The EU issues new FAQs clarifying the Best Efforts Obligation on EU Operators

Please click here to download this client alert.

On November 22, 2024, the European Commission updated its Frequently Asked Questions clarifying the scope and application of the so-called “best efforts” obligation (the “Best Efforts Obligation”) of EU parent companies and controlling shareholders (“EU Operators”) in respect of their non-EU subsidiaries (“FAQs”).

Below we summarize key clarifications.

Background

The Best Efforts Obligation was imposed by Article 8a of Council Regulation (No) 833/2014 (imposing sectoral and trade-related measures against Russia) and Article 8i of Council Regulation (No) 765/2006 (imposing both asset freezes and sectoral/trade-related measures against Belarus):

“Natural and legal persons, entities and bodies shall undertake their best efforts to ensure that any legal person, entity or body established outside the Union that they own, or control does not participate in activities that undermine the restrictive measures provided for in this Regulation.”

While in the Russia program the Best Efforts Obligation was only adopted in the context of sectoral and trade-related restrictions, the Best Efforts Obligation in the Belarus program concerns both asset freeze measures and sectoral sanctions.

Best efforts

Recently, the Commission has clarified that the Best Efforts Obligation has the twofold goal of ensuring that: (i) EU Operators are aware of the activities of their non-EU subsidiaries and would stop or prevent the activities which contradict EU sanctions; and (ii) non-EU subsidiaries are aware of the activities that could undermine EU sanctions and expose EU Operators to a risk of violation.

As clarified by the European Commission, best efforts to be undertaken by EU Operators includes actions such as the adoption of internal compliance programs, systematic sharing of corporate compliance standards, sending newsletters and sanctions advisories, setting up mandatory reporting, and organizing training for the group companies’ staff, particularly in case of sanctions violations, that are suitable and necessary to mitigate and manage risk effectively.

Public statements of non-EU subsidiaries undertaking not to engage in any activities that risk undermining EU sanctions or the EU Operators’ compliance policies can also be seen as a “plus,” but not sufficient as a stand-alone “best efforts” measure, according to the regulator.

Any measure should also be feasible for the EU Operator in view of its nature, size and the relevant factual circumstances. Such feasibility assessment is to be made on a case-by-case basis. As an example, it is expected that an Operator relatively small in size that operates in a highly regulated sector with abundant compliance resources takes substantive actions.

At the same time, an action would not be seen as feasible if the EU Operator, due to circumstances that it did not cause itself, is not able to exercise control over the non-EU subsidiaries. Lack of control appears, at present, to be the primary defense available to EU Operators.

For example, Russian national laws allow the Russian Government to appoint temporary administration to manage assets of companies from “unfriendly countries,” including EU Member States. In such circumstances, EU Operators could arguably not be held liable for actions of its Russian subsidiaries since that would be beyond their control.

However, the same defense would not be viable if it was determined that the loss of control was caused by inadequate risk assessment and management of the EU Operator or was due to risk incurred by executives or employees of the non-EU subsidiary. This would apply if the non-EU subsidiary is prosecuted under the laws of Russia or any other third country.

Entities established outside the EU

The Best Efforts Obligation covers activities of subsidiaries owned or controlled by EU Operators located or established anywhere, including outside the EU, e.g., in Russia and Belarus.

Undermining vs. Circumventing

The Commission has clarified the difference between “circumventing” and “undermining.”

“Circumvention” means conduct that has the purpose or result of enabling the perpetrator to avoid the application of a particular restrictive measure, through the creation of a formally legitimate situation that does not display all the constituent elements of a restrictive measures violation. “Undermining activities” are those resulting in an effect that restrictive measures seek to prevent.

According to the European Commission, undermining activities could consist of:

• export or sale of goods from Russia subject to import ban in the EU to third countries conducted by Russian or Belarusian subsidiaries because this would frustrate the aim of cutting revenues from exports of such goods; and
• export of goods and technologies subject to export ban having as final destination Russia or Belarus, since it frustrates the aim of not providing such goods and technology to Russia and Belarus.

In addition, if restricted goods are produced by non-EU subsidiaries using intellectual property rights (“IPRs”) or trade secrets of their controlling EU parent, and subsequently sold to Russia or Belarus, EU Operators that owns IPRs and trade secrets may be held liable if they could have prevented the use of IPRs and trade secrets, but failed to do so.

Although the EU sanctions do not apply extraterritorially, the Best Efforts Obligation is an attempt to make EU companies and nationals liable for actions of non-EU companies which they control or manage which they could have prevented.

Therefore, the Best Efforts Obligation as such is an attempt to penalize persons subject to EU jurisdiction for lack of adequate controls and due diligence.

However, there is still uncertainty as to how National Competent Authorities of EU Member States will enforce the Best Efforts Obligation and determine liability for its violation and penalty, particularly in light of Directive 2024/1226 on the definition of criminal offences and penalties for the violation of EU restrictive measures.

The FAQs announce that the Commission – in consultation with Member States – will prepare a clear set of expectations for EU Operators for ensuring a level playing field across the EU.

Currently, the only Member State authority that has issued guidelines on the subject matter is the German Ministry for Economic Affairs and Climate Action (BMWK). In addressing EU Operators’ generic EU sanctions due diligence requirements, the guidance recalls the liability framework according to which Operators shall not be liable for their actions if they did not know, and had no reasonable cause to suspect, that their actions would infringe EU sanctions.

Nevertheless, the regulator clarified that such defense cannot be invoked if the EU Operator (i) is accused of violating EU sanctions for failing to carry out simple checks or verifications; or (ii) deliberately ignored circumstances that may be obvious (since such situation may be considered equivalent to knowledge).

The same guidance provides recommended measures to be taken by Operators, namely:

• development and regular update of effective, risk-based compliance measures in relation to sanctions that are tailored to the respective business risk;
• more careful and regular risk examination of intermediary companies and alleged end-users, including known contractual partners; and
• the full use of available information and seeking additional information within reasonable limits, if risk indicators exist.

In the coming months, Operators will have to watch for more practical guidance to be issued by National Competent Authorities of other EU Member States.