On 19 January 2021, the European Commission (the “Commission”) adopted and published a paper titled “The European economic and financial system: fostering openness, strength and resilience” (the “Communication”). The Communication is part of the Commission’s strategy to increase the EU’s role as a geopolitical player, and describes how the EU can reinforce its strategic autonomy in macro-economic and financial fields by (among other measures): (i) increasing the EU’s resilience to the extra-territorial application of sanctions regimes imposed by third countries; and (ii) strengthening the implementation and enforcement of the EU’s own sanctions regimes. The document makes the obvious but important point that, “The global economy is increasingly multipolar and the short-term pursuit of unilateral interests by specific actors can undermine effective multilateral cooperation”.
Increasing the EU’s resilience to the effects of third country unilateral sanctions
The Communication observes that the extra-territorial application of sanctions by third countries (i.e. the USA in particular) has seriously affected the EU’s ability to advance its own foreign policy objectives, to honour international agreements, and to manage international relations with sanctioned countries. The Communication notes that such unilateral sanctions have also compromised legitimate trade and investment of EU businesses with other countries.
The proposals to reinforce the EU’s independence in this area underscore the EU’s frustration with the unilateral sanctions imposed under the Trump administration on individuals and countries, including China, Iran, Russia, North Korea, and Venezuela.
The U.S. has repeatedly pressurised the EU to abandon an alternative payment system (INSTEX) meant to shield European trade with Iran from American sanctions. Whilst U.S. and European approaches to sanctions have often diverged to at least some extent, the Trump era exacerbated difference instead of finding common, multilateral, ground; this Communication can be seen as a response to that period.
The Communication states that the Commission will explore ways to protect the EU’s foreign policy and strategic interests, as well as EU companies and individuals, from the effects of unlawful extra-territorial application of unilateral sanctions adopted by third countries. As part of this discussion, the Commission will seek to formulate appropriate measures to ensure the uninterrupted flow of essential financial services, including payments, between the EU and its trading partners.
The Commission will also consider additional policy options to further deter and counteract the unlawful extra-territorial application of unilateral sanctions by third countries to EU operators. This may include an amendment to Regulation (EC) 2271/96 (the “Blocking Regulation”) to introduce non-trade related measures of retaliation under international law.
Finally, we note that the Commission will seek to strengthen multilateral cooperation on sanctions, especially with its G-7 partners.
Strengthening the implementation and enforcement of EU sanctions
The Communication notes that the effective and uniform implementation of EU sanctions will further enhance the EU’s strategic weight by increasing the EU’s credibility as a regulatory power and preserving the integrity and level playing field of the EU Single Market. To achieve that end, the Commission will undertake the following measures:
From 2021, the Commission will assess the effectiveness of EU sanctions by examining their economic impact on subject entities, on trade patterns between the EU and the country concerned, on EU businesses, and on the provision of humanitarian aid. Based on this assessment, the Commission will coordinate with the EU’s High Representative for Foreign Affairs and Security Policy to formulate proposals to improve the effectiveness of EU sanctions regulations.
In 2021, the Commission will review practices that circumvent or evade sanctions, including the use of cryptocurrencies. The results of this review will inform possible legislative proposals or implementation guidelines from 2022.
In 2021, the Commission will set up a Sanctions Information Exchange Repository as a database for reporting and exchange of information between the Commission and Member States on the implementation and enforcement of sanctions. In addition, the Commission will assess the need to review existing reporting obligations for Member States.
The Commission will set up an expert group on sanctions and extraterritoriality, composed of representatives of Member States, to cover issues related to the technical implementation of EU sanctions and of the EU Blocking Regulation (No 2271/96). This group will also serve as a forum on the EU’s resilience to the extra-territorial reach of unilateral sanctions. .
Currently, Member States’ authorities that deal with requests for authorisation from EU businesses or humanitarian operators active in multiple Member States are often not informed of parallel requests to, or decisions issued by, other national authorities. This might result in the uncoordinated enforcement of EU sanctions and in “form shopping”. The Commission will work with Member States to establish a single contact point for enforcement and implementation issues which have cross-border dimensions.
The Commission will continue to further ensure that EU funds and economic resources provided to non-EU states, international organisations and international financial institutions are not used in violation of EU sanctions, in particular by continuing to agree on legally binding provisions with partners using EU funds to ensure compliance, and by following up on their implementation.
The Commission will establish a dedicated system for anonymous reporting of sanctions evasion, including whistleblowing. The Commission will also work with Member States to ensure that national penalties for breaching EU sanctions are effective, proportionate, and dissuasive. On this point, we note that the EU’s recent Whistleblower Protection Directive (EU 2019/1937) must be implemented by Member States by mid-December 2021. Please see our earlier briefing note on that Directive here .
Impact on the U.K.
Since Brexit, the U.K.’s new standalone sanctions regime (as enacted by the Sanctions and Anti-Money Laundering Act 2018) largely mirrors existing EU sanctions. However, the U.K. regime differs from the EU regime in certain respects (e.g. see the U.K. sanctions on 49 individuals under the Global Human Rights Sanctions Regulations 2020), and is expected to diverge further as the U.K. government pursues its own foreign policy priorities outside of the EU. Present indications are that this new ‘Global Britain’ will also pursue multilateral coordination on various issues, including economic sanctions. Whilst the commercial benefits of all that remain to be seen, international companies doing business in the U.K. need to remain aware of their compliance obligations both here and in their relevant markets overseas; that includes sanctions programmes by a more confidently geo-political EU (as envisaged by the Communication) and by a more multilateralist United States under the new Biden administration.