European Commission Releases FAQs on the “Best Effort” Obligation under EU Sanctions Against Russia and Belarus

Key Takeaways

• The commission adopts an extensive interpretation of the “best effort” obligation.
• According to the commission, EU operators should conduct appropriate due diligence to ensure their awareness about the activities of their non-EU subsidiaries and to identify activities which could undermine EU sanctions.
• EU operators are expected to implement an effective risk-based sanctions compliance program which should cover their non-EU subsidiaries and include appropriate internal controls.
• The commission underlines that EU operators can be held liable if they are aware that the activities of their non-EU subsidiaries undermine the EU sanctions and allow those activities to continue.
• In order to invoke the non-liability clause, an EU operator must demonstrate that it conducted appropriate due diligence. Failing to do so precludes the operator from invoking the clause.

Background & Analysis

On 22 November 2024, the European Commission, published the highly anticipated frequently asked questions on the “best efforts” obligation, which was introduced earlier this summer by the EU in its sanctions regulations against Russia (Article 8a of Regulation 833/2014, see our previous alert) and Belarus (Article 8i of Regulation 765/2006, see our previous alert).

Presented as one of the measures to “crack down on circumvention” in the 14th sanctions package, this new obligation requires EU operators to “undertake their best efforts to ensure that any … entity … established outside the Union that they own or control does not participate in activities that undermine” EU sanctions adopted against Russia and Belarus.

The commission’s FAQs mainly rely on the recitals to the regulations which introduced the “best efforts” obligation. They provide nonetheless some clarifications that reflect the commission’s extensive interpretation of this obligation. Although the commission’s FAQs are not legally binding, the national competent authorities rely on them when implementing and/or enforcing EU sanctions. 

1. Entities Covered by the “Best Efforts” Obligation

• Application to all non-EU entities: The commission clarifies that the “best efforts” obligation should apply to all entities owned or controlled by EU operators located anywhere outside the EU, including in Russia.
• Exception for non-EU entities over which EU operators lost control for reasons that they did not cause themselves: Relying on the recitals, the commission confirms the “best efforts” obligation should only comprise actions which are “feasible” for EU operators and should not apply to non-EU entities over which EU operators has no “effective control” for reasons that they did not cause themselves (e.g., legislation of a third country). According to the commission, this would not be the case when the loss of control is the result of “inadequate risk assessment and management, coupled with risk-prone decisions of the EU operator.” However, this defense should be valid if the control over the non-EU company is lost due to external reasons, such as compulsory administration or nationalization pursuant to Russian Federal Law No 470-FZ or Presidential Decree No 302. The commission also notes that the risk of prosecution of executives and employees of the non-EU entity should be considered when determining effective control. Given that compliance with EU sanctions may constitute a criminal offense under both Russian and Belarus legislation, it remains unclear how the “best efforts” obligation should be applied in relation to subsidiaries of EU companies in Russia and Belarus.

2. Activities Targeted by the “Best Efforts” Obligation

• Activities that undermine EU sanctions: Noting that the concept of “undermining” is different from “circumventing,” the commission clarifies that the “best effort” obligation targets activities that undermine EU sanctions, i.e., resulting in an effect that the sanctions seek to prevent. The commission provides the following examples of activities that could undermine EU sanctions:
  • Non-EU entity supplying goods subject to export-related restrictions to Belarus;
  • Non-EU entity trading in Russian-origin goods that are subject to import-related restrictions (including intra-group transfers).

Relying on the Afrasiabi decision of the Court of Justice, the commission defines the term “circumvention” as “activities that, under cover of a formal appearance which enables them to avoid the constituent elements of an infringement of a restrictive measure, have the aim or result of enabling their author to avoid the application of that measure.”

3. Actions Expected from EU Operators to Comply with the “Best Efforts” Obligation

• Implementation of compliance program: According to the commission, the “best efforts” obligation requires EU operators to implement an internal compliance program covering activities of their non-EU subsidiaries. That compliance program should notably include training and communication, as well as adoption of internal controls, including procedures allowing management to react rapidly to sanctions violations by non-EU subsidiaries (including via their escalation to EU parent companies).
  • The compliance program should be proportionate to the EU operator’s nature and size (i.e., reflect its market sector, risk profile, turnover, number of staff etc.) and consider other factual circumstances (e.g., compliance resources available, degree of effective control).
  • The commission notes that it will engage with member states to prepare a clear set of expectations for EU operators.

4. Liability of EU Operators

• According to the commission, the following behaviors would be considered a breach of the “best efforts” obligation:
  • When EU operators are aware that the activities of their non-EU subsidiaries undermine the EU sanctions and tolerate them. The commission further notes – without additional detail – that this could also amount to a circumvention of EU sanctions.
  • When EU operators fail to conduct appropriate due diligence to ensure their awareness about the activities of their non-EU subsidiaries. In this circumstance, they would not be able to invoke the non-liability clause, which provides that if operators did not know, and had no reasonable cause to suspect, that their actions would infringe EU sanctions, such actions should not give rise to any liability.

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Hughes Hubbard’s Paris-based EU economic sanctions and export controls team, part of the firm’s Sanctions, Export Controls, and AML practice, is well-positioned to assist EU operators in navigating, in a practical and pragmatic way, yet another due diligence obligation. Please contact us if you have any questions about the Article 8a FAQs or any of the prior topics of our client alerts.