Sanctions: The end of the beginning? Moving into a new era of anti-circumvention and enforcement

Constant vigilance is required to identify those that are performing unlawful activities in a manner that would give the appearance of lawfulness to avoid the effect of sanctions - but it is an inherently difficult exercise. The evidence that would enable the detection of unlawful activity is often equivocal, and ‘bad actors’ are proving adept at finding new, innovative ways to maintain and further their interests, becoming ever more sophisticated in their efforts to circumvent the sanctions in place. The focus now must therefore be on consolidation, and on ‘closing the gaps’ to combat the rapid emergence of new evasion typologies.

This has not the escaped the notice of legislators; as the types of new sanction that can be imposed on Russia reduce, the prevention of circumvention and evasion of sanctions (and enforcing them) is very much a priority, and will remain so for the foreseeable future as UK, EU and US sanctions authorities seek to maintain the integrity of their restrictive measures against Russia.

The main challenge that is being faced across jurisdictions is the continued trade of controlled goods, particularly Russian oil, goods containing controlled Russian input content (eg, iron and steel products) and those common high priority items found on the battlefield in Ukraine. Despite the comprehensive controls that have been imposed, Russia has continued to import such goods, particularly those components seen as critical to its military industry – it is clear that the international community considers that more must be done to restrict Russia’s access to the goods (and revenue) allowing it to pursue the war in Ukraine.

So what is being done?

Each of the UK, EU and the US have made clear that clamping down on circumvention is a high priority in 2024 and beyond. The EU has been particularly active in this regard; we first saw the introduction of Article 12f to the EU measures imposed against Russia, which established an as-yet unused framework to prohibit the sale, supply, transfer or export  of certain goods to third countries (and the provision of certain related services) if there is a high risk that the goods in question will be then diverted to Russia.

This was followed by what was colloquially known as the ‘No Russia’ clause; this Article 12g provided that, as of 20 March 2024, exporters must contractually prohibit the re-exportation of certain goods or technology to or for use in Russia when selling, supplying, transferring or exporting to a third country (unless that third country is listed as a partner country). The EU has also imposed a broadly equivalent restriction against Belarus.

The EU has since introduced further measures aimed at tightening the position; we have seen the introduction of a new Article 8a, which obliges EU operators to use ‘best efforts’ to ensure that any non-EU entity that they own or control does not participate in activities that undermine EU restrictive measures. With this development, the EU’s sanctions regime begins to take on the look and feel of a sanctions program that contains extraterritorial elements creating new risks that EU operators will need to manage carefully.

Interesting too is the introduction of Articles 12ga and 12gb. The former, which is effective 24 December 2024, obliges EU operators which sell, licence or transfer IP rights or trade secrets related to certain ‘common high priority items’ to contractually prohibit any third-country counterparts from using such rights in connection where the common high priority items are intended to be sold, supplied, transferred or exported into Russia, or are otherwise for use there. The latter imposes enhanced due diligence requirements for suppliers of such common high priority items, and are required to ensure that non-EU entities that they own or control implement the same diligence procedures.

Perhaps most significantly, the EU has bolstered its anti-circumvention prohibition; the position now is that where persons participate in a given activity that has the object or effect of circumventing restrictive measures, and are aware that such a participation may have that object or that effect, and accepts that possibility, this will constitute a breach. The effect of this is that the liability threshold has been lowered from before when it was necessary to show an intent to circumvent; now all that needs to be established is that there was an awareness of a possibility that a given action could lead to circumvention.

The UK has not yet implemented equivalent legislative measures, but it has been active in designating entities found to have been violating and circumventing the UK’s measures against Russia , most particularly those entities – some of them non-Russian – operating as part of Russia’s ‘shadow fleet’ of tankers and/or lifting Russian oil and petroleum products in breach of the G7 Oil Price Cap.

Dealing with this burgeoning Russian “shadow” fleet has become a key priority of all G7 nations. Characterised by their age, anonymous ownership, and involvement in deceptive practices, these ships operate under the radar to avoid sanctions, environmental regulations, and insurance costs. Many are registered under flags of convenience and lack proper liability coverage; the latter of these issues poses a potentially huge problem. In the event of an oil spill or similar, these uninsured ships may have no recourse with which to pay the costs of such an accident, which poses significant risks to the environment.

Manipulation of shipping and ancillary costs (including shipping, freight, customs, and insurance costs) has been observed as a frequent circumvention method used by actors who wish to obfuscate Russian oil and oil products being purchased above the price cap. As a way to combat this, the G7+ Oil Price Cap Coalition introduced changes to the attestation model, with the insurance market now requiring attestations to be provided on a per voyage basis and requiring the provision of details of any ancillary costs incurred.

Focus on Enforcement

Significant steps are also being taken to strengthen sanctions enforcement. It  has been reported that the Russian Elites, Proxies, and Oligarchs (REPO) Task Force, made up of the G7, the EU and Australia, has blocked over USD 58bn worth of sanctioned Russian assets, and we expect that this will continue. 

The European Parliament has also recently adopted a directive which seeks to harmonise the rules on the violation of EU sanctions, and establishes certain minimum standards concerning the definition of criminal offences and penalties. The aim is to ensure that sanctions violations can be criminally investigated and prosecuted on a common basis across all Member States, further enhancing enforcement consistency.

In the UK, the Office of Financial Sanctions Implementation is increasing its staff and working closely with the National Crime Agency to enhance enforcement efforts. Additionally, the UK late last year announced the launch of the Office of Trade Sanctions Implementation (“OTSI”), the stated aim of which is strengthen enforcement and clamp down on companies dodging trade sanctions against Russia. Whilst the finer detail (and any related legislative proposals to provide for supervisory and/or enforcement powers) is not yet available, we expect that OTSI will have an important part to play in the UK’s trade sanctions enforcement efforts going forward.

Key Takeaways

The UK and EU are increasingly applying a degree of extra-territoriality to the sanctions they impose against Russia; whether this signals a shift towards a more systematic secondary sanctions regime more akin to the US’s remains to be seen, but it is certainly apparent that a more robust approach is being taken in order to maintain the integrity of the measures imposed against circumvention abroad.

With this increasing regulatory focus on circumvention and enforcement, it is becoming ever more crucial for individuals and businesses to maintain constant vigilance, implement effective compliance functions and be thorough when conducting due diligence. New evasion typologies are constantly coming to the fore, and a sophisticated approach in response is needed. Failure to do so could result in significant repercussions, both financial and reputational.

If you have any queries regarding the measures imposed or the impact that these may have on your business, please do feel free to reach out to Hogan Lovells.

Authored by Jamie Rogers, Aleksandar Dukic, and Matt Steven.

With thanks to Macala Russell for her assistance with this article.