On 28 November 2022, the Council of the EU unanimously adopted a decision adding violations of EU sanctions to the list of “EU crimes” referred to in the Treaty on the Functioning of the EU (TFEU). This inclusion allows the EU to impose certain rules to harmonize Member States’ enforcement of sanctions violations.
Only a few days later, the EU Commission published its draft proposal for a directive, which sets out certain common rules for enforcement of sanctions violations. The draft lists the violations which should constitute a criminal offense. It also prescribes certain penalties for violations committed by natural and legal persons, including penalties as imprisonment, judicial winding-up and fines calculated on annual turnover.
In this article we will explain the contents of the draft directive in detail and provide background information on this unprecedented development.
Following Russia’s invasion of Ukraine on 24 February 2022, the EU has massively expanded its already existing sanctions regime regarding Russia. To date, the EU has imposed nine packages prohibiting a wide range of activities involving Russia and/or Russian parties.
The EU also has similar sanctions regimes in place regarding other countries, such as Syria, North Korea and the Democratic Republic of Congo. In addition, the EU also imposes restrictive measures under so-called “horizontal” regimes, which target terrorism, cyber-attacks, proliferation of chemical weapons and corruption.
Vast differences in the enforcement of EU sanctions
Although EU sanctions apply uniformly across the EU, the actual enforcement of the measures is subject to the national laws of the Member States. Due to vast differences in the national laws of Member States, sanctions and violations of sanctions are enforced notably different across the EU.
For example, in some Member States, a sanctions violation constitutes a criminal offence, whereas it can constitute either a criminal offense or an administrative offense in other Member States. There are also notable differences in the penalties for sanctions violations. For example, administrative fines for sanctions violations by legal persons range between EUR 133.000 and EUR 37.5 million. In Member States where sanctions violations are treated as a criminal offense, some Member States operate with a maximum prison sentence between 2 and 5 years, while others prescribe a maximum sentence between 8 and 12 years.
Overall, the maximum fines (both criminal or administrative) vary in the range from EUR 1.200 in some Member States up to EUR 5.000.000 in others, which clearly illustrates the vast differences.
According to the EU Commission, these differences undermine the objectives of the EU sanctions and raise concerns regarding cross-border violations and “forum shopping”. There is a considerable risk that illegal activities will take place in or migrate to the jurisdictions with the least severe penalties.
To address this, the Council therefore adopted the decision to classify violations of sanctions as an “area of crime” as referred to Article 83(1) TFEU. This specifically allows the EU to establish certain minimum rules to harmonize the legal definition of criminal offences and the penalties. Other areas that are currently listed as “EU crimes” include terrorism, human trafficking, illicit drug trafficking, corruption and money laundering.
The draft directive on minimum rules for sanctions enforcement
The EU Commission’s draft directive defines the categories of violations which constitute criminal offenses in the Member States and imposes rules concerning the minimum penalties for both legal and natural persons.
Scope of the directive
The draft directive sets out the categories of violations which constitute a criminal offense. These are listed in article 3 and include amongst others:
- making funds or economic resources available to a sanctioned person, entity or body,
- trading in goods or services whose import, export, sale, purchase, transfer, transit or transport is prohibited,
- participating in financial activities which are prohibited, and
- circumventing a prohibition or restriction by:
- concealing funds which should have been frozen,
- concealing the fact that a sanctioned person is the ultimate beneficiary by providing false or incomplete information,
- breaching or failing to fulfil conditions under an authorization, and
- failing to cooperate with the authorities in relation to reporting obligations.
The draft directive covers offenses which are committed intentionally and falling within the listed categories. Certain categories however also apply to conduct committed with serious negligence.
The draft directive also requires Member States to ensure that inciting, aiding and/or abetting the offences is also punishable as a criminal offense.
Penalties for natural persons
The proposed directive provides for certain minimum criminal penalties (including fines and imprisonment) for natural persons.
For example, for severe offenses the directive requires the maximum penalty to provide for imprisonment. Certain offenses would accordingly be punishable by a maximum penalty of at least one year of imprisonment, whereas other offenses require a maximum penalty of at least five years of imprisonment.
Criminal offenses should also be punishable by additional criminal penalties, including fines.
Penalties for legal persons
The draft directive also sets out the relevant penalties for violations committed by legal persons, including, violations committed by authorized representatives or persons with leading positions.
According to the proposal, penalties for legal persons should include criminal and administrative fines, and in certain cases also the exclusion from access to public benefits, aid or funding, including tenders, grants and concessions. Other severe penalties also include:
- disqualification from business activities,
- withdrawal of permits and authorisations for activities which have resulted in the offence,
- placement under judicial supervision,
- judicial winding-up, and
- closure of establishments used for committing the offence.
The directive also provides for fines corresponding to the legal person’s annual worldwide turnover, including up to 5% thereof.
Already at a first glance, it is clear that the directive proposes far-reaching and severe penalties for violations of EU sanctions. This development further underlines the need to ensure proper transaction and customer screening and adequate internal compliance procedures.
The EU Parliament and the Council will now discuss the proposal as part of the ordinary legislative procedure. The draft must be adopted by the Council and the European Parliament before it enters into force.
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