Compliance with EU Sanctions on Russia

Introduction

Since the 23^rd of February 2022, the European Union (the “EU”) has adopted four separate sanctions packages in response to Russia’s illegal and unprovoked military aggression against Ukraine. The sanctions adopted on the 23^rd of the February were in response to Russia’s decision to recognise the two ‘People’s Republics’ of Donetsk and Luhansk as independent states. Three further packages of much harsher measures followed after the start of the invasion on the 25^th and 28^th of February and on the 2^nd of March 2022.

The following article looks more closely at the sanctions from a trade perspective and in particular focuses on; what companies need to do, what to avoid in order to ensure compliance and the potential penalties should a company contravene any of the sanctions.

All EU sanctions were imposed by EU Regulation and as such, they have direct effect in all member states and are binding on all natural and legal persons. Private companies have an obligation to ensure that they are in full compliance with these new measures.

1. Council Regulation (EU) 2022/263 (“Regulation 2022/263”)

This sanctions package was adopted by the EU on the 23^rd of February;

• Under Article 2, it is prohibited to import into the European Union goods originating in Donetsk and Luhansk (the “Specified Territories”)
• Under Article 4, it is prohibited to sell, supply, transfer, or export specified goods and technology, listed in Annex II of the Regulation, suitable for use in the telecommunications, transport, energy and oil production sectors:

1. to any natural or legal person, entity or body in the Specified Territories, or
2. for use in the Specified Territories.

• It is prohibited to provide technical assistance or brokering services related to the goods and technology listed in the Regulation, or related to the provision, manufacture, maintenance and use of such items, to any natural or legal person, in the Specified Territories or for use in the Specified Territories.
• It is prohibited to provide technical assistance, or brokering, construction or engineering services directly relating to infrastructure in the Specified Territories, in the telecommunications, transport, energy and oil production sectors, defined on the basis of the listed goods and technologies. This prohibition is independent of the origin of the goods and technology.[1]

Companies should ensure that they comply with Article 2 and make appropriate enquiry to ensure that they are not importing any goods from the Specified Territories. Companies need to confirm that they are not exporting any of the goods listed in Annex II to Regulation 2022/263 to the Specified Territories, this covers a wide array of goods and technologies. If a company is involved in the production or supply in any of the covered industries, it is likely that it will have a product covered by Annex II. Any company in contravention could face significant penalties, as set out in the penalties section below.

2. Council Regulation (EU) 2022/328 (“Regulation 2022/328”)

On the 25 February 2022, the EU adopted a second sanctions package. Regulation 2022/328 amended Council Regulation (EU) No 833/2014 which initially implemented sanctions against Russia in the aftermath of the annexation of Crimea;

• Article 2 places a ban on the export of all dual-use items, regardless of origin, to any person in Russia or for use in Russia.
• Article 2a places an export ban on a wide range of goods and technology considered to contribute to Russia's development of the defence and security sectors, including related assistance/services. The extensive restrictions cover various items not normally covered by EU dual-use controls, but which are covered in the US Commerce Control List; this includes items for the electronics sector (e.g., microprocessors, semiconductors), and information security, sensors, lasers, navigation/avionics, marine and aerospace/propulsion items.
• There is also a prohibition on the sale, supply, transfer or export, of specific goods and technology, listed in Regulation 2022/328, suited for use in aviation or space industry, to Russia or for use in Russia.
• For each of the aforementioned prohibitions on exports of goods and technology, there is a corresponding prohibition on the provision of technical assistance, brokering services or other services, including financial services, related to the goods and technology.[2]

Dual-use items are goods, software and technology that can be used for both civilian and military applications. Regulation (EC) No 2021/821 governs the EU's export control regime and there are four types of export authorisations in place. If a company is already exporting dual-use goods, it is likely that it will have this authorisation. This provision uses the term “to Russia or for use in Russia”, therefore, even if the final destination is not Russia, but it is going to be used in Russia, it would also be covered by Article 2.

Article 2a places a ban on the export of any goods listed in Annex II to Regulation 2022/328. As illustrated above, Annex II is quite expansive and refers to a wide variety of goods and technology. Both of these provisions use the terms directly or indirectly in relation to the sale, supply, transfer or export of goods and technology. This covers situations where a company either exports directly to Russia or export to Russia via distributors or other customers.

Companies should check whether the goods and technology that they export fall within the definition of dual-use goods or whether their goods are listed in Annex II to Regulation 2022/328. Companies should also interrogate the supply chain to assess whether they are exporting directly or indirectly to Russia. The penalties for contravention are set out below.

3. Council Regulation (EU) 2022/336 (“Regulation 2022/3362”)

On the 28^th of February, the EU adopted its third package of sanctions against Russia, imposing asset freezes on various Russian businesspersons active in the oil, banking and finance sectors, while closing off the EU's airspace for Russian air carriers and preventing Russia's Central Bank from accessing its foreign reserves in the EU.

4. Council Regulation (EU) 2022/355 (“Regulation 2022/355”)

On 2 March 2022, further restrictions were also introduced on exports of dual-use goods and technology and related services, as well as restrictions on exports of certain goods and technology which might contribute to Belarus’ military. These restrictions are similar to those imposed and outlined above under Regulation 2022/328.

Possible Penalties

In Ireland, penalties for breaches of EU sanctions are provided for at a national level and implemented via Statutory Instrument. Regulation 2022/328 amending Council Regulation (EU) No 833/2014 and Regulation 2022/263 were implemented by S.I. No. 82 of 2022. If a company is found to have been in contravention of provisions set out in Regulation 2022/328 or Regulation 2022/263, Section 4 sets out that a person who is guilty of an offence shall be liable:

(a) on summary conviction, to a class A fine (fine not exceeding €5,000) or to imprisonment for a term not exceeding 12 months or both; or

(b) on conviction on indictment, to a fine not exceeding €500,000 or to imprisonment for a term not exceeding 3 years or both.

These penalties are equally applicable to a Company if proved to have been so committed with the consent or connivance of or to be attributable to any neglect on the part of any person, being a director, manager, secretary or other officer of the body corporate.

Regulation 2022/355 amending Regulation (EC) NO 765/2006 was implemented by S.I. No. 101 of 2022. Section 4 provides for the same penalties as set out in S.I. No. 82 of 2022.

What companies need to do

If a company is involved in the export or import to the countries/regions covered as set out above, you should make immediate enquiry to ascertain whether the company could be in contravention of any of the above Regulations, and if necessary, cease the export of those goods to the applicable countries.

If a company is involved in the sale of any goods described in the foregoing Regulations, you need to investigate whether the company or any of its customers are involved in the export of goods to any of the applicable countries.

If the answer to this is yes, you might consider requesting confirmation in writing from these customers that they do not export your products and technology to those countries. You might also consider issuing a letter to each of your customers requesting them to stop any sale, export etc of your products and technology to those countries or make a request for disclosure of their customers to confirm that they are not doing so.

Reduction in Imports from Russia

In addition to the impact of the Regulations on Companies exporting to Russia, Belarus and the Specified Territories, there are also going to be a wider impact from the reduction in supply across various industries. There will be pressure on global companies to move away from Russian raw materials and to find alternative suppliers. This is already evident in the recent aftermath of the invasion, with companies such as Shell announcing that they are no longer buying Russian oil or gas. News emerged that the US are placing a ban on the import of Russian oil and the EU are also looking at following suit. If Russian oil or gas flows were to falter, it would lead to significant price increases due to the lack of alternatives.[3]

Russian and Ukraine also account for just under a third of the world’s wheat exports. The country is an important source of metals used in manufacturing such as nickel, titanium, palladium and aluminium.

A range of companies across many sectors are dependent on supplies from Russia or have operations within the country. Companies will need to put plans in place immediately to mitigate the level of impact that the disruption will cause to their supply chain.

Companies should be monitoring the situation closely, as further sanctions impacting on trade and supply chains are likely. Irish companies can monitor updates on the Department of Foreign Affairs and the Department of Enterprise, Trade and Employment’s websites.