Update on EU-Russia sanctions: liability for failure to act in case of sanction violations?

The recently published new FAQs from the European Commission regarding the so-called “Best Efforts” obligation under Article 8a of Regulation (EU) No. 833/2014 raise numerous questions and require companies to make significant adjustments. This article highlights the key changes, their practical implications, and the challenges they present.

1. Main content of the new FAQs

In its FAQs, the EU Commission explains that the Best Efforts obligation requires both natural and legal persons, as well as organizations within the EU, to make every effort to ensure that subsidiaries established outside the EU do not undermine the EU’s restrictive measures.

1.1 Definitions and clarifications

The FAQs define the terms “best efforts,” “undermining” and “circumventing” largely with reference to the recitals of the regulation and the case law of the European Court of Justice.

1.2 Scope of application

The obligation also explicitly applies to Russian subsidiaries of EU companies. Companies are required to prevent all activities that could lead to the undermining of EU sanctions – whether through direct exports to Russia or the use of IP rights such as trademarks or patents. According to the Commission, it must be prevented that Russian subsidiaries import goods subject to an EU export ban from a third country to Russia, or export Russian goods subject to an EU import ban to third countries, or engage in such import and export activities.

1.3 Relationship between control and feasibility

The Commission clarifies that the obligation only covers measures that are feasible given the size, structure, and control of a company. However, companies that have limited control over their subsidiaries through their own decisions cannot claim lack of control as an excuse. If local laws in the third country (e.g., counter-sanctions) where the subsidiary is based hinder implementation, only measures that are feasible for the EU company are required.

2. Critical assessment of the FAQs

2.1 Broad interpretation of the obligation

The EU Commission’s broad interpretation presents companies with considerable challenges, particularly when it comes to enforcing and providing evidence of their efforts. Previously, sanction-relevant actions by a third-country subsidiary could be excluded from attribution if the subsidiary acted independently and the EU parent company was not involved in operational decisions (“decoupling”). However, under Article 8a of Regulation 833/2014 as amended, the Commission’s view suggests this may no longer suffice, necessitating greater intervention in the subsidiary’s business operations.

The Commission considers it an infringement if an EU company is aware of sanction-relevant actions but does not react to them. This “liability for failure to act” entails considerable risks and, in the Commission’s view, could even violate the anti-circumvention prohibition in Article 12 of Regulation 833/2014 as amended.

2.2 Extraterritorial extension

With its interpretation, the Commission is de facto pursuing an extraterritorial application of EU sanctions. This contradicts the EU’s previous stance, which criticized extraterritorial sanctions regulations, such as those of the United States, as violations of international law.

3. Action required for companies

3.1 Compliance measures

The Commission recommends comprehensive measures to meet the Best Efforts obligation. These include:

Establishment of internal compliance structures
Training and mandatory reporting
Systematic dissemination of corporate standards
Prompt response to violations

However, compliance with these requirements requires considerable resources and therefore poses major challenges for small and medium-sized companies in particular.

3.2 Risk assessment and control

Companies should carry out a careful assessment of their control options. If local laws in third countries, such as in Russia, prevent the implementation of measures, this can reduce the requirements in individual cases. At the same time, the Commission emphasizes that companies cannot rely on obstacles created by their own decisions, such as inadequate risk management or the relinquishment of control.

4. Conclusion and outlook

The EU Commission’s new FAQs on Article 8a of Regulation 833/2014 create more uncertainty than they resolve. The far-reaching and partially text-detached interpretation raises significant legal and practical questions.

Companies in the EU are faced with the challenge of adapting their control and compliance systems in such a way that the circumvention of sanctions is effectively prevented not only in the EU, but also with regard to third-country subsidiaries. At the same time, it remains to be seen whether the Commission’s announced cooperation with national authorities will bring the desired clarifications.

Until then, caution and thorough legal review are paramount! Companies should take all necessary measures now to comply with their Best Efforts obligation and protect themselves from potential liability risks. Our sanctions law expert Thomas Baumgartner will be happy to assist you.

Disclaimer

This article is for general information only and does not replace legal advice. Haslinger / Nagele Rechtsanwälte GmbH assumes no liability for the content and correctness of this article.

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