Sanctions & Export Controls: guidance to combat forced labour & EU Parliament requests that the EU Magnitsky Act include corruption

In July 2021, the Dutch Minister of Finance published a report on illegal trust services in the Netherlands, which demonstrates active attempts to evade the supervisory authorities. Both the European Union (“EU”) and the United States (“US”) have issued guidance to help businesses address the risk of forced labour in their supply chains. Also, the EU Parliament adopted a resolution welcoming the EU Global Human Rights Sanctions Regime (the “EU GHRSR”), also known as the EU Magnitsky Act, and calling for corruption to be included as a sanctionable offence. In the US, an individual has been charged with economic espionage, theft of trade secrets and violating international commerce regulations and another was sentenced to over five years imprisonment for conspiring to illegally export semiconductor chips with military applications to China. This, and more, in our newsletter.

1. The Netherlands            

• Netherlands (Report on illegal trust services) – On 8 July 2021, the Dutch Minister of Finance published a report from SEO Economic Research on illegal trust services in the Netherlands that are regulated by the Dutch Trust Offices (Supervision) Act 2018 (Wet toezicht trustkantoren 2018). The study estimates that 3,800 directors are seen as an increased risk of providing illegal trust services in the Netherlands, and that in combination with the number of target companies, the estimated market share of the potentially illegal trust sector is 15%. Researchers have found 690 domicile addresses where at least 10 entities are registered, showing that the potential share of illegality in the trust sector in the Netherlands is substantial.

The Minister of Finance has indicated that these results are alarming, as it appears that parties are actively trying to evade the supervisory authorities, and are together with earlier observations on the trust sector risks, enough to trigger additional regulatory measures. In January, it was announced that the Minister of Finance was preparing a law to prohibit clients of trust offices from using conduit companies (doorstroomvennootschappen). Moreover, it is expected that a law prohibiting trust services offered to countries on the EU Commission’s list of high-risk countries and non-cooperative third countries in the area of taxation will be put to Parliament after the summer.

The Minister of Finance has also highlighted the necessity for additional legislation to prevent the circumvention of licenses, to strengthen the supervision and coordination of the Dutch authorities in surveying trust services and the effectiveness of penalties and to allow for a broader study of the future of the trust sector in the Netherlands.

• Netherlands (Export Control Policy 2020) – On 12 July 2021, the Dutch Minister of Foreign Affairs published a report on the Dutch export control policy in 2020. The report outlines the character of the national defence and security-related industry, discusses the instruments, procedures and principles of the national export control policy and describes the nature and extent of the licenses issued in 2020 for the export of military and dual-use goods. Moreover, the report looks at a number of international developments in the field of export control, such as the EU annual report on export of military goods in 2020 and the Arms Trade Treaty, which welcomed five new state parties in 2020.

2. European Union & United Kingdom

A. European Union             

• EU,  US / China (Forced labour due diligence guidance) – In July 2021, both the EU and the US issued guidance for businesses to address the risk of forced labour in their supply chains.

On 12 July 2021, the EU Commission and the European External Action Service published Guidance, providing concrete and practical advice on how to identify, prevent, mitigate and address the risk of forced labour in operations and supply chains, for businesses to ensure that their activities do not contribute to forced labour practices in any sector, region or country.

The EU therefore calls on EU companies to respect human rights, regardless of their location size, sector, operational context, ownership and structure. The Guidance sets out the practical aspects of due diligence, the specific considerations in relation to forced labour and provides an overview of international standards on responsible business conduct that are relevant for combatting forced labour, such as the United Nations Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidance for Responsible Business Conduct. The EU Guidance provides for examples of forced labour, and in an Annex, a six-step OECD Due Diligence Procedure is set out for businesses, providing an overview of the steps and policies they should implement in order to ensure full compliance.

The Guidance moreover notes, as announced earlier this year, that the Commission is currently preparing a legislative proposal on Sustainable Corporate Governance to further ensure responsible corporate behaviour. This proposal will introduce mandatory human rights and environmental due diligence.

On 13 July 2021, the US Department of State issued an updated Xinjiang Supply Chain Business Advisory in response to growing evidence of forced labour and other human rights abuses in the region. The updated Business Advisory, strengthens inter alia recommendations for businesses regarding the risks and potential exposure related to supply chains and investment links to Xinjiang, including but not limited to surveillance, and highlights the US Department of State Guidance on Implementing the UN Guiding Principles of Business and Human Rights for transactions linked to foreign government end-users for products or services with surveillance capabilities.

• EU (EU Magnitsky Act and corruption) – On 8 July 2021, the EU Parliament adopted a resolution welcoming the EU GHRSR while calling for corruption to be included as a sanctionable offence.

The resolution notes that unlike similar sanctions regimes around the world, the EU GHRSR does not currently include corruption related to grave human rights violations as an offence sanctionable by restrictive measures. The EU Parliament thereby calls on the EU Commission to come forward with a legislative proposal to amend the EU GHRSR to extend its scope by including acts of corruption, or alternatively, for the EU to draw on the UK Global Anti-Corruption Sanctions Regulations or the US Global Magnitsky Act and adopt an EU anti-corruption sanctions regime in order to complement the EU GHRSR.

Moreover, the EU Parliament suggested multiple other revisions and improvements to the current sanctions regime. In its resolution, the EU Parliament, amongst others, called for a regular review of listings, clearly defined and transparent criteria for listing and de-listing of sanctioned individuals and entities under the EU GHRSR, and appropriate legal procedures though which a listing can be challenged. It also called for all EU Member States to interpret the application and enforcement of sanctions in the same consistent manner and the need for the EU Commission to ensure that national penalties for breaching EU sanctions are effective and proportionate. It requested a centralised oversight mechanism on implementation and compliance to ensure stronger sanctions enforcement, as well parliamentary oversight of the EU GHRSR and an enhanced role in flagging serious human rights violations, to increase the legitimacy of the EU GHRSR.

B. United Kingdom

• UK (Transferring funds to accounts held by non-designated persons with designated banks) – On 25 June 2021, the UK Economic Secretary to the Treasury upheld a decision to impose a monetary penalty issued by the Office of Financial Sanctions Implementation (“OFSI”) on TransferGo Limited (“TransferGo”). In 2014, the EU (including the UK) imposed an asset freeze on the Russian National Commercial Bank (“RNCB”) under Council Regulation (EU) No 269/2014 (“EU Regulation”) for allegedly being involved in destabilising Ukraine. According to OFSI, TransferGo made an error in its assessment of whether payments to the RNCB were subject to financial sanctions restrictions. TransferGo asserted that as the relevant clients and beneficiaries were not themselves subject to financial sanctions restrictions, the payments to their accounts with RNCB did not breach any sanctions. However, OFSI considered that “funds held in bank accounts ultimately belong to those banks” and that transferring funds to accounts held by non-designated persons with designated banks is a breach of the prohibition on making funds available to a designated person – provided that the person knew, or had reasonable cause to suspect that it was doing so. Consequently, a penalty of £50,000 was imposed for contravention of Regulation 4 of The Ukraine (European Union Financial Sanctions) (No. 2) Regulations 2014 (“UK Regulations”).

• UK (Annual report on strategic export controls) – On 27 July 2021, The UK Export Control Joint Unit and the UK Department for International Trade published its annual report on strategic export controls. This report gives a detailed overview of the UK’s strategic export controls policy and export licensing decisions in the period of January to December 2020. The report includes sections on the UK export licensing process, the different types of export licenses that are available, EU Exit Legislation of the UK, enforcement actions, information on compliance, the Court of Appeal judgement about military exports to Saudi Arabia and international policy developments.

3. United States of America

• US / China (IEEPA) – On 7 July 2021, Mr. Wang, from New York, was charged with economic espionage, theft of trade secrets and violating the International Emergency Economic Powers Act (“IEEPA”) and arraigned before the US District Court for the Western District of New York. Wang was assigned to work on a fiber laser research and development project initiated by the Defense Advanced Research Projects Agency. His work provided access to methods and processes used to produce fiber lasers that were protected trade secrets and controlled for export by the US government. Without permission, Wang downloaded and copied non-public and restricted project files onto a personal device, while conducting negotiations with various governmental entities in China in an attempt to establish his own fiber laser business. For the purpose of these negotiations, Wang travelled to China and, during these trips, he illegally exported technical data regarding fiber laser manufacturing, in violation of the IEEPA. If convicted, Wang faces a maximum penalty of 20 years in prison and a fine of up to USD 5,000,000.

• US / Iran (IEEPA) – On 13 July 2021, the US Department of Justice announced that a New York federal court unsealed an indictment, charging four Iranian nationals with conspiracies related to kidnapping, sanctions violations, bank and wire fraud, and money laundering. According to court documents, the four Iranian nationals conspired to kidnap a Brooklyn journalist, author and human rights activist for mobilizing public opinion in Iran and globally to change the regime’s laws and practices. The suspects are charged with conspiring (1) to kidnap, which carries a maximum sentence of life in prison; (2) to violate the IEEPA and sanctions against the government of Iran, which carries a maximum sentence of 20 years in prison; (3) to commit bank and wire fraud, which carries a maximum sentence of 30 years in prison; and (4) to launder money, which carries a maximum sentence of 20 years in prison. An Iranian co-conspirator residing in California resident, faces additional structuring charges.

• US / China (IEEPA) – On 22 July 2021, Mr. Yi-Chi Shih, an American citizen, was sentenced to more than five years in prison for conspiring to illegally export semiconductor chips with military applications to China. He was also requested to pay USD 362,698 in restitution to the US Internal Revenue Service and fined him USD 300,000. Shih was convicted in 2019 for, amongst others, conspiracy to violate the IEEPA and the Export Administration Regulations. Evidence showed that Shih defrauded a US company that manufactured high-powered semiconductor chips out of its confidential and proprietary business information. He accessed the victim company’s web portal through an associate who pretended to be a domestic customer seeking to obtain custom-designed semiconductor chips that would be solely used in the US, concealing his intent to export the goods to China.


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