The Dawn of a New Era for EU Sanctions Enforcement? EU Adopts Directive on the Definition of Criminal Offences and Penalties for the Violation of EU Sanctions

April 29, 2024 – On April 24, 2024, the European Union (“EU”) adopted the long-awaited Directive on the definition of criminal offences and penalties for the violation of Union restrictive measures and amending Directive (EU) 2018/1673 (“Directive”). As underlined in our previous alert, the Directive comes at a time of increased focus on sanctions enforcement in the EU in the context of Russia’s war of aggression against Ukraine.

The Directive marks a significant development towards the strengthening of EU sanctions enforcement, as it seeks to provide for a set of common basic definitions of criminal offences and penalties across Member States for investigating, prosecuting and sanctioning violations of EU restrictive measures. The Directive will enter into force on the twentieth day following its publication in the Official Journal of the EU, and Member States will have until 20 May 2025 to implement it into national law. To further facilitate the effective implementation of restrictive measures, the EU has also adopted on 12 April 2024 a Directive on asset recovery and confiscation that aims at swiftly tracing and identifying assets owned or controlled by individuals and entities subject to EU sanctions.

Key take-aways:

• The Directive confirms a general push towards criminal enforcement of EU sanctions for better harmonization and coordinated action between Member States and EU institutions.
• The new harmonized rules will intensify the focus on compliance and in particular on supervision by persons holding a leading position in legal entities;
• The Directive introduces incentives for compliance and collaboration efforts in investigative proceedings;
• Legal persons could be subject to higher fines, equal to a percentage of total worldwide turnover, depending on the gravity of the offence;
• The Directive will reinforce cooperation among Member States and the importance of proactive internal investigation of possible violations of EU sanctions.
• All in all, the implementation of the Directive will likely prompt debates in Member States over the state of their national enforcement frameworks.
  

1. Background Leading Up to the Directive

Restrictive measures (sanctions) are one of the most important tools enabling the promotion of values and objectives set out in the Common Foreign and Security Policy (“CFSP”) of the EU, which include safeguarding fundamental interests, preserving peace, and strengthening international security. Following Russia’s military aggression against Ukraine, in February 2022, they have become an even more strategic tool for the EU and its allies, playing an increasingly pivotal role in the geopolitical setting.

As of April 2024, the EU has over 40 sanctions programs in place. Restrictive measures address both country-specific and subject-specific situations (e.g., human rights violations, the proliferation and use of chemical weapons, the financing of terrorism, cyberattacks, etc.). For Russia alone, the EU has adopted 13 packages of restrictive measures, targeting nearly 2140 individuals and entities, as well as key sectors of the Russian economy. A 14^th package was reportedly in preparation as of the time of this alert.

The implementation and enforcement of EU sanctions is the responsibility of the 27 Member States, who are required to adopt national rules providing for effective, proportionate, and dissuasive penalties for infringements of EU restrictive measures. However, until the adoption of the Directive, they had no obligation to impose criminal penalties for such violations. A Report of the European Parliament Research Center highlighted that the implementation and enforcement of sanctions at the national level has led to discrepancies between national systems, “arguably undermining the EU’s ability to act as a united front and the efficacy of the measures.”

According to the Explanatory Memorandum of the Directive, at present, 13 Member States categorize sanctions infringements as administrative or criminal penalties depending on the gravity of the violation. In two Member States (Spain and Slovakia), a violation of EU restrictive measures can lead to administrative penalties only. In addition, to date only a few Member States have initiated any legal proceedings related to the violation of EU sanctions.

In its Proposal for a Directive, the European Commission (“Commission”) noted that inconsistent enforcement of restrictive measures, lack of criminal investigation and prosecution of violations, and the varying types (criminal or administrative) and levels of penalties (e.g., the maximum fine ranging from €133,000 to €37.5 million for legal persons) across Member States had a twofold effect of undermining their efficacy and the cohesiveness of the EU’s action at large.

In view of this disparity, in June 2022, the violation of EU restrictive measures was added to the list of areas of crimes enumerated at article 83(1) of the Treaty on the Functioning of the EU (“TFEU”). The move was remarkable itself, as it was the first extension of the list of EU crimes since 2007. In addition, the Commission was granted the power to propose legislation in the field under the ordinary legislative procedure.

2. Overview of Key Provisions

Jurisdiction

According to Article 12 of the Directive, Member States should establish their jurisdiction in the following cases:

• the criminal offense was committed in whole or in part within a Member State’s territory;
• the criminal offence was committed on a ship or an aircraft registered in a Member State;
• the offender is a national of a Member State.

Furthermore, Member States should inform the Commission if they decide to extend their jurisdiction to offenses committed outside their territory where:

• the offender is one of their habitual residents;
• the offender is one of their officials acting in his or her official duty;
• the offence is committed for the benefit of a legal person established on their territories; or
• the offence is committed for the benefit of a legal person in respect of any business done in whole or in part on their territories.

Finally, Member States should cooperate in case the offence falls within the jurisdiction of more than one Member State.

Criminal Offences

The Directive covers violations of EU restrictive measures adopted on the basis of Article 29 of the Treaty of the European Union (“TEU”) or Article 215 of the TFEU (article 2(1) of the Directive).

Article 3(1) of the Directive enumerates a list of behaviors that shall constitute a criminal offence when committed with intent:

• making funds or economic resources available to designated persons;
• failing to freeze funds or economic resources belonging to or owned, held or controlled by designated persons;
• enabling designated persons to enter into, or transit through, the territory of a Member State;
• entering into or continuing transactions with a third State or bodies or entities owned or controlled by a third State or its bodies, including the award or continued execution of public or concession contracts if such transactions are prohibited or restricted;
• trading goods or services whose import, export, sale, purchase, transfer, transit or transport is prohibited or restricted;
• providing services, financial services or performing financial activities which are prohibited or restricted.

Moreover, the aforesaid article 3(1) specifically addresses the circumvention of EU sanctions which should be considered as a criminal offence in the following cases:

• using, transferring to a third party, or otherwise disposing of, funds or economic resources owned, held, or controlled by a designated person, which are to be frozen, in order to conceal those funds or economic resources;
• providing false or misleading information to conceal the fact that a designated person, entity or body is the ultimate owner or beneficiary of funds or economic resources which are frozen;
• failing by designated persons to comply with their obligation to report to the competent administrative authorities funds or economic resources within the jurisdiction of a Member State, belonging to, owned, held, or controlled by them;
• failing to comply with an obligation to provide the competent administrative authorities with information on frozen funds or economic resources or information about funds or economic resources within the territory of the Member States, belonging to, owned, held or controlled by designated persons and which have not been frozen, where such information was obtained in the performance of a professional duty.

The covered criminal offences include breaching or failing to comply with conditions under authorizations granted by national competent authorities to conduct activities which are in the absence of such authorization prohibited or restricted under EU sanctions

Finally, article 3(2) allow Member States to determine that certain covered offences do not constitute a criminal offence where such offence involves funds, economic resources, goods, services, transactions or activities of a value of less than €10,000. In such case, Member States shall ensure that the threshold of €10,000 or more may be met through a series of covered offences conduct that is linked and of the same kind, where that conduct is carried out by the same offender.

Article 4 of the Directive also specifies that inciting, aiding and abetting the above-mentioned offences, as well as the attempt to commit certain offences should also constitute criminal offences under the Directive.

Intent Standard

In principle, according to Article 3(1), the covered offences must be committed intentionally. Therefore, they would require a specific intent from the offenders to be considered as criminal offences. Article 3(3) provides that the covered offences committed with serious negligence should also constitute criminal offences, at least when the violations relate to the items included in the Common Military List of the EU or to dual-use items listed in Annex I and IV to Regulation 2021/821. It should be noted that the serious negligence standard should apply to both natural and legal persons (Article 5 and 6 of the Directive).

Penalties

The Directive states that the criminal penalties set up by Member States must be effective, proportionate and dissuasive for offenders (Articles 5 and 7). It should be underlined that the Directive provides minimum standards and Member States may elect to implement laws which will foresee higher penalties depending on the circumstances.

• Natural persons

Article 5(3) of the Directive provides for penalties applicable to natural persons ranging from 1 to 5 years of imprisonment, depending on the gravity of the offence:

The threshold of €100 000 or more may be met through a series of offences that are linked and of the same kind, where those offences are committed by the same offender (Article 5(4)).

Moreover, according to Article 5(5) individuals may face accessory criminal and non-criminal penalties including:

• fines proportionate to the gravity of the conduct and to the individual, financial and other circumstances of the natural person concerned;
• withdrawal of permits and authorizations to pursue activities that resulted in the relevant criminal offence;
• disqualification from holding, within a legal person, a leading position of the same type used for committing the criminal offence;
• temporary bans on running for public office;
• where there is a public interest, following a case-by-case assessment, publication of all or part of the judicial decision that relates to the criminal offence committed and the penalties or measures imposed.

• Legal persons

Article 6(1) of the Directive provides that Member States shall ensure that legal persons can be held liable for breaching or circumventing EU sanctions where:

• Such offences have been committed for the benefit of those legal persons by any person who has a leading position within the legal person concerned, acting either individually or as part of an organ of that legal person, based on:
  • a power of representation of the legal person;
  • an authority to take decisions on behalf of the legal person; or
  • an authority to exercise control within the legal person.
• The lack of supervision or control by a person with a leading position within the legal person concerned has made possible the commission by a person under its authority of a criminal offence for the benefit of that legal person (Article 6(2)).

Pursuant to Article 7(2), penalties for legal persons may include criminal or non-criminal fines, the amount of which shall be proportionate to the gravity of the conduct and to the individual, financial and other circumstances of the legal person concerned. The maximum level of such fines should not be less than:

Member States may establish rules for cases where it is not possible to determine the amount of the fine on the basis of the total worldwide turnover of the legal person.

Moreover, legal persons may face other criminal and non-criminal penalties or measures, including (Article 7(1)):

• exclusion from entitlement to public benefits or aid;
• exclusion from access to public funding, including tender procedures, grants and concessions;
• disqualification from the practice of business activities;
• withdrawal of permits and authorizations to pursue activities which have resulted in the relevant criminal offence;
• placement under judicial supervision;
• judicial winding-up;
• closure of establishments used for committing the criminal offence;
• Where there is a public interest, publication of all or part of the judicial decision relating to the criminal offence committed and the penalties or measures imposed, without prejudice to rules on privacy and the protection of personal data.

The liability of legal persons shall not exclude the possibility of criminal proceedings against natural persons (Article 6(3)).

Aggravating and mitigating circumstances

Articles 8 and 9 of the Directive call for Member States to provide for aggravating and mitigating circumstances for the determination of the sentence, including one or more of the following:

Limitation periods

Article 11 of the Directive states that Member States should provide for limitation periods enabling the investigation, prosecution, trial and adjudication of covered criminal offences for a sufficient period of time after the commission of these offences. The Directive provides for the following limitation periods:

Member States can set limitation periods of less than five years, but no less than three years, provided that the periods may be interrupted or suspended in the event of specified acts (Article 11(4)).

Exclusions

Humanitarian assistance for persons in need or activities in support of basic human needs provided in accordance with the principles of impartiality, humanity, neutrality, independence and with international humanitarian law is excluded from the scope of the Directive (Article 3(5)).

In addition, legal professionals are not obliged to report information obtained in strict connection with judicial, administrative or arbitral proceedings, or when ascertaining the legal position of a client (Article 3(4)).

Investigative Tools

Article 13 of the Directive provides that Member States should ensure that effective and proportionate investigative tools are available for investigating or prosecuting the covered criminal offences, including where necessary special investigative tools, such as those used in combatting organized crime or in other serious crime cases.

Freezing and Confiscation

Article 10 of the Directive requires Member States to take the necessary measures to enable the freezing and confiscation, in accordance with Directive 2014/42/EU of 3 April 2014 on the freezing and confiscation of instrumentalities and proceeds of crime in the EU, of:

• instrumentalities and proceeds from the covered criminal offences; and
• funds and economic resources subject to EU restrictive measures in respect of which the designated natural person, or the representative of a designated entity or body, commits, or participates in, specified covered criminal offences.

Reporting Allegations of Misconduct / Whistleblower Protection

Pursuant to Article 14 of the Directive, Member States should ensure that Directive 2019/1937 of 23 October 2019 on the protection of persons who report breaches of EU law is applicable to the reporting of the covered criminal offences and to the protection of persons reporting such violations.

Coordination and Cooperation

Pursuant to Article 15, Member States are required to designate a unit or body for ensuring coordination and cooperation between law enforcement authorities and authorities in charge of implementing EU sanctions in relation to the covered criminal offences.

According to Article 16, where the covered criminal offence is suspected to be of a cross-border nature, the competent authorities of the Member States concerned should consider referring the information related to those criminal offences to appropriate competent bodies.

Moreover, the Directive provides that Member States, Europol, Eurojust, the European Public Prosecutor’s Office (“EPPO”) and the Commission should, within their respective competences, cooperate with each other in the fight against the covered criminal offences (Article 16(1)):

• Europol and Eurojust shall, where appropriate, provide the technical and operational assistance needed by the competent national authorities to facilitate the coordination of their investigations.
• The Commission may establish a network of experts and practitioners to share best practices and provide assistance to the competent authorities of Member States in order to facilitate the investigation of covered criminal offences, which may provide a publicly available and regularly updated mapping of the risks of violations or circumvention of EU sanctions in specific geographic areas, and with respect to specific sectors and activities (Article 16(2)).
• Member States’ competent authorities should share with the Commission information on practical issues, in particular on patterns of circumvention (Article 16(3)).

Pursuant to Article 17, Member States should set up a system for the recording, production and provision of anonymized statistical data on the reporting, investigative and judicial stages in relation to the covered criminal offences.

3. Key Takeaways

As the Directive crystalizes compliance with EU sanctions as a top priority and their violation as a particularly serious crime, transposition will undoubtedly be the subject of intense scrutiny by policy makers, EU operators and civil society at large.

In the past years, in the context of sanctions against Russia, there has been increasing interest at the EU level in enforcing sanctions and combatting sanctions circumvention. Several other initiatives have already been undertaken by the EU to that end, including:

• in March 2022, the creation of the Freeze and Seize Task Force to ensure the efficient implementation of EU sanctions against designated Russian and Belarussian oligarchs across the EU;
• in December 2022, the creation of a Special Envoy position to ensure continuous and high-level discussions with third countries to avoid the circumvention EU sanctions against Russia;
• in June 2023, the adoption of the EU anti-circumvention tool in Regulation 833/2014 allowing the Council to prohibit the sale, supply, transfer, export and related services, related to goods and technology listed in Annex XXXIII of Regulation 833/2014, whether or not originating in the EU, to any person in the third country specified in Annex XXXIII;
• the adoption of the “No-Russia Clause” mechanism in Regulation 833/2014 requiring exporters to contractually prohibit the re-exportation to Russia and for use in Russia when selling, supplying, transferring or exporting to a third country (except partner countries listed in Annex VIII of Regulation 833/2014) certain listed goods and technology.

Other initiatives are currently being discussed at the EU level, such as the potential involvement of the new EPPO in the investigation and prosecution of EU sanctions violations.

Therefore, in the meantime, operators subject to EU sanctions jurisdiction should pay heightened attention to (i) conducting group-wide sanctions-focused mapping exercises to identify their exposure to EU sanctions risks, and (ii) implementing robust policies, procedures and tools meant at preventing, identifying, investigating, and sanctioning the violation or circumvention of EU sanctions.

4. Current Status under French law

In France, two bills from 2007 and 2016 failed to introduce an Article 437-1 into the French Criminal Code intended to criminalize non-compliance with embargoes and restrictive measures adopted by the EU, the United Nations or the Organization for Security and European Cooperation. Both bills provided that the violation of such measures would be punishable by a fine of up to €750,000 and up to 7 years in prison. In addition, the 2016 bill provided for aggravated penalties of up to 10 years of imprisonment and a fine up to €1,500,000 where the offence would be committed within the framework of a criminal organization.

Absent the adoption of either bill, in France, the enforcement of EU restrictive measures currently relies on Article 459 of the French Customs Code, which make it a criminal offence to contravene or attempt to contravene (i) the laws and regulations governing financial relations with foreign countries, and (ii) the restrictive measures relating to economic and financial relations adopted by the EU pursuant to articles 75 and 215 of the TFEU or to international treaties and agreements.

• Natural persons may be sentenced to five years of imprisonment, a fine, at least corresponding to the amount of the offence or attempted offence and up to two times the said amount, as well as the confiscation of the body, means of transport and proceeds of the offence.
• Legal persons may be sentenced to the quintuple of the fine applicable to natural persons, as well as the accessory penalties provided for by Article 131-39 of the French Criminal Code.

Criminal enforcement actions for sanctions violations have been rather discreet, if not extremely rare. Indeed, Article 458 of the French Customs Code conditions the prosecution under Article 459 to the prior complaint of the French Ministry of Economics and Finance, a mechanism known as “Verrou de Bercy”. Beyond the fact that prosecution is left to the discretion of the government, Article 458 of the Customs Code currently lacks clarity as to which offences it applies.

Therefore, over the next twelve months, the French legislature will have to determine, among other things:

• whether the repressive regime and related provisions, currently provided in the French Customs Code should migrate to the French Criminal Code;
• the elements of the covered criminal offences, potential aggravating and mitigating factors, as well as the threshold of the penalties;
• whether investigation and prosecution will fall within common jurisdiction rules or will be granted to specialized prosecutors;
• whether the “Verrou de Bercy” may be maintained under the Directive.

The transposition of the Directive into French law will likely also raise questions about out-of-court settlements for allegations of EU sanctions violation. First it will be interesting to see whether the French legislature would decide whether these offenses are eligible for the Comparution sur reconnaissance préalable de culpabilité procedure provided for at Article 495-7 of the French Criminal Code. In addition, considering the Directive’s approach to cooperation and the need to create incentives for the private sector, it will be interesting to see whether the French legislature decides to extend the Convention judiciaire d’intérêt public (CJIP) to the offenses covered by the Directive.