EU Sanctions: ‚Best Efforts‘ Deep-dive

Arne Mielken
Nov 23, 2024
5 min read

EU Commission clarifies ‘Best Efforts’ Obligations under Belarus and Russia Sanctions. Read out deep-dive for a detailed analysis of our obligations and download the guidance.

Following the EU's expanded sanctions against Russia and Belarus during the summer of 2024, new “best efforts” obligations were introduced to counteract sanctions circumvention. These obligations require EU-based entities to exert significant influence over their non-EU subsidiaries to ensure compliance with restrictive measures.

On November 22, 2024, the European Commission released its long-awaited guidance in Frequently Asked Questions (FAQs), clarifying the scope and expectations of these "best efforts" obligations.

This blog explores the nuances of the guidance, its implications for businesses, and actionable steps EU Operators can take to ensure compliance.

Questions we answer in this deep dive are:

Who is affected?
What activities fall under "best efforts" obligations?
When must EU Operators act?
What are the compliance expectations?
When can liability arise as a result of “best efforts” obligations?

Download the new FAQ here

Understanding the Scope of the Obligations

Who Is Affected?

The Commission confirms that "best efforts" obligations apply to all non-EU entities owned or controlled by an EU Operator, including those in Russia ("Non-EU Subsidiaries").

As a reminder, the recitals to the Regulations introducing “best efforts” obligations specified that:

Ownership is “holding 50% or more of the proprietary rights of the legal person, entity, or body, or having a majority interest therein.”
Control is evaluated based on indicators such as “the power to appoint or remove most of the members of the administrative, management, or supervisory body; the right to utilise all or part of the assets of the legal person, entity, or body; managing the business of the legal person, entity, or body on a unified basis while publishing consolidated accounts; or the right to exert a dominant influence over the legal person, entity, or body.”

What activities fall under "best efforts" obligations?

"Best efforts" relate to activities that "undermine" restrictive measures, meaning they produce an effect that these measures aim to prevent.

According to the Commission, "undermining" is different from "circumvention." "Undermining" nullifies the effects of sanctions, while "circumvention" involves activities that appear legal but intend to or result in evading the application of sanctions.

The Commission also offers examples of activities considered as undermining EU sanctions:

A non-EU subsidiary provides goods subject to export controls under EU sanctions to Russia or Belarus.
A non-EU subsidiary engages in trading goods produced in Russia that are under import controls by EU sanctions, even if those goods are produced by a non-EU subsidiary in Russia and even if the trade occurs within the same group.

Essential Requirements under "Best Efforts"

When Must EU Operators Act?

When should "best efforts" be implemented? "Best efforts" require actions that are suitable and necessary to prevent the evasion of restrictive measures, but only if those actions are "feasible." The Commission explains that "feasibility" is assessed individually, taking into account the nature, size, and relevant factual circumstances of each EU Operator.

In this context, the degree of effective control over a non-EU subsidiary can be considered. If "control is entirely absent," an EU operator cannot be expected to prevent a non-EU subsidiary from participating in activities that undermine sanctions.

However, liability would not be diminished if the loss of control stems from "inadequate risk assessment and management, along with risk-prone decisions of the EU operator."

An important consideration is the risk of prosecution of executives and employees of the non-EU subsidiary under third-country laws.

What Are the Compliance Expectations?

1 ) EU Operators are anticipated to establish a compliance framework for Non-EU Subsidiaries. "Best efforts" entail implementing suitable policies, controls, and procedures.

The Commission outlines its expectations as follows:

Measures vary based on the nature, size, and specific circumstances of each EU Operator.
The compliance resources of an EU Operator should be considered. For instance, an EU Operator in a heavily regulated sector with significant compliance resources is expected to undertake substantial actions, irrespective of its size.
EU Operators must be informed about the activities of non-EU subsidiaries they own or control and recognize thosethat could potentially undermine EU sanctions.

Measures to be implemented include:

Internal compliance programs.
Consistent sharing of corporate compliance standards.
Distribution of newsletters and sanctions advisories.
Implementing mandatory reporting or organizing compulsory sanctions training for staff.
Establishing procedures to promptly address sanctions violations, including reporting them to the EU operator with ownership or control.

Public statements by Non-EU Subsidiaries may also be taken into account. The Commission announced plans to develop, with Member States, a "clear set of expectations for EU operators."

2) EU Operators are expected to block transactions

"Best efforts" require EU Operators to take "all actions necessary and feasible" to prevent the undermining of EU sanctions. According to the Commission, EU Operators must employ all available means to block transactions by a non-EU subsidiary that compromise EU sanctions.

For example, if goods are produced using IP rights transferred by an EU Operator to its non-EU subsidiary, the EU Operator must prevent the use of those IP rights to stop the supply of these goods to Russia, even if the transfer happened before sanctions were enforced.

The Commission expects EU Operators to take every possible action to block transactions by Non-EU Subsidiaries that would undermine EU sanctions.

When can liability arise as a result of “best efforts” obligations?

The Best Efforts FAQs indicate that an EU Operator may be held liable under the “best efforts” obligations in the following cases:

Knowledge of activities undermining EU sanctions: The EU Operator knows that its Non-EU Subsidiary engages in activities that endanger EU sanctions and accepts them.
Failure to block transactions undermining EU sanctions: The EU Operator fails to take necessary and feasible actions to prevent the undermining of EU sanctions by non-EU subsidiaries.
Failure to carry out appropriate due diligence regarding activities of non-EU subsidiaries: EU Operators cannot rely on a "no liability clause" if they fail to ensure awareness of the activities of their non-EU subsidiaries.

Beyond the “best efforts” obligations, the Commission does not exclude the potential liability of EU Operatorsbased on anti-circumvention provisions, even in cases of mere knowledge of activities undermining EU sanctions carried out by their non-EU subsidiaries.

Practical Implications for EU Operators

While the FAQs are not legally binding, they reflect the Commission’s interpretation and are likely to influence enforcement decisions. Businesses should approach them as a baseline for compliance best practices.

Actionable Steps

Map Your Subsidiaries: Identify all non-EU entities under your ownership or control.
Implement Comprehensive Training: Ensure that employees across subsidiaries are aware of sanctions requirements.
Regularly Audit Operations: Conduct periodic reviews of subsidiary transactions and compliance frameworks.
Develop a Response Plan: Establish protocols for swiftly addressing suspected sanctions breaches.

Conclusion

The EU’s introduction of "best efforts" obligations underlines a shift toward greater accountability for businesses operating across borders. By clearly defining expectations, the European Commission has provided operators with a roadmap for ensuring compliance.

For EU Operators, the message is clear: proactive risk management and robust compliance systems are essential not only to meet legal requirements but also to safeguard reputations in a rapidly evolving sanctions landscape.

Are your compliance measures strong enough to meet these new standards? If you’re unsure, connect with Customs Manager Ltd for expert advice and tailored solutions.