FCC ESSENTIALS

Explore our latest FCC (Financial Crime Compliance) Essential article as Christopher Stringham, Product Manager at Neterium, dives into his strong dedication to Financial Crime Compliance (FCC).

In the seven edition, Christopher dives into the history of European autonomous sanctions. It began with the European Community's measures against the Soviet Union following the 1979 invasion of Afghanistan. The effectiveness of sanctions has been debated, with enforcement being a critical element, as highlighted by a 2004 UN Report and intensified by the EU's 2018 Sanctions Guidelines. The EU's recent Directive (EU) 2024/1226 aims to harmonise criminal penalties for sanctions violations, setting minimum standards for offenses and penalties across member states. Despite these efforts, significant flexibility remains in implementation, which could lead to continued discrepancies and forum shopping within the EU. Read to discover more about the evolution and challenges of European autonomous sanctions and follow Neterium for regular updates on the Financial Crime Compliance.

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The history of European autonomous sanctions begins with the measures of the European Community against the Soviet Union for the illegal invasion of Afghanistan in 1979. At the beginning of 1980, the EEC decided to support the US grain embargo by prohibiting the increase of exports to the USSR as well as the suspension of future sales of subsidized sugar.i These limited measures proved ineffective and international coalition supporting them fell apart quickly.ii

Effectiveness of sanctions has remained a key topic relating since that time and not only in the context of unilateral sanctions. A United Nations Report in 2004 bemoaned the failure of sanctions when member states failed to enforce the measures.iii But with return of polarization in the UN Security Council, the primacy of unilateral sanctions is clear.

Sanctions are issued for a variety of reasons. The most cited justification is as a tool of compellence. According to the General Framework for EU Sanctions, restrictive measures (sanctions) are imposed for the purpose of compelling "a change of Policy or activity” by a third-countries or non-state actors.iv According to a Report by the European Parliamentary Research Service, "Judged by this criterion, sanctions more often fail than not." In the case of the sanctions against the USSR relating to Afghanistan, the multilateral coalition disintegrated very quickly and did not play any role in the eventual withdrawal.v

As mentioned in the 2004 UN Report, enforcement is a key element of ensuring the effectiveness of programs. In the European Union, discussion of enforcement and effectiveness intensified in 2018 with the publication of the Sanctions Guidelines by the Council of the European Union. This stated, "The effectiveness of EU restrictive measures – and also the EU’s credibility – hinges to a large degree on restrictive measures being implemented and enforced promptly and without exceptions in all Member States."vi Additionally, a report by Eurojust in 2021 noted, "Although there is a real interest amongst EU competent authorities in pursuing actions against individuals and corporations violating the EU-imposed sanctions regimes, the number of enforcement actions within the EU during the past few years remains minimal."vii

Discussions of sanctions enforcement typically focuses on the actions of the United States. Consider the case of a large European bank that reached a massive settlement with OFAC in 2014 regarding potential violations of US sanctions between 2004 and 2012.viii While the Americans acted quickly and publicly, investigations by the bank’s domestic authorities regarding potential violations of UN sanctions against Rwanda in the mid-90s were only opened after NGOs brought a compliant to public prosecutors in 2017ix. The case does not seem to have progresses since then, and there do not seem to be any public statements regarding the reasons.x In fact, few Member States publish information or statements regarding sanctions investigations or enforcement activity.

Overall, the EU has been under pressure to "to improve its sanctions implementation record."xi And one point that has frequently been raise is that implementation and enforcement is decentralised, while decision making is centralised in the EU Commission. There are more than 160 designated competent authorities; one member state (Latvia) has 27 different agencies. Additionally, it is up to the member states to implement criminal penalties and has resulted in a situation where there are widely different punishments throughout the bloc.

As an example of the divergence in penalties, the maximum period of imprisonment varies from six months in Greece to twelve years in Italy and Malta. And the maximum fine for individuals varies from €1.300 in Estonia to €5 Million in Malta. In two states, violations are seen as purely administrative.xii

To address these concerns and Limitations, the European Union has been working on passing a few reforms. First, the new Anti-Money Laundering Authority should take a role in creating “a common supervisory approach to verification of compliance with sanctions-related requirements.”xiii The specifics will be apparent once the final draft of the proposals have been passed and published. Secondly, the EU has proposed, and recently passed, Directive (EU) 2024/1226 on the definition of criminal offences and penalties for the violation of Union restrictive measures. The Directive was published in the Official Journal of the European Union on April 29, 2024.

This directive is heavily influence by Directive (EU) 2018/1673 on combating money laundering by criminal law. It seeks to harmonise criminal penalties across the EU for violating sanctions by establishing minimum standards.

Article 3 outlines the offenses that Member States are required to classify as criminal acts. These include:

• Directly or indirectly providing funds or economic resources to designated persons.
• Failing to freeze funds or economic resources belonging to designated persons.
• Engaging in trade of sanctioned goods or conducting transactions with states or designated persons.
• Offering financial services or conducting financial activities that are prohibited or restricted.

This section also provides a definition of 'circumvention' which includes:

• using a Shell or front Company to conceal that the true beneficiary of the transaction is a designated Person.
• providing false or misleading Information to conceal that the true beneficiary of the transaction is a designated Person.
• failing to report on funds of designated persons which have been frozen.

Interestingly, the definition of money laundering in Directive (EU) 2018/1673 doesn’t explicitly mention the use of front companies or providing false information. The definition of money laundering is more generic: “he concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of, property, knowing that such property is derived from criminal activity”. Since Directive (EU) 2024/1226 reforms the earlier directive to include the violate of EU restrictive measures as a predicate offense, using a shell company to conceal or disguise the true nature of the transaction would count as both sanctions' circumvention and money laundering.

Article 5 sets the minimum requirements relating to penalties for natural persons. These are very detailed, with various lengths of imprisonment, starting from at least one year, depending on the specific Violation and the amount of funds involved. As an example, the failure to freeze the funds of a DP, when the value is at least €100k, should have a maximum imprisonment term of at least five years. This provision sets the minimum level that the Maximum Penalty must be. Greece, which currently has a maximum imprisonment of 6 months, will therefore have to increase this to 5 years. Italy and Malta, which have maximum terms of imprisonment of 12 years will not have to change their penalties. The directive does not set Minimum Penalties, so it is still possible that courts can impose sentences of less than the five years in accordance with the national sentencing laws and guidelines.

Articles 6 and 7 cover the liability of legal persons. Here an important restrictive element is included. Liability depends on the actions of persons within the Organisation who have a "leading Position." This means that legal persons will only be liable when a leading Person either makes an active decision to violate EU sanctions or where a "lack of supervision" by the leading person makes the violation possible. When a violation occurs, penalties can include such consequences as exclusion from public tenders or disqualification to conduct business/winding-up. The maximum fine must be at least 5% of total worldwide Turnover or €40 million.

Regarding limitation periods, member states must ensure that prosecutions may be initiated for at least five years following the offense. Member states could impose a shorter period (three years) where such period may be interrupted or paused. Contrast this with the changes implemented by Section 3111 of H.R. 815 (Public Law 118-50) which increases the Limitation period for the Violation of US sanctions to 10 years from the date of the latest Violation.xiv

In Article 12, minimum standards of jurisdictions are set. There are three mandatory situations where a member state must ensure that it has jurisdiction. Two of these are the same as in the money laundering directive: when the criminal offense is committed within the territory of the member state and when the offender is a national of the member state. The sanctions directive adds that jurisdiction should also exist when the crime is committed on board a ship or aircraft registered in the member state or flying its flag. There are also some situations in which a member state could also elect to impose jurisdiction and would then be required to inform the commission.

The most interesting point, which was also in the money laundering directive, is that jurisdiction may be extended when the “the offence is committed for the benefit of a legal person established on its territory.” Currently, subsidiaries of EU companies in third countries are not required to follow EU sanctions.xv This is due to the EU’s long-standing objection to the extra-territorial application of sanctions, by the US.xvi However, if member states were to exert jurisdiction where the actions were made for the benefit of EU legal persons, then this also apply to third-country subsidiaries. This provision is copied directly from the previous directive, so it isn’t a conscious attempt to move towards explicit extraterritoriality, but it does open the door in an area where the EU was previously hesitant.

Overall, the immediate impact of this directive will be limited. It only sets “minimum levels for the maximum term of imprisonment” and does not set any minimum terms of imprisonment. As a directive, member states still have significant flexibility in implementing it. That means that there could still be substantial variance between member states and contribute to continued forum shopping. This directive does not affect enforcement, and there will likely be variation in enforcement. Still, this is an interesting step in the European Union’s ongoing efforts to ensure that sanctions are an effective and useful tool.

Sources

[1] Delegation of the Commission of the European Communities to the United Nations. 1980. "EC Statement Condemns Soviet Union's Invasion of Afghanistan Seeks Immediate Withdrawal." http://aei.pitt.edu/60299/1/ECN_1980.pdf

[1] Nossal, Kim Richard. “Knowing When to Fold: Western Sanctions against the USSR 1980-1983.” International Journal, vol. 44, no. 3, 1989, pp. 698–724. JSTOR, https://doi.org/10.2307/40202621. Accessed 13 May 2024.

[1] United Nations. A more secure world: our shared responsibility. 2004 https://www.un.org/peacebuilding/sites/www.un.org.peacebuilding/files/documents/hlp_more_secure_world.pdf

[1] General framework for EU sanctions. (2023, May 5). Retrieved from EUR-Lex: https://eur-lex.europa.eu/EN/legal-content/summary/general-framework-for-eu-sanctions.html

Also Section 4 of: General Secretariat of the Council. 2018. "Sanctions Guidelines – update." Brussels. https://data.consilium.europa.eu/doc/document/ST-5664-2018-INIT/en/pdf.

[1] European Parliament, Policy Department, Directorate-General for External Policies. "Implementation and monitoring of the EU sanctions’ regimes, including recommendations to reinforce the EU’s capacities to implement and monitor sanctions." October 2023. https://www.europarl.europa.eu/RegData/etudes/BRIE/2018/621870/EPRS_BRI(2018)621870_EN.pdf

[1] General Secretariat of the Council. 2018. "Sanctions Guidelines – update." Brussels. https://data.consilium.europa.eu/doc/document/ST-5664-2018-INIT/en/pdf.

[1] Secretariat, EUROJUST - Genocide Network. 2021. "Prosecution of Sanctions (Restrictive Measures) Violations in National Jurisdictions." The Hague. https://www.eurojust.europa.eu/sites/default/files/assets/genocide_network_report_on_prosecution_of_sanctions_restrictive_measures_violations_23_11_2021.pdf.

[1] Department of Justice - Office of Public Affairs. 2014. "Press Release - BNP Paribas Agrees to Plead Guilty." June 30. https://www.justice.gov/opa/pr/bnp-paribas-agrees-plead-guilty-and-pay-89-billion-illegally-processing-financial.

[1] SHERPA. BNP Paribas case in Rwanda. Retrieved May 14, 2024, from https://www.asso-sherpa.org/bnp-paribas-case-in-rwanda

[1] See note vii.

[1] See note iv.

[1] See not vii.

[1] European Commission. “Frequently asked questions about the new EU Anti-Money Laundering Authority (AMLA)”. https://finance.ec.europa.eu/financial-crime/amla/frequently-asked-questions_en.

[1], US Congress. H.R.815 - Making emergency supplemental appropriations for the fiscal year ending September 30, 2024, and for other purposes. Retrieved from https://www.congress.gov/bill/118th-congress/house-bill/815/text#toc-HB2D5FCAE5F8A4A60BD602BF00174830E

[1] European Commission. "Frequently Asked Questions - RELATED PROVISION: ARTICLE 5b; ARTICLE 5c; ARTICLE 5g OF COUNCIL." https://finance.ec.europa.eu/document/download/a2f66733-09b6-43ec-b8f5-c594a55ca997_en?filename=faqs-sanctions-russia-deposits_en.pdf+.

[1] European Communities: Comments on the US Regulations Concerning Trade with the USSR (1982) 21 International Legal Materials 891, para 8