The EU paradox with tackling sanctions circumvention

The EU has long opposed any extraterritorial application of sanctions. However, faced with reality, steps towards extraterritoriality are clearly emerging but the EU might still wish to nuance its message, write Tom Keatinge and Gonzalo Saiz Erausquin.

Tom Keatinge is the director and Gonzalo Saiz Erausquin is a research analyst at the Centre for Financial Crime and Security Studies at RUSI.

Since February 2022, the EU has introduced a raft of sanctions against Russia, increasingly expanding the scope of its sanctions regime. The latest measures address a weak spot – sanctions circumvention through third countries.

At first glance, these policy moves suggest that the EU is taking steps towards a long-avoided approach encompassing extraterritorial application and secondary sanctions. The reality is more complex.

Extraterritorial dilemma

EU sanctions are only binding within its jurisdiction, meaning for EU companies and individuals, both within the Union and abroad, and all entities that operate in the EU.

Meanwhile, it is not illegal for businesses in other jurisdictions to continue trading goods and services with Russia that are sanctioned by the EU. This creates loopholes in the EU’s sanctions policy – and a dilemma for the EU.

Targeting third parties beyond the EU’s jurisdiction – even with an EU nexus through re-exporting EU goods – would constitute an extraterritorial application of sanctions. This is a step the EU has long resisted and protested when applied by others, notably the US.

The US has made longstanding use of the extraterritorial capacity of its sanctions regimes, with the US Treasury’s Office of Foreign Assets Control (OFAC) imposing heavy fines on entities across third countries – including allied ones – for engaging with sanctioned jurisdictions or activities.

The US goes as far as imposing ‘secondary sanctions’, targeting third parties without the need for any nexus between the third party and the US.

In September 2022, OFAC confirmed its willingness to take extraterritorial action to enforce its Russia sanctions and did so multiple times since, confirming that those that enable Russia’s illegal war in Ukraine are in OFAC’s sights, wherever they may be located.

The EU, on the other hand, has for long expressed its opposition to any extraterritorial application of sanctions and secondary sanctions, prohibiting compliance by EU operators with foreign sanctions regimes.

This narrative has, on the surface, been maintained since February 2022. However, faced with reality, steps towards extraterritoriality are clearly emerging.

Is the EU changing its mind?

Since the beginning of 2023, the EU has been increasing its efforts to encourage third countries to align with its sanctions and close loopholes.

First, in December 2022, the European Commission appointed David O’Sullivan as EU Sanctions Envoy to ’focus on implementation and tackling circumvention‘ through diplomatic engagements with third countries.

Since his appointment, O’Sullivan has visited several countries, with some signs of success. Second, the EU offers increased technical assistance for third countries that agree to halt circumvention.

Alongside the diplomatic activity, the 11th sanctions package adopted in June 2023 establishes a series of new powers where diplomacy does not yield the intended results.

These powers include adding ‘third-country operators’ to a new sanctions list, Annex XXXIII of Regulation 833/2014 – currently empty. The package also introduced a ‘last-resort’ measure should circumvention persist, going as far as adding the third country itself to the sanctions list.

The most effective lever the EU can pull in diplomatic negotiations is the fear of losing access to the EU market.

The ‘anti-circumvention tool’ serves as a name-and-shame list that highlights to EU operators the risk of dealing with facilitators of circumvention, providing an incentive for third countries to take action to maintain trade relations with the EU.

The EU argues that this is not extraterritoriality, insisting that ‘we are not asking operators who are outside EU jurisdiction to comply with our sanctions.’

And yet in relation to Russia’s aggression, individuals and entities from third countries such as Iran, Syria and the UAE have been listed by the EU.

These entities respectively sent drone components to Russia, facilitated the recruitment of Wagner mercenaries, and supported the maritime transport of Russian oil.

Targeting these third-country entities is critical to restricting Russia’s military, but taking such action means the EU is sanctioning third-party operators for engaging in activities that are not illegal under their own jurisdictions and have no nexus to the EU.

The Commission has confirmed the possibility of imposing such financial sanctions and travel bans on ‘foreign operators who partake in the circumvention of EU sanctions’. However, introducing rules and enforcing them remain two different things.

Will the EU actually enforce this?

As this approach could create tensions with countries such as China and India, the EU might be deterred from using its growing extraterritorial powers.

While some entities from Hong Kong were sanctioned in the latest package, the EU might need to threaten possible diplomatic conflict with China to address the threat of Western microelectronic components being shipped to Russia.

Regardless of the extent of this mission creep in designations, enforcement of the EU sanctions regime remains weak. Unlike the US, the EU does not have a single OFAC-style body to enforce sanctions in the Union.

Also, sanctions violations are not yet criminalised across all member states – the EU is negotiating a directive to criminalise sanctions breaches, including circumvention. This is key as many national authorities are struggling to investigate sanctions violations if it is not a crime in their jurisdiction.

Furthermore, to showcase enforcement muscle, the EU should actively pursue entities and countries facilitating sanctions evasion.

(Near) future will tell

The EU has successfully overcome the different interests of member states to achieve – and maintain – a comprehensive sanctions regime against Russia. But however united the EU remains, circumvention through third countries will blunt the effectiveness of the EU response.

For the EU, looking tough on sanctions circumvention is leading to the inevitable conclusion that it requires a clear strategy for applying extraterritoriality, however, it may wish to nuance its message.

This strategy will necessitate the Union leaving behind long-held opposition to secondary sanctions and learning at least some lessons from across the Atlantic.