacklists for individual companies and – as a last resort – export bans on dual-use goods vis-à-vis entire third countries. Furthermore, the proposal to extend the obligation on everyone to report any information relevant to sanctions to the competent national authorities and/or the European Commission to include the trade-related sanctions measures against Russia, was also taken up.
On 8 September 2023, the European Commission published its ‘Guidance for EU operators: Implementing enhanced due diligence to shield against Russia sanctions circumvention’, advising EU companies on how to spot circumvention risks when dealing with business partners within and outside the EU, and on how to act in this situation. The Guidance gives an overview of potential actions that are line with due diligence requirements set out in EU law. Examples of customer-related, goods-related and country-specific risk indicators are given to show what criteria should typically result in further inquiries.
On 4 October 2023, the Federal Ministry for Economic Affairs and Climate Action published additional information for companies on the implementation of the reporting obligation of the 11th EU Sanctions Package (cf. FAQs to the Federal Ministry for Economic Affairs and Climate Action here). Article 6b of Regulation (EU) no. 833/2014, which is part of the 11th EU sanctions package, imposes a general obligation to report, which is aimed at every individual and entity. This obligation is also part of other EU Regulations imposing sanctions, but had so far not applied in the context of the EU bans on exports to Russia. Under the new provision, anyone possessing information about potential infringements of sanctions, in particular about Russia’s attempts to avail itself of material important to its war efforts via detours and third countries, must report this information to the competent authorities. Failure to do so can result in an administrative penalty.
To support market participants in weighing up the risks of export deals and in implementing these without violating the sanctions regime, the Federal Ministry for Economic Affairs and Climate Action published an ‘Advisory paper to support companies in dealing with goods-trade related sanctions‘ (in German). This paper is based on the most recent insights regarding sanctions-related risk indicators and is to serve as non-binding and non-exhaustive support for (exporting) companies in their compliance work.
The joint measures undertaken by the G7 are coordinated by the Task Force Russian Elites, Proxies and Oligarchs (REPO) and a new Enforcement Coordination Mechanism (ECM). At EU level, the Freeze and Seize Task Force acts as the central advisory and coordination forum for further measures. The European Commission has also appointed an EU Sanctions Envoy, Mr David O’Sullivan, who took up his office in early 2023. He is responsible for enforcing the EU sanctions regime internationally, together with partner countries and third states. The focus here is on the sanctions against Russia.