Frank Flanagan, Aaron C. Garavaglia and Daragh O'Shea

The EU has operated its own sanctions regimes since the 1980s,[1] but they have expanded dramatically in the last four years. While the EU maintains country-specific sanctions regimes against more than 50 countries,[2] most of the recent expansion relates to restricting almost all foreseeable economic activities with Russian or Belarussian parties. Over this time, how European companies are expected to comply has changed and regulators have initiated various enforcement activities across Europe that have resulted in fines and imprisonment.

While Ireland has not publicly released as much information concerning enforcement activities as other Member States,[3] several recent news reports suggest that a change may be on the horizon. With this in mind, Irish companies should understand the risks of non-compliance.

Recent reporting – goods with a military use

The Irish Times recently published the results of an extensive investigation conducted in partnership with various foreign press outlets that concerned the diversion of European electronic components into Russia.[4] According to the investigation, a significant volume of various components originating from Irish companies were imported into Russia. Some of them were subsequently found inside low-cost, mass-produced drones that were used by Russia in Ukraine. The reporting confirmed that none of the products concerned were directly exported from Ireland to Russia, and therefore they must have been transported into Russia via intermediary parties. It appears that some of the components are classified by the EU as “common high priority items,”[5] which triggers additional obligations on exporters. The components identified included antennas, chips, and GPS signal receivers.

The Taoiseach stated, in response to a parliamentary question that:[6]

Uncontrolled goods

Even where its goods are not restricted by sanctions, reports may emerge of a supplier’s products appearing in Russia. This may lead to media inquiries. It may also create reputational risk, particularly if the supplier has stated that it withdrew from the Russian market. In response, suppliers should be prepared and be able to articulate their position clearly if these risks are to be minimised.

What does Irish industry need to know?

Based on these reports, we anticipate that Irish industry overall will likely experience additional supervision and enforcement activities. This may take a variety of forms, including informal queries, investigations, or criminal prosecution. While the reporting stated that none of the companies identified were accused of any wrongdoing, they do illustrate the complexities and inherent difficulties in supply chain and distributor management and confirm the commercial reality that these are industry-wide problems.

Moreover, if the exporters of components that end up in Russian weapons do not succeed in clamping down on how their products are finding their way to Russia, they run the risk that the Government could decide to require export licences for their products.[7] This would impose a significantly more onerous regime.

Despite the scale of the problem, Irish companies are still expected to use adequate compliance measures. The reports are a useful opportunity for Irish industry overall to understand their compliance obligations under EU and Irish law and double-check their existing policies and procedures.

As a Member State of the EU, Ireland is bound by EU sanctions. Irish companies, including Irish subsidiaries of non-European companies, and employees that are Irish nationals must comply with EU sanctions. This obligation exists globally, i.e., an Irish employee working outside of the EU must still comply with restrictions. EU sanctions also apply to all activities carried out within Ireland, regardless of who performs them. Generally, sanctions are EU regulations, which apply directly without the need for Member States to pass transposing legislation.

The penalties for violating EU sanctions are determined by Member State national law. Under Irish law, the potential consequences of non-compliance can be severe. Violations may be a criminal offence that can be prosecuted either in in a summary manner or on indictment. Penalties of up to a fine of up to €5,000 and/or up to 12 months’ imprisonment can be imposed on summary conviction and a fine of up to €500,000 and/or up to 3 years’ imprisonment on indictment.[8]

While the economic activities restricted by EU sanctions are too numerous to list here, we can highlight those that are likely most relevant for Irish industry. These include restrictions on selling, supplying, transferring or exporting various categories of technological goods, including dual-use items and items that the European Commission has identified as of potential contribution to Russia’s military and technological enhancement or the development of its defence and security sector.[9] There are also restrictions on selling, supplying, transferring or exporting luxury goods.[10] Categories of “luxury goods” are set out in an annex accompanying the relevant regulation. Unless stated otherwise, goods with a value exceeding €300 per item are considered a “luxury good.” These restrictions are without prejudice to existing export control requirements.[11]

In addition to restrictions over the movement of physical goods, EU sanctions also restrict the provision of numerous categories of services, including technical or financial assistance concerning certain sanctioned goods. They also restrict the provision of legal advisory, accounting, or artificial intelligence services, engaging in any activity with a Russian party that is controlled or majority-owned by the Russian government, and providing technical or financial assistance relating to dual-use goods and technology.

Crucially, many of these restrictions apply directly and indirectly. For industry, this means that you can be liable for activities caused by your supply or distribution chain, it is not enough to simply rely on the fact that your customers are not based in or connected to Russia. The EU has sanctioned numerous intermediary parties that are based in countries outside of Russia, including, within the EU, China, Thailand, India, and Turkey. As a result, directly or indirectly selling, supplying, transferring or exporting certain goods to these parties without an authorisation could violate EU sanctions.[12] While applying appropriate controls, policies, and procedures concerning supply and distribution chains can help mitigate the potential for liability, it does not preclude it. In simple terms, if your distributor sells to a restricted party or your distributor sells to another intermediary party that then itself sells to a restricted party, you may still be liable.

Indirect liability may also occur if you are not undertaking your “best efforts” to ensure that any entity established outside of the EU that you own or control does not undermine EU sanctions. What is considered a “best effort” is situation-specific. Accordingly, due consideration should be paid to the business’s size, business sector, and type of activity undertaken. Regulators, however, will expect the “best efforts” of a company with significant resources to be more proactive and sophisticated than those of a smaller company.

Despite all of this, Irish companies may be liable if they knowingly and intentionally participate in activities that may have the object or effect of circumventing EU sanctions restrictions, so long as they are aware of that possibility.[13] Crucially, an Irish company may be liable even if it did not intend to circumvent sanctions.

While these are some of the legal risks to consider, Irish companies will also want to consider the reputational risks that may arise from the discovery of their products in Russia when they have publicly stated that they would no longer do business in Russia. As these press reports have shown, companies should be prepared to respond to public questioning. We recommend having statements drafted in advance that address the following points, at a minimum:

• Diversion is an industry-wide problem
• As a company, we are aware of these issues and have developed controls, policies, and procedures to mitigate diversion
• We comply with all relevant laws and cooperate with regulators

What does Irish industry need to do?

Recent reporting has drawn increased attention to sanctions compliance in Ireland. This comes at a time when Ireland will assume the Presidency of the Council of the European Union on 1 July. It is reasonable to assume that sanctions supervision and enforcement activities in Ireland will increase. To meet this risk, Irish companies should check and double-check their existing sanctions compliance programs.

As there is no one way to comply with these regulations, a company’s compliance strategy must be broad and be appropriately tailored according to the products it exports, the company’s size, resources, and industry. Compliance programs should be as comprehensive as practicable. To bolster an Irish party’s chance of being able to rely on an available defence, should they need it. Under EU and Irish law, a party will not be liable for a sanctions violation if they can successfully show that they neither knew nor had reasonable cause to suspect that their actions would violate EU regulations. To assist, parties should consider the following points when developing their sanctions compliance program:

• Screen customers, suppliers, and partners against the list of parties sanctioned by the EU. At a minimum, screenings should occur at the time of onboarding and on a regular basis thereafter.
• Include sanctions clauses in commercial agreements. These clauses are not required as a matter of EU or Irish law.[14] However, they usefully remind parties that sanctions remain an ongoing concern and can include express options for parties to terminate an agreement if they believe or reasonably suspect that a counterparty is or will be violating EU sanctions.
  • Sanctions clauses should be clearly written and expressly commit the parties to comply with EU sanctions, as opposed to more generalised terminology such as “all applicable laws”.
  • If possible, sanctions clauses should be future proofed so that you can accommodate new restrictions or risk levels without having to individually amend agreements.
• Include appropriate safeguard language in distributor agreements. Since parties may be liable for indirect violations, we recommend requiring distributors to expressly agree to apply appropriate due diligence concerning their resellers, suppliers and customers. One convenient method would be to require your distributors to apply your trade compliance terms on their resellers, suppliers and customers. This would also allow you the option of putting your distributors on notice that they will be contractually liable to you for their trade compliance violations or those of their resellers, suppliers, etc.
• Require your distributors grant you access and audit rights to their records and facilities on request.

Conclusion

Four years on from their significant expansion, EU sanctions compliance remains an ongoing obligation. As recent press reporting shows, companies can easily find their products being diverted to Russia despite the fact that they may have exited the market themselves. Companies have a duty to try to prevent circumvention of EU sanctions and are obliged to have a sanctions policy.

While not all forms of economic activities with Russia have fallen within the scope of EU sanctions, the restrictions are comprehensive and continue to evolve. So long as the war in Ukraine continues, it is reasonable to assume that the range of restricted activities will likely increase. Our team of experts can help your company reduce its risk of an inadvertent sanctions liability. Our team includes industry experts and previous in-house trade compliance counsel.

This article first appeared on the Mason Hayes & Curran website.