The 14th Package and Beyond | June 2024

Unpacking the 14th Package

For all the talk of "sanctions fatigue", the 14th package of EU sanctions against Russia is arguably one of the most compliance-heavy round of measures adopted to date. Stepping up the pressure on the Russian economy through a continued expansion of the EU sanctions toolbox, the 14th package introduces another stepping stone to the further development of an EU sanctions compliance culture and its global influence.

While the 14th package includes key individual and sectoral measures, what distinguishes it from others is its impact on core principles of EU sanctions law and practice. Beyond the revised provisions of the regulations, recitals stand out as a growing source of compliance guidance. Time will show whether and how recitals, European Commission FAQs, and Member State legal regimes will be articulated.

In the meantime, the 14th package further illustrates the subtleties in the EU's approach to sanctions jurisdiction, heightened compliance expectations, and the appetite for enforcement both at home and abroad. These developments, however, also raise new interpretative questions and operational challenges for the private sector that will take time to navigate.

Select Highlights of the 14th Package

Extended Reach of EU Sanctions

Jurisdiction over non EU-entities: As a reminder, under the regulation's standard jurisdictional clause, EU sanctions apply (i) within the territory of the EU, (ii) on board any aircraft or any vessel under the jurisdiction of a Member State, (iii) to any person inside or outside the territory of the EU who is a national of a Member?State, (iv) to any legal person, entity or body, inside or outside the territory of the EU, which is incorporated or constituted under the law of a Member State, or (v) to any legal person, entity or body in respect of any business done in whole or in part within the EU.

The 14th package confirms this general principle, and the jurisdictional clauses remain unchanged. However, through a recital, the package clarifies that where

Union operators are able to and effectively assert a decisive influence over the conduct of a legal person, entity or body established outside the Union, they may incur responsibility for actions of that legal person, entity or body that undermine the restrictive measures and should use their influence to prevent those actions from occurring.

While variations of this principle were already formulated in guidance issued by select national competent authorities (e.g, Direction générale du Trésor and the Federal Ministry for Economic Affairs and Climate Action), its inclusion (admittedly through a recital) lays out a new common baseline across the EU. The recitals add that "decisive influence" can derive from ownership and control over the legal person,, entity or body outside of the EU.

• Ownership is defined as “being in possession of 50 % or more of the proprietary rights of the legal person, entity or body, or having a majority interest therein”.
• The elements pointing to "control" include “the power to appoint or remove a majority of the members of the administrative, management or supervisory body; the right to use all or part of the assets of the legal person, entity or body; managing the business of the legal person, entity or body on a unified basis, while publishing consolidated accounts; or the right to exercise a dominant influence over the legal person, entity or body”.

Enhanced Compliance Requirements:

New best-efforts obligation: The 14th package require EU operators to undertake their "best efforts" to ensure that any entity established outside the EU that they “own or control” does not participate in activities that undermine the sanctions. According to the recitals:

• Best efforts include all actions that are suitable and necessary to prevent the activities that undermine the restrictive measures provided for in Regulation (EU) No?833/2014.
• Best efforts should be built on a risk-based approach. EU operators should calibrate the best efforts in view of (i) their nature, (ii) their size, and (iii) the relevant factual circumstances, in particular the degree of effective control over the non-EU entity.
• Best efforts can include, inter alia, the implementation of appropriate policies, controls and procedures to mitigate and manage risk effectively, considering factors such as: (i) the third country of establishment, (ii) the business sector, and (iii) the type of activity of the entity that is owned or controlled by the EU operator.
• At the same time, the recitals clarify that best efforts should be understood as comprising only actions that are feasible for the EU operator in view of (i) its nature, (ii) its size and the relevant factual circumstances, and (iv) in particular the degree of effective control over the legal person, entity or body established outside the Union. Such circumstances include the situation where the EU operator, due to reasons that it did not cause itself, such as the legislation of a?third country, is not able to exercise control over a?legal person, entity or body that it owns.

Specific compliance requirements for EU common high priority items operators: As of 26 December 2024, EU operators producing, selling, supplying, transferring or exporting Common High Priority Items will be required, among other obligations, to:

• Document and keep up-to-date risk assessments relating to the risks of exports to or for use in Russia of Common High Priority Items, proportionate to their nature and size;
• Implement policies procedures to mitigate and manage risks of exports to or for use in Russia, which have to be proportionate to the nature and size of the operator;
• Ensure that these policies and procedures in non-EU subsidiaries that sell, supply, transfer or export Common High Priority Items, unless due to reasons the EU operator did not cause itself, it is not able to exercise control over the non-EU subsidiary.

These requirements do not apply to EU operators that sell, supply or transfer Common High Priority Items only within the EU or to partner countries.

Codified standard for circumvention: The prohibition on circumventing sanctions was amended to be aligned with the interpretation of the Court of Justice of the European Union's seminal 2011 Case C-72/11, Afrasiabi and Others. This prohibition now expressly covers any participation in activities the object or effect of which is to circumvent sanctions or without deliberately seeking that object or effect when the operator is aware that such participation may have that object or effect and accepting that possibility.

Limited availability of the no-liability clause: Under the standard "no-liability clause," EU operators cannot be held liable if they did not know or had no reasonable cause to suspect that their actions would infringe EU sanctions. The package clarifies that this protection is not absolute; it

cannot be invoked where Union operators have failed to carry out appropriate due diligence. Publicly or readily available information should be duly taken into account when carrying out such due diligence. Therefore, for example, a?Union operator should not be able to successfully invoke such protection when it is accused of breaching the relevant restrictive measures because it has failed to carry out simple checks or inspections.

Voluntary self-disclosure (“VSD”) as a mitigating factor – The package clarifies, through a recital, that VSDs may be taken into account by Member States as a mitigating factor, in accordance with their respective national law. Where a natural or legal person (i) voluntarily, (ii) completely and (iii) in due time discloses a violation of the restrictive measures, it should be possible for NCAs to take that self-disclosure into account when applying penalties, as appropriate.

New Sanctions Risks for Non-EU Financial Institutions and other Third Parties

On 14 June 2024, the Leaders of the Group of Seven (G7) gathered in Apulia, Italy. Concerning sanctions, the Communiqué noted that the G7 will continue taking measures against actors in China and third countries that materially support Russia’s war machine, including financial institutions and other entities in China that facilitate Russia’s acquisition of items for its defense industrial base. It particular, the Communiqué noted:

In this context, we reiterate that entities, including financial institutions, that facilitate Russia’s acquisition of items or equipment for its defense industrial base are supporting actions that undermine the territorial integrity, sovereignty, and independence of Ukraine. Accordingly, we will impose restrictive measures consistent with our legal systems to prevent abuse and restrict access to our financial systems for targeted individuals and entities in third countries, including Chinese entities, that engage in this activity. We will take robust action against actors who aid Russia in circumventing our sanctions, including by imposing severe costs on all those who fail to immediately cease providing material support to Russia’s aggression and by strengthening domestic enforcement and stepping up our business engagement to promote corporate responsibility. We call on financial institutions to refrain from supporting and profiting from Russia’s war machine. We will take further steps to deter and disrupt this behavior.

In light of the G7's efforts to deter third parties to support or facilitate Russia's war effort and industrial-military base, the 14th package introduces several new deterrence and enforcement tools.

New tool to sanction non-EU financial institutions that support Russia's defence-industrial base: The 14th package introduces a new transaction ban with certain credit and financial institutions established outside the EU that might be facilitating transactions that "frustrate" EU sanctions against Russia by supporting its defence-industrial base.

• The 14th package establishes a?transaction ban on EU operators with credit and financial institutions as well as crypto assets providers, established outside of the Union, when the Council has determined (through addition to a new Annex XLV) that those entities facilitate transactions that support Russia’s defence-industrial base through the export, supply, sale, transfer or transport towards Russia of dual-use goods and technology, goods and technology as listed in Annexes?XI, XX and XXXV to Regulation (EU) No?833/2014, common high priority items as listed in Annex?XL to Regulation (EU) No?833/2014, or firearms and ammunition as listed in Annex?I?to Regulation (EU) No?258/2012.
• The transaction ban covers any direct or indirect transaction with parties listed on Annex XLV and any entities acting on behalf or at the direction of such parties. No designation has been made as of yet.

New tool to sanction non-EU financial institution that use SPFS outside Russia: As from 25 June 2024, it is prohibited for EU entities operating outside of Russia to directly connect to the SPFS of the Central Bank of Russia or equivalent specialized financial messaging services set up by the CBR.

• The 14th package introduces another transaction ban on EU operators to engage in any transaction with entities established outside Russia as listed in a new Annex XLIV of Regulation 833/2014.
• The Council may add entities established outside of Russia which use the SPFS or a Russian equivalent to a new Annex XLIV that, by such use, (i) increase Russia’s financial resilience and (ii) support the circumvention of the prohibitions of EU sanctions against Russia.

New tool to sanction vessels that contribute to Russia's ability to wage war: The 14th package introduces the possibility for the Council to sanction vessels (through addition to a new list - Annex XLII) that are deemed by the EU to contribute to Russia's ability to wage war.

• The vessels may be sanctioned for a variety of reasons, including (i) support the Russian defense and security sector, (ii) engage in irregular and high-risk shipping practices for crude oil or petroleum products, (iii) support the energy sector in Russia, (iv) engage in activities undermining or threatening Ukraine, (v) transport goods subject to commercial restrictions under EU sanctions, (vi) facilitate or engage in the violation, circumvention or frustration of EU sanctions, or (vii) are owned, chartered, operated or used in the name of, on behalf of, in relation with or for the benefit of sanctioned entitles.
• 27 vessels have been sanctioned to date.

New tool to sanction parties that bring legal actions in Russia covered by the no-claims clause: In 2020, Russia introduced new provisions in its Arbitration Procedure Code with the purpose of ensuring the exclusive jurisdiction of courts in Russia in disputes with the participation of persons in respect of which sanctions are applied or in disputes of one Russian or foreign person with another Russian or foreign person, if the basis for such disputes is sanctions.

• The 14th package enables the possibility to subject companies which make use of those provisions of Russian law to a?transaction ban.
• The transaction ban covers any?legal person, entity or body referred to in the no-claims clause (Article 11) that lodged a?claim before a?Russian court against an EU operator to obtain an injunction, order, relief, judgment or other Court decision pursuant to Article?248 of the Arbitration Procedure Code of the Russian Federation or equivalent Russian legislation, in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the sanctions against Russia.

Other New EU Sanctions Adopted in June

• Extension of EU sanctions against Belarus: On 29 June 2024, the Council adopted additional sanctions against Belarus for the regime's involvement in Russia’s war of aggression against Ukraine. These comprehensive measures aim at mirroring to a certain extent the sanctions already in place against Russia. Interestingly, the new sanctions include a "no-Belarus clause", certain due diligence obligations, and a requirement for EU parent companies to use their best efforts ensure that their third-country subsidiaries do not take part in any activities resulting in an outcome that the sanctions seek to prevent. Read more here.
• Additional Russia sanctions anti-circumvention designations: On 28 June 2024, the Council listed two individuals and four entities for circumventing EU sanctions and materially supporting the Russian government. Read more here.
• Hamas and Palestinian Islamic Jihad: On 28 June 2024, the Council listed six individuals and three entities responsible for participating in the financing of Hamas and the Palestinian Islamic Jihad (PIJ) or?enabling their violent actions, bringing to a total of 12 individuals and three entities sanctioned under the EU sanctions program against Hamas and the PIJ. Read more here.
• Cyber-attacks threatening the EU and its member states: On 24 June 2024, the Council designated six individuals involved in cyber-attacks affecting information systems relating to critical infrastructure, critical state functions, the storage or processing of classified information and government emergency response teams in EU member states. For the first time, sanctions were imposed against cybercriminal actors that use ransomware campaigns against essential services, such as health and banking. Read more here.
• Sudan: On 28 June 2024, the Council imposed sanctions against six individuals responsible for activities undermining the stability and political transition of Sudan, where fighting is still ongoing between the Sudanese Armed Forces (SAF) and the Rapid Support Forces (RSF) and their respective affiliated militias.

Meeting on 27 June 2024, the European Council echoed the G7's Communiqué and suggested its readiness to take further action. The Conclusions of the 27 June European Council noted, in relevant part:

The European Council welcomes the adoption of the 14th package of sanctions against Russia and the agreement on further restrictive measures against Belarus. It calls for the full and effective enforcement of sanctions as well as for further measures to counter their circumvention, including through third countries. The European Union remains ready to further limit Russia’s ability to wage war and urges all countries not to provide any material or other support for Russia’s war of aggression.

Resources & Upcoming Webinars

A comprehensive summary of the 14th package is available here. See also the European Commission FAQ on the 14th package.

Learn more about EU sanctions due diligence, challenges and best practices. A Framework for Effective EU Sanctions Compliance Programs offers some structural thoughts on how to build or enhance EU sanctions compliance programs.

Find our more about the 14th package and other developments in EU sanctions and export controls since the start of 2024.

• 04 July 2024 | 11:00 AM-12:15 PM (CET): Sanctions économiques et contr?le des exportations : Bilan à mi-année 2024 et perspectives (in French). Free registration here.
• 25 July 2024 | 03:00 PM - 04:15 PM (CET): EU Sanctions & Export Controls: 2024 Mid-Year Review, hosted by the Association of Certified Sanctions Specialists . Free registration here.

Looking Ahead

• Hungary will hold the presidency of the Council starting on 1 July 2024 through 31 December 2024.