EU Secondary Sanctions

The EU sanctions regime consists of a vast number of regulations and decisions, outlining specific sanctions of various types and purposes. These sanctions can generally be divided into primary sanctions and secondary sanctions, with the former accounting for the majority of EU sanctions. While secondary U.S. sanctions have faced significant criticism, including from EU institutions, and have sparked an extensive legal debate, secondary sanctions are also a component of the EU sanctions regime.

Under certain circumstances, non-EU financial institutions and other firms risk becoming subject to secondary EU sanctions and subsequently being included on one of the EU sanctions lists. In case of a listing and depending on the specifics of each case, EU persons are prohibited from selling, supplying, transferring, or exporting specific goods to the sanctioned firm, engaging in business relationships with it, or providing it with funds or economic resources—these measures described as the "Wall Street equivalent of the death penalty" (Lohmann, SWP Comment, 5/2019).

Third-country firms are therefore advised to carefully assess their individual risk of being sanctioned by the EU. If there is a potential risk, they should implement robust risk mitigation measures—particularly at a time when the EU is continuously tightening its sanctions.

Difference between Primary and Secondary Sanctions

Primary sanctions are imposed on specific groups of persons, organisations, or entities (POEs), including government bodies, when the sanctioning state considers it necessary to protect its security or geopolitical interests. These POEs may be linked to a particular state (e.g., Russia under Regulation (EU) No 833/2014), a non-state organisation (e.g., Al-Qaida and the Taliban under Regulation (EC) No 881/2002), or other specific targets (e.g., cyber-attacks under Regulation (EU) 2019/796).

Secondary sanctions, on the other hand, do not target POEs that directly threaten the sanctioning state's security or geopolitical interests. Instead, they are intended to suport primary sanctions by penalising third-party POEs that significantly support or maintain close ties with POEs subject to primary sanctions. As a result, secondary sanctions may be imposed on POEs that are not located in the sanctioned state, are not part of the sanctioned non-state organisation, or do not pursue the sanctioned behaviour themselves.

Secondary sanctions, like primary sanctions, generally do not impose direct obligations on the sanctioned POE. This would not make sense, as the sanctioned POE is not subject to the sanctioning state's jurisdiction. However, persons that are under the sanctioning state's jurisdiction are subject to certain obligations. These obligations may include the prohibition to sell, supply, transfer, or export specific goods to the sanctioned POE, or even to have a business relationship with it, or to provide to the sanctioned POE funds or economic resources, or to freeze funds or economic resources within the sanctioning state's jurisdiction. As a result, the sanctioned POE is effectively excluded from the sanctioning state's market, in whole or in part, which may lead to significant financial losses.

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Examples for EU Secondary Sanctions

The EU has so far taken a modest approach to imposing secondary sanctions. However, it has already implemented such sanctions or at least established the legal basis to impose them in the future. The following examples illustrate some EU secondary sanctions.

Trade Restrictions for Companies with Close Links to the Russian or Belarusian Defense and Security Sector

Under Article 2b(1) of Regulation (EU) No 833/2014, EU persons are prohibited from selling, supplying, transferring, or exporting dual-use goods and technology (Article 1(a) of that Regulation), as well as the goods and technology listed in Annex VII (goods which may contribute to Russia's military and technological enhancement or the development of its defence and security sector), whether or not they originate in the EU, to any person, organisation, or entity (POE) listed in Annex IV. It is also prohibited to provide certain technical or brokering services related to these goods and technology, to offer certain financing or financial assistance related to them, and to transfer intellectual property rights or trade secrets associated with these goods and technology to any POE listed in Annex IV (Article 2b(2) of Regulation (EU) No 833/2014).

Annex IV lists POEs that are military end-users, are part of Russia's military and industrial complex, have commercial or other links with, or otherwise support, Russia's defence and security sector. It is explicitly intended to also include POE in third countries other than Russia. Whereas the list initially included only POEs based in Russia, with the adoption of the 10th sanctions package against Russia, companies based outside the EU were listed for the first time. This began with Iranian companies and has since expanded to include companies from Armenia, China, India, Kazakhstan, Kyrgyzstan, Serbia, Singapore, Sri Lanka, Syria, Thailand, Turkey, the United Arab Emirates, and Uzbekistan.

As a result, third-country companies established outside Russia with close links to the Russian defense and security sector risk becoming subject to EU secondary sanctions even without a special EU nexus. Their inclusion in Annex IV of Regulation (EU) No 833/2014 will prevent EU persons from selling, supplying, transferring, or exporting the specified goods and technologies to them.

Article 1fa(1) of Regulation (EC) No 765/2006 provides a similar rule concerning Belarus. However, Annex V currently includes only Belarusian companies. Since the Annex does not explicitly state that the list may also include companies from third countries other than Belarus, it appears that such companies will not be included in the list in the future either.

Asset Freezing and Provision Ban for Supporting the Circumventions of Sanctions Against Russia or Belarus

Under Article 2 of Regulation (EU) 269/2014, EU persons are obliged to freeze all funds and economic resources belonging to, owned, held or controlled by persons, organisations, or entities (POE) listed in Annex I and no funds or economic resources shall be made available to or for the benefit of such POE.

As part of the eighth sanctions package against Russia, an additional ground for including POEs in Annex I was introduced under Article 3(1)(h) of Regulation (EU) 269/2014. The rule says that Annex I shall include POE facilitating infringements of the prohibition against circumvention of the provisions of Regulation (EU) 269/2014, Regulation (EU) No 692/2014, Regulation (EU) No 833/2014, Regulation (EU) 2022/263, Decision 2014/145/CFSP, Decision 2014/386/CFSP, Decision 2014/512/CFSP, and Decision (CFSP) 2022/266, or otherwise significantly frustrate those provisions.

The list is not restricted to POE with residence or legal seat in Russia and may also include POE located in other third countries. Even though the focus lies on POE located in Russia, it also includes companies from other countries such as Belarus, Georgia, Iran, North Korea, Turkey (Türkiye), and the United Arab Emirates.

A similar rule has been implemented under Article 2(7) of Regulation (EC) No 765/2006 with regard to the Belarus sanctions regime. The list in Annex I of that Regulation shall also include POE that have been identified by the EU Council as facilitating infringements of the prohibition against circumvention of the provisions of that Regulation or of Decision 2012/642/CFSP or as otherwise significantly frustrating those provisions. The list in Annex I is also open to non-Belarusian companies. However, currently, only one company from Turkey (Türkiye) is included.

Third-country firms may therefore be subject to EU secondary sanctions by being listed for facilitating the circumvention of sanctions against Russia or Belarus. However, a strong nexus to the EU is required, as the listing ground aims to deter non-EU persons from participating in prohibited sanctions circumvention by EU persons. As a result of being listed, EU persons are required to freeze the firm's funds and economic resources and are prohibited from making these assets available to the sanctioned firm.

Transaction Bans for Using the Russian Payment System while Supporting the Circumventions of Sanctions Against Russia

According to Article 5ac(2) of Regulation (EU) No 833/2014, it is prohibited for EU persons to engage in any transaction with a person, organisation, or entity (POE) listed in Annex XLIV of that Regulation. This rule was newly introduced as part of the 14th sanctions package against Russia.

Annex XLIV is intended to include POEs established outside Russia that use the SPFS (Sistema Peredachi Finansovykh Soobscheniy) of the Central Bank of Russia or equivalent specialised financial messaging services set up by the Central Bank of Russia or the Russian State and that, by such use, (i) enhance Russia’s financial resilience and (ii) support the circumvention of the prohibitions in Regulation (EU) No 833/2014 and Regulation (EU) No 269/2014. As of now, no POE has been listed in Annex XLIV. 

Similar to the new listing grounds under Article 3(1)(h) of Regulation (EU) No 269/2014 and Article 2(7) of Regulation (EC) No 765/2006, Article 5ac(2) of Regulation (EU) No 833/2014 also requires an EU nexus, as it targets the support of the “circumvention” of the prohibitions set out in Regulation (EU) No 833/2014 and Regulation (EU) No 269/2014. Such circumvention occurs only when an EU person knowingly and intentionally engages in such activities. However, the purpose of Article 5ac(2) of Regulation (EU) No 833/2014 is to compel non-EU persons, who are not legally bound by EU sanctions, to comply with certain EU sanctions by threatening their exclusion from the EU market.

Export Bans on Certain Goods to Specific Third Countries

Article 12f of Regulation (EU) No 833/2014, introduced as part of the 11th sanctions package against Russia, goes beyond the possibility of sanctioning third-country companies for collusive activities with EU persons aimed at undermining EU-Russia or Belarus sanctions by excluding these third-country companies from the EU market.

Instead, Article 12f provides that the sale, supply, transfer, or export of certain particularly sensitive goods, along with related services, financing and financial assistance for these goods, and the transfer of intellectual property rights and trade secrets related to them, may be prohibited entirely for any POE in specific third countries.

The restrictions of Article 12f of Regulation (EU) No 833/2014 apply to the goods and technology and countries referred to in Annex XXXIII of that Regulation. Sentence 3 of Article 12f(3) states that the Annex should include third countries that have been identified by the EU Council as having systematically and persistently failed to prevent the sale, supply, transfer, or export of goods and technology, as listed in that Annex, to Russia, despite the Union’s prior outreach and assistance to the country concerned. So far, the EU has refrained from including third countries in Annex XXXIII.

Article 12f of Regulation (EU) No 833/2014 marks a departure from the principle that EU export control law is generally based on the act of exporting from the EU, rather than on the origin of the good. Even without prior collusive cooperation with an EU person to circumvent EU-Russia sanctions, the re-export of certain goods originally exported from the EU to Russia may be prohibited under this rule. Furthermore, entire countries may face sanctions if they fail to take effective measures to enforce EU goods-related sanctions within their territory.

Risk Mitigation Measures

International banks and financial institutions, as well as other companies not located in the EU, should carefully assess their individual risk of being affected by EU secondary sanctions, particularly if they maintain business relationships with states or companies sanctioned under the EU sanctions regime. This analysis should consider all business areas, goods produced, and services provided, as well as their potential impact under the various EU sanction regulations and decisions.

If a potential risk of being targeted by EU secondary sanctions is identified, the firm should implement specific risk mitigation measures. Depending on the firm's risk appetite, it could either fully mitigate the risk by refraining from certain business relationships or, if accepting a certain degree of risk is deemed reasonable, manage the risk through targeted measures. Such measures may include establishing a sanctions risk management function, incorporating special clauses in the firm's general terms and conditions (GTC) or individual contracts, a documentation of the risk management system and procedures, and more. The aim of these measures is also to be able to demonstrate to the authorities, if necessary, that any potential act against the EU sanctions regime was not intentional and that all reasonable steps have been taken to prevent it. However, the type and intensity of these measures depend on the firm's individual circumstances.

Kronsteyn Legal Services

Kronsteyn provides specialized advice on German and European financial markets law, including financial sanctions law. The German law firm assists with all matters related to financial sanctions, such as administrative or civil law proceedings and the provision of legal opinions. For any inquiries, please contact Attorney at Law Dr. Hendrik Müller-Lankow.