European Commission proposes to criminalise evasion of EU sanctions

• Europe

• Fraud and financial crime
• International trade
• Sanctions

08-12-2022

On 2 December 2022, the European Commission announced its proposal to introduce a new Directive which will harmonise the way Member States investigate, prosecute and penalise individuals and entities for sanctions violations. This follows the EU Council’s decision on 28 November 2022 to add sanctions violations to the list of ‘EU crimes’. The Directive on the definition of criminal offences and penalties for the violation of Union restrictive measures is designed to reinforce the EU sanctions regime, by: providing definitions of criminal offences for sanctions violations; setting out effective and proportionate penalty levels for these criminal offences with the aim of dissuading future perpetrators; and improving and increasing cross-border investigation and prosecution.

Background

The EU has commented many times in recent years that there is a perception that sanctions are enforced inconsistently across the EU, and that this undermines the efficacy of the regime. The conflict in Ukraine has brought these concerns to the fore, with the EU being concerned that companies and individuals can utilise ‘legal loopholes’ due to conflicting aspects of criminal law across the EU (i.e. transferring asset ownership to a non-sanctioned individual or transferring assets across various jurisdictions and ‘hiding’ them through complex legal or financial structures/vehicles).

The Commission followed a two-step approach to pass legislation to help end impunity for those violating EU sanctions. As a first step, in May 2022, the Commission proposed to add the violation of EU restrictive measures to the list of EU crimes under Article 83(1) of the Treaty on the Functioning of the European Union. This proposal was adopted on 28 November 2022. At the same time, the Commission proposed new reinforced rules on asset recovery and confiscation, which will also contribute to the implementation of EU restrictive measures. The proposed Directive is the second step to criminalise the evasion of EU restrictive measures.

We set out below some of the key provisions of the Directive.

Types of restrictive measure violations (Article 2)

The Directive aims to primarily capture violations concerning:

• the freezing of funds and economic resources;
• prohibitions on making funds and economic resources available;
• prohibitions on entry into, or transit through, the territory of a Member State;
• sectoral economic and financial measures; and
• arms embargoes.

Punishable criminal activities (Articles 3 and 4)

Under Article 3 of the Directive, Member States will need to ensure that the following activities are criminally punishable when carried out intentionally and in direct violation of EU sanctions:

• making funds or economic resources available to a sanctioned person;
• failing to freeze (without undue delay) funds or resources belonging to a sanctioned person;
• enabling entry of a sanctioned individual into a Member State (or their transit through a Member State);
• entering into transactions with a third country which are prohibited by EU sanctions;
• trading in goods or services whose import, export, sale, purchase, transfer, transit or transport is prohibited or restricted (including providing brokering services);
• providing financial activities which are prohibited or restricted (including financial assistance, investment services etc.);
• providing other services which are prohibited or restricted (including legal advisory services, accounting, auditing, bookkeeping and tax consulting services etc.);
• circumventing a restrictive measure (e.g. concealing funds, concealing owner or beneficiary information, failing to report, failing to comply, failing to cooperate with an obligation etc.); and
• breaching or failing to fulfil conditions under authorisations/licences granted by competent authorities to conduct activities.

In addition, Member States are expected to take all necessary measures to ensure that inciting, aiding and/or abetting of offences are also classified as punishable criminal offences (Article 4).

Penalties (Articles 5, 6 and 7)

The Directive proposes that all of the criminal activities set out above be “punishable by effective, proportionate and dissuasive criminal penalties”. The Directive proposes:

• For individuals: a maximum penalty of at least 5 years’ imprisonment and a fine of at least EUR 100,000.
• For entities:
  • criminal or non-criminal fines of up to 5% of the annual worldwide turnover;
  • exclusion from access to public funding;
  • disqualification from the practice of business activities; withdrawal of permits and authorisations to pursue activities which have resulted in committing the offence;
  • placing under judicial supervision;
  • judicial winding-up, and closure of establishments used for committing the offence.

The corporate penalty reference of annual worldwide turnover is a curious choice for these types of offences. For those Member States which are used to levying hefty penalties, this may seem like a good starting point for calculations of penalty levels (which can of course be adjusted down after taking into account mitigating factors), but for other Member States which are used to penalties in the region of a few thousand euros per violation this may seem like an excessive approach.

Jurisdiction and limitation period (Articles 11 and 12)

Articles 11 and 12 of the Directive relate to jurisdiction rules and the proposed period of limitation for violations, respectively.

It is proposed that a Member State will have jurisdiction if, for example, the offender is a national or resident of the Member State, the offence was committed in whole (or in part) within the Member State’s territory, or the violation was committed for the benefit of an entity established, or in respect of any business done, in that Member State.

Article 12 specifies that the limitation period should be a time period in which thorough investigation, trial, prosecution and decision can occur. As such, the Directive suggests that Member States should ensure that they take the “necessary measures” to enable a thorough and full process of investigation and decision for “a period of at least 5 years from the time when the offence was committed”. However, Member States may establish a shorter limitation period (provided it is no shorter than 3 years) in cases where a limitation period may be “interrupted or suspended in the event of specified acts”.

Next steps

The Directive will now be considered by the Council of the EU and the European Parliament. Once agreed and adopted, the intention is that Member States will have 6 months to ensure it is transposed into relevant national law.

Comment

The Directive seeks to ensure that the EU’s restrictive measures have teeth and that enforcement activity is more uniform across all Member States. Currently, not all Member States have the right tools to guarantee the full effects of EU sanctions. In two Member States, sanctions violations do not even have a rank of a criminal offence and can only lead to administrative penalties. Once the Directive is adopted, it should rectify this by implementing a harmonised approach across the EU, with similar definitions and penalties. 

The EU appears determined to put an end to what it perceives to be unacceptable levels of sanctions circumvention, by increasing effective enforcement of sanctions in the EU. In the words of the Vice President for Values and Transparency the EU hopes that the new law will results in “no more loopholes, no more safe havens and no more playing the system – we’re getting tougher”.

The messaging from the Commission is clear. This new law will lead to more frequent and more aggressive enforcement of sanctions, meaning that it is more important now than ever for companies to ensure that they are fully compliant with EU sanctions.

Read our regular updates on sanctions imposed by the EU, UK, US and Switzerland in response to the conflict in Ukraine >

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