Too hot to handle!

Corporate entities and individuals face various risks from infringing EU sanctions relating to Russia. Cormac Little warns solicitors to tread carefully in this fast-moving area.

Like 6 June 1944 and 11 September 2001, Russia’s invasion of Ukraine on 24 February 2022 is a major historical and political landmark. Moreover, this unprovoked military action has had significant legal consequences – most notably, the imposition of a series of sanctions on Russian businesses/individuals by the EU. These sanctions (or, in ‘EU-speak’, “restrictive measures”) are contained in various revised and new regulations adopted by the EU’s Council of Ministers.

What is a sanction?

In essence, a sanction is a legal instrument adopted by the United Nations, the EU, or an individual country, such as the US or the UK, to achieve a foreign-policy and/or national-security goal.

Usually, sanctions are imposed in response to armed conflict, the invasion/annexation of an independent sovereign country, and/or violations of international law/human rights. Sanctions adopted by the EU often originate from resolutions adopted by the UN Security Council.

The overriding aim of a sanction is, without resorting to military action, to stop/change the policy or activity of the target(s), who has been/is suspected of having committed serious crimes or behaved in a manner that breaches international law or norms. Sanctions also have a limited deterrent effect.

At any given time, the EU (and, by extension, the Irish State) has a series of sanctions in place regarding various ‘rogue’ countries and/or terrorist groups. Leaving aside sanctions resulting from the war in Ukraine, the EU/Ireland currently has restrictive measures in place regarding countries such as Syria, North Korea, and Venezuela, plus terrorist groups such as al-Qaeda and ISIS.

Types of sanctions

Various categories of sanctions may be imposed by the EU. These include:

• Trade sanctions: the adoption of export and/or import bans, investment prohibitions, or the withdrawal of tariff preferences,
• Admission restrictions: the imposition of travel or visa bans for named individuals,
• Asset freezes: preventing any change in volume, amount, location, ownership, possession, character, destination, etc, enabling the use of funds held by the targeted natural or legal persons,
• Financial sanctions: prohibiting financing/the supply of financial services or imposing restrictions on the raising of new equity or debt,
• Economic sanctions: preventing economic activity being carried out by the target(s) –
• for example, banning transactions or dealings or prohibiting other forms of commercial action,
• Diplomatic sanctions: the interruption of diplomatic relations with a target country (for example, recall of ambassadors and/or other diplomats), and
• Military sanctions: targeted military strikes and/or embargoes regarding weapons and other military equipment.

This division into ‘types’ of sanctions is, to some extent, artificial. In practice, many legal instruments comprising sanctions contain elements of two or more of the above categories.

Often, UN, EU and US sanctions are closely coordinated with a view to maximising their impact on the target country, group or individual. As all EU member states are also members of the UN, the Council of Ministers generally adopts laws to give effect to relevant UN sanctions. However, the EU may also adopt stricter measures than those required by the UN.

Separate to the implementation of UN resolutions, the EU may, as part of its Common Foreign and Security Policy (CFSP), adopt sanctions with a view to promoting its own foreign-policy objectives. Such restrictive measures are contained in a CFSP decision under article 29 of Treaty on European Union.

Economic sanctions are typically, then, put into effect by means of an EU regulation adopted by the Council of Ministers under article 215 of the Treaty on the Functioning of the European Union.

The war in Ukraine is an example of where the EU and the UN have differing foreign policy objectives, with the result that the EU has taken independent action. Specifically, Russia, being a permanent member of the Security Council, has the right to veto any UN resolutions, so clearly no UN sanctions are likely to arise from this conflict.

For EU sanctions to apply, it is sufficient that an EU natural or legal person is involved, or that the relevant parties act in whole or in part within the EU. Restrictive measures adopted by the EU by regulation are directly applicable/automatically binding on all natural and legal persons in the state (and elsewhere in the EU).

Irish secondary legislation

Although the State is, as mentioned above, automatically bound by all EU regulations, Irish secondary legislation – that is, a specific statutory instrument (SI) referring to the relevant EU legislation – is also usually adopted by the Minister for Finance.

The timing of the entry into force of such SIs varies. Some have taken months. Others, including the secondary legislation triggered by the 2022 EU regulations resulting from the invasion of Ukraine, have been adopted much more quickly.

Typically, the relevant SI provides that a person contravening a provision of the relevant EU regulation is guilty of an offence. It also usually stipulates the relevant penalty/penalties, which can include fines on entities and/or individuals (in both cases, on indictment, of a maximum of €500,000) and/or prison sentences on individuals (on conviction on indictment of up to three years).

Since article 34 of the Constitution arguably prevents significant administrative fines, criminal offences are generally chosen as the primary enforcement tool for infringement of EU sanctions.

Sanctions in 2014 and 2022

While the February 2022 invasion of Ukraine clearly represented a significant intensification of the ongoing conflict, Russia’s 2014 direct (that is, annexation of the Crimea and Sevastopol in southern Ukraine) and indirect (military campaign by a Russian-backed separatist movement in the Donbas region of eastern Ukraine) actions had already resulted in the adoption of restrictive measures against relevant Russian/other interests/individuals by the EU.

These sanctions are primarily contained in Council Regulation 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining the territorial integrity, sovereignty, and independence of Ukraine, and in Council Regulation 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine.

Regulation 269/2014 contains measures including the freezing of funds and economic resources of relevant Russian/Ukrainian individuals in response to the Crimean situation. On the other hand, Regulation 833/2014 prohibits the export of dual-use goods and technology to Russia if those products are for military use. (‘Dual-use’ means the relevant item is suitable for both civil and military purposes.)

This law also bans the sale of such goods and technology to certain Russian entities, while also prohibiting the provision of related technical support and financing. In addition, Regulation 833/2014 prevents the Russian state and certain Russian financial institutions from accessing capital markets in the EU. (Other 2014 EU sanctions targeted certain Ukrainian politicians and other individuals accused of misappropriating exchequer funds and/or undermining the rule of law, including former Ukrainian president Viktor Yanukovych.)

As Russia was assembling its troops near the border with Ukraine in late 2021 and early 2022, both Regulation 269/2014 and Regulation 833/2014 provided a ‘ready-to-use’ framework for the adoption of a deeper and broader set of restrictive measures by the EU against relevant Russian/Ukrainian legal and natural persons.

The amended laws have added a significant number of individuals and entities (including Vladimir Putin) to the sanctions list, while also adopting measures aimed at weakening Russia’s economic base/ability to wage war by depriving it of both critical technologies/access to the EU market.

Since 2014, restrictions on trade and investment have been imposed by the EU regarding Crimea and Sevastopol. Earlier this year, a similar set of restrictions was adopted by the EU regarding the non-government-controlled territories of the Donetsk and Luhansk regions.

In 2020, an array of financial, economic and trade sanctions had been applied by the EU to Belarus – these rules were expanded this year in response to that country’s support of Russia’s actions in Ukraine.

All EU sanctions may be subject to regular change and revision. For a current overview of the measures adopted in response to Russia’s attack on Ukraine, see the ‘Sanctions adopted following Russia’s military aggression against Ukraine’ page on the European Commission website.

Overview of sanctions in place

The relevant EU trade sanctions target commerce with Russia in a long list of specific economic sectors. In addition to the ban on the export of dual-use goods, by way of a small sample, this list contains a prohibition on new investments in the Russian energy sector; a ban on public support or financial assistance for trade with Russia; an EU broadcast-ban on Russian state-owned media outlets, including the English-language TV channel Russia Today; a ban of the import of iron and steel from Russia; and a prohibition on exports of advanced semiconductors to Russia.

Travel bans and asset freezes now apply to hundreds of individuals and legal entities purportedly responsible for undermining Ukraine’s territorial integrity. In the financial-services sector, specific measures have been adopted regarding matters/functions such as insurance/reinsurance, acceptance of deposits, engagement with the Russian central bank, sale of securities, access to the SWIFT system, crypto-assets, and refinancings.

EU regulations containing sanctions typically contain derogations – that is, permit the otherwise-prohibited activities in limited circumstances, such as allowing the purchase of goods or services required to satisfy the basic needs of the designated or sanctioned individual, releasing funds to pay for legal services, and/or paying for the maintenance of the frozen funds or economic resources.

In addition, EU restrictive measures often allow an exemption for contracts concluded before the entry into force of the relevant sanctions. If granted, such derogations usually require the relevant EU member state to inform the other EU member states and the European Commission.

The relevant EU regulations prohibit activities that thwart the objective of the restrictive measures. However, any person or entity who did not know, and had no reasonable cause to suspect, that their action would violate the relevant EU rules will not be liable. Indeed, any freezing of funds and economic resources that is done in good faith on account of the EU sanctions rules will also not result in liability, unless the funds were frozen negligently.

Competent authorities

EU sanctions rules contain a list of competent authorities who, as mentioned above, are permitted to release frozen funds/economic resources in line with the relevant derogations. The three competent authorities in Ireland are the Department of Foreign Affairs; the Department of Enterprise, Trade and Employment; and the Central Bank of Ireland. Relevant details regarding Russian-related sanctions are available on each of their respective websites. (In addition to the above-mentioned websites, a section of lawsociety.ie provides links to relevant resources on this wide-ranging, nuanced and dynamic topic.)

Next steps

Corporate entities and individuals face various risks from infringing EU laws on sanctions. These include business disruption, loss of investment, major reputational damage, the requirement to devote management time to compliance issues/defending potential allegations plus, and perhaps most importantly, severe penalties including fines and/or jail terms for the relevant offenders.

Clearly, engaging with or on behalf of Russian natural or legal persons has, since late February 2022, become much more fraught with risk.

While already an obligation for solicitors under AML/CFT rules, conducting proper client due-diligence has only increased in importance. Moreover, the real purpose, particularly of instructions from new clients with links to Russia, must be carefully considered.

In both onboarding and subsequently advising Russian-related clients, solicitors must keep abreast of all relevant legal developments in this fast-moving area.  

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