Introduction
In the Netherlands, the Supreme Court ruled on the interpretation of goods “made available directly or indirectly” to a sanctioned entity. In the European Union (“EU”), the European Council renewed two sanctions regulations targeting Russia, in response to the ongoing Russian aggression against Ukraine. Moreover, the Council adopted the full suspension of visa facilitation with Russia, which will affect all Russian travelers to the EU. In response to the EU sanctions, Russia announced that the Nord Stream 1 pipeline would remain closed until the West lifted its sanctions on Russia. The pipeline is vital for the supply of natural gas to Europe and its closure might have far-reaching impact for the EU. This, and more, in this newsletter.
1. The Netherlands
Ruling on term ‘directly or indirectly made available’
On 28 June 2022, the Dutch Supreme Court confirmed the decision of the Court of Appeal ‘s-Hertogenbosch in a case concerning motor parts “made available directly or indirectly” to the National Iranian Gas Company (“NIGC”), a sanctioned entity. The Court of Appeal stated that it is possible for goods to have been made directly or indirectly available to a sanctioned entity even when it is not possible to determine if the goods in question have been received by the sanctioned entity.
According to the Court of Appeal it is not relevant if the sanctioned party has actually received the export consignments or has (indirectly) acquired the power of disposal over those consignments. This follows from case law of the Court of Justice of the European Union (“CJEU”) which states that “made available” should be interpreted broadly. According to the CJEU it does not refer to a particular legal qualification, but covers all the acts which must be performed under the applicable law for a person to acquire effective power of disposal over the asset in question. In this regard, the Court found it in particular relevant that the suspect was aware that the companies in Dubai and Turkey, to which the export shipments were sent on order of the suspect, were not end users of the goods, but trading companies. Therefore, the suspect could have known, or at least had to suspect that those goods would be transferred to Iran. Additionally, the suspect was in copy of various e-mail correspondence showing instructions and communications regarding the forwarding of the shipments to Iran from Turkey and Dubai. According to AG Keulen, who delivered a conclusion in this case, this also showed that the trading companies ordered and/or received the export shipments on behalf of NIGC and intended to use the economic resources for the benefit of NIGC. The AG found this most relevant in proving that the export shipments were indirectly made available to NIGC.
As such, by indirectly making available goods to a sanctioned entity in Iran, the suspect was in breach of the Sanctiewet 1977 (translated as: Dutch Sanctions Act), the Sanctieregeling Iran 2012 and Regulation (EU) nr. 267/2012. The suspect was sentenced to imprisonment for a term of eighteen months (six of which were suspended).
The decision not only shows that the Dutch Supreme Court follows the broad interpretation of sanctions legislation, but also that high (prison) sentences for these types of violations are actually imposed.
AFM investigates compliance with Russia sanctions
On 1 September 2022, the Autoriteit Financiële Markten (the “AFM”; Financial Markets Authority) announced the results of its investigation into how adequate companies comply with the EU sanctions against Russia. The AFM, in particular, supervises the rules as set out in the sanctions regulations with regard to the administrative organisation and internal control of investment firms and (managers of) investment institutions.
The investigation shows that the sanctions regulations are, in general, well adhered to. The AFM indicates that there is a strong will among organisations to comply with the regulations. However, some organisations have stated that the administrative and financial burdens of complying with the regulations are significant. Especially compared to the relatively small risk their business will come into contact with EU sanctions. The AFM indicates that chances might seem small that these companies are affected by EU sanctions, but points out this occurred more than once. Every organisation itself remains at all times responsible for compliance with the sanction regulations. It may therefore be useful, for example, to periodically test processes and systems in practice, to be prepared if a sanction does hit the institution.
The screening of relations against the sanctions list is a core obligation under the sanction regulations. The investigation shows that organisations increasingly use external parties to support them with these screenings. The AFM also points out that outsourcing of screenings to third parties can lead to improved compliance with sanctions regulations, as the third parties are often better suited to perform screenings more efficiently and more thorough. However, it remains the responsibility of each organisation to comply with the sanctions regulations, Therefore, it is important that institutions systematically perform checks on outsourcing to determine whether in practice the outsourcing is working as intended in advance and meets the legal requirements.
Finally, organisations should be aware that sanctions can be circumvented. The investigation shows that awareness of this risk can be improved. Organisations should consider how sanctions can be circumvented through their services and should employ appropriate management measures. Robust relationship research can play an important role here.
2. European Union
European Union wins WTO’s first appeal arbitration award
On 25 July 2022, the EU received a favourable ruling against Turkey’s discriminatory practices on pharmaceuticals in the first World Trade Organization (“WTO”) appeal arbitration award. The ruling was made under Article 25 of the Dispute Settlement Understanding (“DSU”), and is the first WTO appeal ruling since the Appellate Body became paralysed in December 2019.
The EU brought the case to the WTO in 2019, challenging Turkey’s so-called “localisation requirement” as discriminatory. The Turkish measure required foreign producers to move their production of certain pharmaceutical products to Turkey or be excluded from a reimbursement scheme. The Panel ruled in favour of the EU and recommended that Turkey bring its measures in line with international trade rules. The decision was appealed by Turkey.
The Appellate body, which would normally hear such appeals, became unable to issue a ruling due to the United States’ blockage of new Member appointments. The paralysis of the Appellate Body means in practice that any disputes where appeal is instigated enter a legal void, since the disputes cannot be resolved permanently. In order to avoid the legal void, the EU and Turkey agreed to an ad hoc appeal arbitration agreement under Article 25 DSU. The arbitration procedure under Article 25 DSU enables parties to undertake an agreed alternative appeal procedure in order to resolve a dispute. By agreeing on this arbitration procedure, the EU and Turkey ensured that a full dispute settlement, including an appellate review, could take place despite the paralysis of the Appellate Body.
The appeal award confirms the Panel’s ruling and held that Turkey must remove the challenged localisation and prioritisation measures immediately, or within a period of time negotiated with the EU or fixed by a WTO arbitrator.
The dispute between Turkey and the EU shows that the WTO appeal impasse can be broken, and a binding resolution of WTO disputes is still possible.
European Union suspends visa facilitation with Russia
On 9 September 2022, the Council of the EU adopted the full suspension of visa facilitation with Russia. The EU-Russia visa facilitation agreement entered into force on 1 June 2007 and facilitated the issuance of short stay visas by reducing the application fee, the required documentary evidence, and processing times.
The suspension is another restrictive measure against Russia in response to Russia’s military aggression against Ukraine. The EU already adopted the partial suspension of the visa facilitation agreement for diplomats, other Russian officials and business people. However, the full suspension will have much greater reach. The full suspension affects all categories of Russian travellers coming to the EU for a short stay. Going forward the general rules of the European visa code will apply to Russian citizens. Consequently, this will result in an increase in the visa application fee from €35 to €80, the need to present additional documentary evidence, increased visa processing times and more restrictive rules for the issuance of multiple-entry visas.
The Commission is expected to present additional guidelines to ensure this suspension does not negatively impact certain people travelling to the EU for essential purposes, such as journalists, dissidents and civil society representatives.
European Union extends existing Russia sanctions
On 14 September 2022, the European Council decided to extend the sanctions targeting 1206 individuals and 108 entities in response to the still ongoing Russian aggression against Ukraine. The listed individuals and entities are targeted because the EU considers them responsible for undermining or threatening the territorial integrity, sovereignty, and independence of Ukraine. The sanctions will be extended by six months, until 15 March 2023. These restrictive measures consist of travel restrictions for natural persons, the freezing of assets, and a ban on making funds or economic resources available to the individuals and entities included on the sanction list. Previously, on 26 July 2022, the European Council decided to extend the sanctions targeting specific sectors of the Russian Federation. These sanctions were also extended by six months, until 31 January 2023. The current restrictive measures consist of a broad spectrum of sectoral sanctions, including restrictions on transport, financing, energy, advanced technology, luxury and dual-use goods, and freezing central bank assets, disconnecting banks from the SWIFT messaging system, export controls, and a ban on imports of Russian coal and oil.
European Commission adopts eighth sanctions package
On 6 October 2022, the European Commission’s eighth round of sanctions against Russia in response to Russia’s illegal annexation of Luhansk, Donetsk, Zaporizhzhia, and Kherson was adopted by the European Council.
The sanctions package introduced further sectoral measures against Russia. The new sanctions include, inter alia the widening scope of services that can no longer be provided to the government of Russia or legal persons established in Russia: these now include IT consultancy, legal advisory, architecture and engineering services. New import restrictions on certain items that generate significant revenues for the Russian Federation, such as wood pulp and paper, and stones and precious metals. It also further expands the number of advanced technology items targeted in Annex VII of Regulation (EU) 833/2014 which have been banned from export to Russia. New items include coal including coking coal (which is used in Russian industrial plants), specific electronic components (found in Russian weapons), technical items used in the aviation sector, as well as certain chemicals.
Furthermore, the prohibitions laid down in Council Regulation (EU) 2022/263 (i.e. a full import restriction on goods originating in the regions Donetsk and Luhansk, as well as export restrictions on certain goods to these areas) have now been extended to the regions of Kherson and Zaporizhzhia. This extension to these non-governmental controlled areas of Kherson and Zaporizhzhia are in response to the sham referenda in these areas and the illegal annexation by Russia.
Lastly, thirty new individuals and seven entities have been added to Annex I of Regulation 269/2014, imposing an asset freeze on these individuals and the assets owned, held or controlled by these individuals. Most of the names include those involved at a high level with the illegal referenda in the occupied regions of Ukraine.
3. The United Kingdom
UK forces crypto exchanges to report suspected sanction breaches
On 30 August 2022, the Office of Financial Sanctions Implementation (“OFSI”) updated the UK’s official guidance for financial sanctions to include “crypto assets” among those that must be frozen if they belong to a person or company targeted by financial sanction restrictions. Crypto assets are digital assets that use some type of distributed ledger technology, examples include Bitcoin, Ether, and non-fungible tokens.
The new rule will entail that anyone who has reasonable cause to suspect to be in possession of crypto assets of a person targeted by financial sanctions must immediately freeze the assets and report them to the OFSI. Otherwise, they will be committing a criminal offence which may result in criminal prosecution or a monetary penalty.
The use of cryptocurrencies as a means to evade sanctions and move money around the world was already illegal in the UK. However, the change in the guidance highlights the authorities’ concerns with the digital assets. Transactions using cryptocurrencies do not rely on regulated entities and are therefore harder to trace, which could aid sanctions evasion. A Treasury spokesperson told the Guardian: “It is vital to address the risk of crypto assets being used to breach or circumvent financial sanctions. These new requirements will cover firms that either record holdings of, or enable the transfer of crypto assets and are therefore most likely to hold relevant information.”
The UK is not the only country that has become concerned with the possibilities of cryptocurrencies in sanctions evading. In February 2022, the US Treasure and representatives from the White House asked crypto exchanges to stop operating in Russia. In April 2022, the EU banned large crypto transactions with Russia in an effort to close potential loopholes which could allow sanctioned Russians to move money abroad.
4. The United States
Bureau of Industry and Security issues new FAQs addressing red flags
On 16 August 2022, the United States (“US”) Bureau of Industry and Security (“BIS”) released new Frequently Asked Questions (“FAQ”) addressing red flags related to unauthorised export and potential export control evasion of the Russia and Belarus sanctions, and red flags that should be considered by semiconductor foundries when dealing with parties on the Entity List.
BIS has identified commodities as presenting special concern, because of their potential diversion to and end use by Russia and Belarus to further their military and defence capabilities. Multiple items, for example aircraft parts and GPS systems, require a BIS license prior to export or reexport to Russia or Belarus.
Furthermore, illicit actors use a variety of methods when trying to acquire items controlled by the Export Administration Regulations (“EAR”). Therefore, BIS compiled a non-exhaustive list of twenty-two potential red flags which may help companies to identify an export control evasion during a risk assessment. Additionally, BIS identified the following countries that could be used as a transhipment point before reaching Russia or Belarus in order to mask sanctions evasion. These locations include Brazil, China, India, Israel, Mexico, Singapore, South Africa, Taiwan, and Turkey.
Finally, regarding Entity List parties, BIS advises that semiconductor foundries should either refrain from a transaction or submit all the relevant information in the form of an application for a license to BIS when they have knowledge that a customer on the Entity List is using a third party to disguise its involvement in any particular transaction subject to EAR. Furthermore, BIS advises that the receipt of new design files from a new customer present a red flag if similar designs have been received from a company on the Entity List in the past. It could be an attempt from a company on the Entity List to disguise its activity by using a new company. Therefore, foundries should consider screening any software design files against their library of previously received design files in order to rule out the involvement of a company on the Entity List. In addition, for foundries located outside of the United States this is especially important if the listed Entity is located in Russia or Belarus, or if the semiconductor being manufactured, or the Entity List party in question, is subject to one of the foreign direct product rules under the EAR.
The US issues new export controls for chips destined to China
On 7 October 2022, BIS imposed new China-related export controls on advanced computing and semiconductor manufacturing items. According to BIS new export controls (the “Rule”) addresses US national security and foreign policy in two key areas. First, the rule imposes restrictive export controls on certain advanced computing semiconductor chips, transactions for supercomputer end-uses, and transactions involving certain entities on the Entity List. Second, the rule imposes new controls on certain semiconductor manufacturing items and on transactions for certain integrated circuit (“IC”) end uses.
The Rule, inter alia, adds certain advanced and high-performance computing chips and computer commodities that contain such chips to the Commerce Control List (CCL). Additionally, the Rule implements new license requirements for items destined for a supercomputer or semiconductor development or production end use in the PRC and for items destined to a semiconductor fabrication “facility” in the PRC that fabricates ICs meeting specified thresholds. Furthermore, the Rule expands scope of foreign-produced items subject to license requirements to license requirements to twenty-eight existing entities on the Entity List that are located in the PRC, and restricts the ability of U.S. persons to support the development, or production, of ICs at certain PRC-located semiconductor fabrication “facilities” without a license
Lastly, the Rule establishes a Temporary General License (TGL) to minimize the short-term impact on the semiconductor supply chain by allowing from October 21, 2022 through April 7, 2023 specific, limited manufacturing activities related to items destined for use outside the PRC.
The Rule entered into effect in phases after being filed for public inspection with the Federal Register, and has become fully effective.
In addition, BIS also updated its regulations related to BIS’s Entity List to clarify that a sustained lack of cooperation by the host government that effectively prevents BIS from determining compliance with the EAR may lead to the addition of an entity to the Entity List. It provides that the sustained lack of cooperation by a foreign government that prevents BIS from verifying the bona fides of companies on the Unverified List (UVL) can result in those parties being moved to the Entity List, if an end-use check is not timely scheduled and completed
5. Around the globe
Switzerland aligns itself with EU sanctions
On 3 August 2022, Switzerland aligned its sanctions on Russia with the latest European sanctions package of 21 July 2022. The new Swiss measures primarily concern a ban on buying, importing or transporting gold and gold products from Russia. Furthermore, services in connection with these goods are also prohibited.
Switzerland has implemented multiple sanctions against Russia in view of Russia’s ongoing military aggression in Ukraine. Although Switzerland is not part of the EU, the Swiss are committed to adopting EU sanctions against Russian, and so far Switzerland’s list of sanctioned persons and entities in connection with the situation in Ukraine are fully in line with that of the EU.
As part of the sanctions package of 21 July 2022, the EU made various technical and linguistic adjustments to existing measures. The Swiss Federal Council has instructed the Federal Department of Economic Affairs, Education and Research (“EAER”) to make corresponding adjustments to the Swiss measures.
G7 agrees to impose price cap on Russian oil
On 2 September 2022, members of the G7 (UK, US, Canada, France, Germany, Italy and Japan) agreed to impose a price cap on Russian oil in an attempt to cripple Russia’s ability to finance the war in Ukraine by gains from oil. Additionally, the measure would also help reduce soaring global energy prices, finance ministers said.
The proposal entails that importers of Russian oil seeking shipping services and insurance cover from companies based in the countries that have signed up to the policy would only be granted said services if the Russian oil cargoes are purchased at or below the agreed upon price level. Companies in participating countries would thus not be allowed to service importers that buy Russian oil above the agreed price level. The price cap is expected to be implemented by the G7 members and the EU in early December 2022 alongside the new European Union sanctions that initiate a ban on Russian oil imports.
The Kremlin spokesperson Dmitry Peskov responded resolutely by stating that “companies that impose a price cap will not be among the recipients of Russian oil.”
Russia closes Gazprom Nord Stream 1 until sanctions are lifted
On 5 September 2022, the Kremlin said that Russian gas supplies to Europe through the Nord Stream 1 pipeline will remain suspended until the West lifts its sanctions against Russia. The pipeline is vital for Europe, as in 2021 Russia supplied nearly forty percent of Europe’s natural gas needs through Nord Stream 1. As a result, the EU’s demand for gas might outstrip the available supply, which might mean that the EU would have to tap into its gas reserves early and risk pushing the reserve levels below the EU’s target of having eighty percent gas reserves by 1 November 2022. This in turn would, for example, entail that there would be less gas available for heating European homes during the winter, when it would be most needed.
The pipeline was closed by Gazprom on Wednesday 31 August 2022 for maintenance and was scheduled to resume on 3 September 2022. However, one day before the scheduled resumption Gazprom announced that gas supply via Nord Stream 1 would not resume on Saturday and would remain closed indefinitely. Gazprom cited an oil leak it had discovered as the reason for the closure. Yet, on 5 September 2022 Kremlin spokesperson Dmitry Peskov blamed sanctions as the reason behind the maintenance issues and stated that “gas pumping problems arose because of the sanctions imposed against our country.” He expressed that gas supplies would resume if the West lifted its sanctions.