Article 8a of the Russia embargo: Obligations of EU companies regarding their non-EU subsidiaries

Broad interpretation of the scope of Article 8a – also covers Russian subsidiaries

At the end of November 2024, the European Commission published its FAQ on the “Best Efforts” Obligation→ on the interpretation of Article 8a, which was inserted into Regulation (EU) 833/2014 as part of the 14th Sanctions Package and imposes an obligation on EU persons to make “best efforts” to ensure that their third-country subsidiaries do not engage in activities that circumvent the restrictive measures of the Regulation (EU) 833/2014 “undermined”.

In its FAQs, the Commission takes a very broad view. According to the Commission, “undermining” EU sanctions against Russia regularly occurs as soon as a person in Russia receives goods or services that are subject to restrictions under Regulation (EU) 833/2014. The Commission does not require any kind of EU connection to the transaction.

The obligation to “make every effort” to prevent such activities by third-country subsidiaries is also interpreted very broadly by the Commission. The Commission states that only those measures that are feasible for the EU company, given its scope of activity, its size, and the relevant factual circumstances, are covered by this obligation. With regard to the "actual circumstances," the Commission also expressly acknowledges that in situations where an EU company cannot exercise control over (certain) activities of its third-country subsidiary for reasons beyond its control, e.g., due to conflicting third-country regulations, there is no obligation to prevent sanction-relevant activities of the third-country subsidiary. However, the Commission qualifies this statement with regard to the Russian legal system, which generally prohibits compliance with EU sanctions against Russia. Since it is known that Russia is no longer a state governed by the rule of law, inadequate risk assessment and risk management, in conjunction with risky decisions by the EU company, could be considered a self-inflicted loss of control; Such a self-inflicted loss of control cannot limit the duty of care. Therefore, in the Commission's view, Russian subsidiaries of EU companies should, in principle, also fall within the scope of the duty of care. In its FAQs, the Commission addresses specific situations in which EU companies are obligated to prevent activities by their Russian subsidiaries. It mentions the case where the Russian subsidiary produces listed goods for the Russian market based on intellectual property (IP) that was made available to it at some point in the past by the EU company (in compliance with sanctions). The Commission also considers that the obligation to make efforts should apply in cases where a Russian subsidiary manufactures import-listed goods (e.g., Annex XXI goods) in Russia and/or exports them from there to third countries, since the objective of import-side restrictions is to weaken Russia's economic base and limit its capacity to wage war by depriving it of important markets for its products. Furthermore, in the event of exports of goods to Belarus by the Russian subsidiary, the corresponding obligation to make efforts under Article 8i of the Belarus Embargo Regulation (EC) No. 765/2006 is to be applied. Knowledge of actions that undermine the sanctions: According to the EU Commission, for a violation of Article 8a of Regulation (EU) 833/2014, it should be sufficient if an EU company has knowledge of a relevant action and does not react to it. In individual cases, this should even constitute a violation of the prohibition of circumvention under Article 12 of Regulation (EU) 833/2014, which is very problematic from a legal perspective. Measures to Fulfill the Duty of Effort The specific measures to be taken under Article 8a of Regulation (EU) 833/2014 depend on the individual case. The European Commission provides several examples of how the duty of effort can be fulfilled in individual cases, including, for example, the implementation of a group-wide compliance system, the sharing of group-wide compliance standards, the distribution of regular newsletters, the implementation of reporting obligations, the introduction of group-wide training, and contingency plans in the event of breaches. A public declaration by the third-country company that it does not intend to undermine EU sanctions can also be an appropriate measure from the European Commission's perspective. However, the Commission points out in its FAQs that it will work with the Member States to formulate clear expectations for EU companies so that they can meet their obligations and a level playing field prevails throughout the EU. This implies that there are currently no binding requirements for EU companies, but that these still need to be created. Assessment: The statements made by the European Commission often go beyond the wording of Article 8a of Regulation (EU) 833/2014 and are viewed critically by us, as they effectively lead to an extraterritorial extension of EU sanctions against Russia to subsidiaries of EU companies in third countries. Comparable indirect extraterritorial extensions of its own sanctions law to third-country companies by the USA have in the past been explicitly classified by the EU as contrary to international law (see Question 21 of the Guidance on the updated Blocking Regulation). While the Commission's FAQs are not legally binding, the final interpretation of Regulation (EU) 833/2014 rests with the Court of Justice of the European Union. In some cases, the CJEU has ignored the Commission's FAQs when interpreting and applying EU sanctions against Russia and has adopted a contrary interpretation (e.g., judgment of 5 September 2024 on Article 5n of Regulation (EU) 833/2014, Case C-109/23), while in other cases it has used the FAQs as "additional guidance for clarifying the system" (judgment of 18 January 2018, INEOS, Case C-58/17, paragraph 41). It is therefore impossible to say with certainty whether the CJEU would follow the Commission's interpretation in the case of Article 8a. We therefore recommend that affected EU companies review their current handling of subsidiaries in third countries and adjust it if necessary. This particularly applies to the handling of Russian subsidiaries. Existing power relations should be used, where possible, to prevent the "undermining" of EU sanctions, as defined by the Commission's legal opinion. Furthermore, developments should be closely monitored, particularly the Commission's announced consultation with Member States on formulating clear and EU-wide uniform requirements for fulfilling the obligation to make efforts.