Our Terms & Conditions | Our Privacy Policy
By Matthew Rabinowitz, Steven Farmer, Matthew Oresman, and Iris Karaman
International sanctions have long been a geopolitical battleground, with the US and EU historically adopting somewhat divergent approaches. The US is known for its assertive extra-territorial secondary sanctions, compelling foreign entities to comply or risk exclusion from its market. In contrast, the EU has traditionally resisted such measures, adhering to a more restrained approach. However, recent developments suggest a strategic pivot by the EU, particularly through its third-country subsidiary rules concerning sanctions on Russia and Belarus, signalling a shift closer to the US’s assertive model.
A Historic Divergence
The US has long leveraged secondary sanctions and other similar extra-territorial restrictions as a powerful tool to support US national security and foreign policy interests. These sanctions are economic prohibitions that apply to non-US entities, even when there is no direct US nexus, such as activity occurring within the US or involving US persons. For instance, a foreign company that engages in significant transactions with a sanctioned party might face exclusion from the US financial system, regardless of whether there is any direct connection to the US. In some circumstances, US secondary sanctions impose more limited restrictions, such as prohibiting or strictly regulating the opening and maintenance of correspondent accounts or payable-through accounts in the US for non-US financial institutions (so-called “CAPTA” sanctions).
While separately administered, the US also regulates exports, re-exports, and in-country transfers of US-origin goods globally, and certain non-US made items depending on whether they incorporate more than a “de minimis” percentage of US-origin controlled content or are a “direct product” of certain US-origin technology or software. These restrictions in place under the Export Administration Regulations create challenges for non-US companies who must stay attune to US restrictions that may attach to their products or technologies.
In contrast, the EU has historically resisted extra-territorial application of its sanctions. The EU Blocking Regulation prohibits EU entities from complying with certain US extraterritorial secondary sanctions, reflecting the EU’s commitment to uphold its sovereignty and legal principles. The applicability of EU sanctions has traditionally been limited to actions within EU jurisdiction, such as activity by EU companies globally or transactions taking place wholly or partly within EU territory. Unlike US secondary sanctions, which target foreign entities, the EU’s sanctions framework traditionally avoided imposing direct obligations on foreign entities concerning activity occurring outside EU jurisdiction.
A Paradigm Shift
EU sanctions on Russia and Belarus have served as a testing ground for gradually extending the jurisdiction of EU sanctions. In June 2023, the EU introduced measures to curb circumvention by third countries, including a new power that allows the EU to restrict the sale and export of goods to certain third countries facilitating breaches of EU sanctions, though this power remains unused and its practical application is unclear.
Most recently, the EU has adopted new obligations on EU parent companies to ensure their non-EU subsidiaries do not undermine certain EU sanctions. This includes implementing appropriate EU sanctions policies, controls, and procedures to mitigate risks. The requirement applies specifically to sectoral sanctions against Russia and both sectoral and financial sanctions against Belarus (i.e. it does not extend to other EU sanctions regimes such as those maintained against Iran or Myanmar).
Similarities and Nuances
Both the EU and US now seek to enforce their sanctions regimes beyond their immediate borders, albeit through different mechanisms. The US uses explicit secondary sanction, while the EU imposes stringent compliance requirements on EU parent companies, achieving a similar effect without formal extra-territorial jurisdiction.
A key difference lies in the flexibility of the EU’s “best efforts” requirement. The EU regime considers potential legal conflicts its companies might face in third countries, suggesting that “best efforts” should account for situations where local laws prevent compliance including, for example, where the EU parent cannot exercise control over a Russian subsidiary due to Russian measures. In addition, “best efforts” expectations vary based on company size, activity, and control over non-EU subsidiaries. Larger EU-headquartered companies with more oversight face higher standards, especially if the non-EU subsidiary undertakes activity that directly or indirectly involves Russia or Belarus. In contrast, the standard would likely be lower for a passive EU holding company that has no oversight over day-to-day operations.
On the US side, in some cases, a US parent can be directly liable for their non-US subsidiaries’ actions, even where the US company plays no direct or indirect role in the activity. Taking Iran as an example, non-US entities owned or controlled by US persons are prohibited from engaging in transactions with the Government of Iran, including state-owned companies, if that activity would be prohibited in the United States or with a US person.
Navigating Legal Clashes and Ensuring Compliance
Navigating the evolving landscape of EU sanctions, particularly with recent jurisdictional changes, requires a comprehensive and nuanced approach. Given the expanded expectations on EU companies, businesses must conduct thorough risk assessments of global operations involving non-EU subsidiaries of EU parent companies. This includes identifying potential exposure to sanctioned activities involving Russia and Belarus, scrutinizing transactions, partnerships, and supply chains, and determining where indirect links might create compliance challenges.
In response to the “best efforts” requirement, companies must update compliance programs to reflect these new obligations. This involves revising internal policies, increasing oversight of subsidiary activities, and ensuring that subsidiaries operate under the same stringent compliance standards as the parent company. Regular staff training on the latest sanctions developments is crucial to maintain awareness and vigilance across the organization. Navigating conflicts between EU sanctions and local laws in third countries, and understanding the practical implications of the “best effort” obligation in practical terms will be paramount.
Conclusion
Over the past two years, the EU has gradually introduced new measures seeking to expand the jurisdiction and intended deterrent effect of EU sanctions. The new “best efforts” obligation, while stopping short of a full US-style secondary sanctions regime, represents a substantial shift by introducing obligations that extend, in practical terms, to non-EU subsidiaries of EU companies. The EU’s sanctions on Belarus and Russia have tested these measures, pushing EU influence beyond its traditional jurisdiction. It remains to be seen whether these measures will be expanded to other EU sanctions regimes, indicating a broader shift in EU sanctions policy, or if they will remain a unique to the Russia and Belarus sanctions regimes.
These shifts could present significant compliance risks for companies, especially EU companies with non-EU subsidiaries that are exposed to Russia and Belarus. Companies should review their current practices and take the necessary steps to ensure compliance with the evolving sanctions framework. Proactively addressing these risks is essential to avoid the severe repercussions of non-compliance and to protect the company’s operations and reputation in an increasingly complex regulatory environment.
About the Authors
Steven Farmer is a Partner at Pillsbury in London. He advises companies across a range of sectors, from some of the world’s largest multinationals to startups, looking to launch or expand in the UK/EU, whilst navigating complex trade regulatory issues.
Matthew Oresman is Managing Partner of Pillsbury’s London office, from where he leads the firm’s International Public Policy practice, carrying out high-profile activities in many of the world’s capital cities. He principally advises business executives, governments, political leaders and NGOs on achieving their most important objectives.
Matthew Rabinowitz is a Partner at Pillsbury in Washington, DC. He advises companies on compliance with export control and sanctions regulations, anti-corruption laws and supply chain reviews. He further assists companies in navigating the CFIUS review process.
Iris Karaman is an Associate at Pillsbury in the firm’s London office. Iris advises clients on all aspects of international trade and investment law, including helping clients to comply with complex EU and UK sanctions.
Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.
Aggregated From –
