Long expected, the EU Commission published explanations on the so-called best-efforts obligation in Article 8a of Regulation (EU) 833/2014 at the end of November and supplemented its FAQs on the EU sanctions against Russia accordingly. The aim is to provide the affected EU economic operators with a guideline for the implementation of the best-efforts obligation.
Best-efforts obligation to subsidiaries in third countries
With the 14th sanctions package, the European Union introduced a best-efforts obligation in June this year, which requires EU economic operators to use their best efforts to ensure that subsidiaries outside the EU that they own or control do not participate in activities that undermine the embargo measures of Regulation (EU) 833/2014 against Russia and the embargo measures of Regulation (EC) 765/2006 against Belarus.
One of the goals of the 14th sanctions package is to improve the effectiveness of the EU embargo sanctions against Russia and Belarus and to counteract ongoing procurement activities and the circumvention of sanctions more effectively.
Article 8a of Regulation (EU) 833/2014 and Article 8i of Regulation (EC) 765/2006 therefore oblige EU economic operators to take appropriate and proportionate measures to influence their third-country subsidiaries to the best of their ability in order to prevent their subsidiaries from undermining the embargo measures of the respective regulation.
The new rule confronts the EU economic operators concerned with numerous questions regarding the scope of application, extent and implementation of this obligation.
On 22 November 2024, the EU Commission supplemented its “Consolidated FAQs on the implementation of Council Regulation No 833/2014 and Council Regulation No 269/2014” and published more detailed explanations on the obligation under Article 8a of Regulation (EU) 833/2014 for the first time. The explanations can also be used analogously for the corresponding obligation under Article 8i of Regulation (EC) 765/2006.
In its FAQs, the EU Commission has taken a position on individual issues regarding the scope, extent and implementation of the best-efforts obligation. For the most part, however, these explanations do not go significantly beyond the statements in the recitals to the introduction of Article 8a in the amendingRegulation (EU) 2024/1745, while other key issues are not addressed.
The explanations of the EU Commission essentially concern the following aspects:
Activities that “undermine” the embargo measures
To explain the term “undermining”, the EU Commission refers to the explanations in recital 29 of the amending Regulation (EU) 2024/1745 and distinguishes “undermining” from the term “circumvention”.
While circumvention comprises covert acts which, according to their outward appearance, do not meet the criteria of an embargo restriction, but which ultimately run counter to the objective of the respective prohibition provision, undermining comprises acts which ultimately have an effect that the embargo measures are actually intended to prevent.
The EU Commission has thus not succeeded in actually clarifying the term “undermining”. In particular, it is still not clear whether undermining also applies if the third-country subsidiary is involved in activities that have no connection to the EU and the legally defined scope of the Embargo Regulation does not apply to the third-country subsidiary.
Best-efforts obligation also towards Russian subsidiaries
As expected, the EU Commission expressly clarifies that the obligation under Article 8a of Regulation (EU) 833/2014 also applies to EU economic operators vis-à-vis their subsidiaries in Russia and is not differentiated between various third countries. The EU Commission also emphasizes once again that this does not entail any further obligation for the third-country subsidiaries themselves to comply with the EU embargo measures. The best-efforts obligation under Article 8a of Regulation (EU) 833/2014 applies only to EU economic operators, who must exert appropriate influence on their third-country subsidiaries.
„Best-efforts“
In addition to the abstract requirements set out in the recitals of the amending regulation with regard to suitable and necessary measures, the FAQs now contain further recommendations from the EU Commission regarding the practical implementation of the best-efforts obligation.
According to this, the EU economic operators concerned should firstly obtain an overview of the business activities of the subsidiaries and the associated potential risks for violations of the embargo measures. Further, the subsidiaries should be made aware of which activities are correspondingly risky.
Based on the EU Commission’s proposals, this could be achieved through internal compliance programs and the establishment of company-wide compliance standards, specific information on embargo measures and mandatory training. The introduction of reporting obligations and escalation processes in the event of reports of violations by the subsidiary is also recommended. As a further proposal, the EU Commission suggests that the third-country subsidiary could even be required to make a public statement expressing its intention not to participate in activities that pose a risk of undermining EU sanctions.
Limitation to feasible measures
In line with the recitals of the amending regulation, the EU Commission only expects the implementation of necessary measures insofar as these are feasible for EU economic operators.
The EU economic operator must define the measures to be taken on a case-by-case basis, considering its nature, size and other relevant circumstances. According to the EU Commission, the relevant circumstances include the area of business activity, risk profile, turnover and available compliance resources. At the same time, the EU Commission makes it clear that it also expects smaller companies to make appropriate efforts if their or the subsidiary’s business activity is high-risk.
Another relevant circumstance that could limit the feasibility of the measures is the degree of control over the third-country subsidiary. In particular, control may be significantly reduced by conflicting legislation in the third country in which the subsidiary is based. Conflicting third-country legislation then also limits the scope or content of possible provisions vis-à-vis the respective subsidiary or can even completely prevent the implementation of provisions.
However, the limitation or loss of control over the third-country subsidiary must not have been caused by the EU operator himself. In this case, the EU economic operator can no longer exculpate itself with the argument of loss of control. In this context, the EU Commission expressly points out that Russia can practically no longer be regarded as a country in which EU economic operators can rely on the rule of law. With regard to subsidiaries in Russia, inadequate risk management and risk-prone decisions by the EU economic operator could be considered as causes of a self-inflicted loss of control.
Examples of non-compliance with the best-efforts obligation
It is also worth highlighting the EU Commission’s explanations of cases in which it assumes that an EU economic operator has not sufficiently complied with its best-efforts obligation and consequently violates Article 8a of Regulation (EU) 833/2014.
If an EU economic operator is aware that its third-country subsidiary is undermining the EU embargo measures and does not intervene against these activities of the subsidiary, the EU Commission considers that there has been a violation of Article 8a of Regulation (EU) 833/2014.
In the opinion of the EU Commission, Article 8a of Regulation (EU) 833/2014 obliges the EU economic operator to prevent its subsidiary in Russia from trading in goods produced there that are subject to an EU import ban, even if these goods are supplied to companies in third countries and not to the EU. Furthermore, from the point of view of the EU Commission, there is a violation if the third-country subsidiary produces goods covered by an EU export ban for which the EU economic operator has previously transferred associated IP rights to the subsidiary and the EU economic operator does not prevent the goods from being delivered to Russia.
Conclusion: Despite the continuing need for clarification and the EU Commission’s interpretation, which must be critically questioned, increased compliance requirements are placed on EU economic operators
The practical benefit of the FAQs with regard to further assistance for EU economic operators in implementing the best-efforts obligation is largely limited. The central question of whether Article 8a of Regulation (EU) 833/2014 only obliges EU economic operators to ensure to the best of their ability that third-country subsidiaries do not engage in activities that also fall within the scope of Regulation (EU) 833/2014 and have a connection to the EU has not yet been conclusively clarified. It remains to be seen whether the EU Commission, as announced, will work with the EU member states to provide further clarification.
Nevertheless, it is evident that, from the point of view of the EU Commission, Article 8a of Regulation (EU) 833/2014 is to be interpreted broadly and that considerable requirements are placed on EU economic operators.
Even though it is emphasized that Article 8a of Regulation (EU) 833/2014 does not entail an extraterritorial application of EU sanctions, it cannot be overlooked in view of the EU Commission’s statements that in practice the best-efforts obligation leads in practice to an indirect extraterritorial application of EU embargo provisions, as EU economic operators must exert appropriate influence on their subsidiaries in order to minimize their liability risk.
Although the FAQs only reflect the legal opinion of the EU Commission and are not legally binding, they nevertheless serve as a guide for the authorities of the EU member states. Therefore, as long as there are no further clarifications on the application and implementation of the duty of effort, the EU economic operators concerned should also take into account the current FAQs regarding their actions towards their third-country subsidiaries.
Vischer Voss would be happy to support you in the risk analysis of the business activities of your third-country subsidiaries as well as in the subsequent development and implementation of suitable and appropriate measures to implement your best-efforts obligation.
