By Jeff Nielsen*
Prior to Russia’s February 2022 full-scale invasion of Ukraine, a considered argument could be made that European Union sanctions were not only niche, but also somewhat impertinent. Enforcement actions for sanctions violations were meager and nowhere close to the estimated over 9,000 current cases pending in member states since 2022. Further, even after Russia’s 2014 “little green men” first invasion of Ukraine, then High Representative of the Union for Foreign Affairs and Security Policy Federica Mogherini emphasized in 2018 the EU’s firm, yet somewhat opaque, objection to the extraterritoriality of U.S. sanctions.
Central to this objection are two concerns. First, EU policymakers fretted that EU companies could be designated as sanctioned by the United States for doing business with Iran under secondary designation authorities (colloquially called “secondary sanctions”) in the U.S’s post- Joint Comprehensive Plan of Action (JCPOA) Iran sanctions. Second, concerns spread across Europe that EU companies that engaged in business with Iran under then limited EU sanctions would be subject to U.S. administrative or criminal enforcement where such business had a U.S. nexus.
Since then, the geopolitical paradigm has evolved significantly. Russia’s war against Ukraine on the EU’s immediate eastern doorstep has persisted well into its fifth year amid escalating Russian hybrid attacks on Europe. In response, the EU has adroitly responded with more assertive use of foreign policy tools – including most prominently sanctions. However, this pivot presents the EU with a dilemma: its robust manifestation of sanctions in many ways now is akin to the very long-established U.S. secondary sanctions practices that it robustly criticized. In particular, the EU has begun listing targets in its Russia sanctions akin to the U.S.’s secondary designation practice in its post-JCOPA Iran sanctions.
This momentous shift calls for acknowledgment among EU policymakers that its opposition to secondary sanctions designation practice has subsided. Such acknowledgement should be upon a more informed understanding the limited scope of secondary sanctions as limited to designations and not including extraterritorial enforcement. Upon this, as the EU’s secondary designation practice has manifest in a sanctions regulatory and policy framework distinct from the U.S., a new taxonomy is merited: ancillary listings. Also, abandonment of EU sanctions measures critical of U.S. secondary sanctions is also warranted.
A brief background on the abrupt recent development of EU sanctions provides context. EU sanctions against Russia have quickly evolved in both scope and complexity to incrementally increase disruptive pressure on Russia’s war effort against Ukraine. By way of example, the European Union’s sanctions regulation prescribing trade-related activities with Russia – Council Regulation (EU) 833/2014 – expanded from a relatively meek 21 pages comprised of 16 articles and six annexes to a current 703 pages comprised of 107 articles and 53 annexes. Further, just prior to 2022, 254 combined persons and entities were listed in Council Regulation (EU) 269/2014, the EU’s financial sanctions regulation against Russia. The EU currently has listed 2,718 combined persons and entities.
In response, Russia has become keenly adept at countering evolving EU sanctions. Seminally, Russian ingenuity in crafting means by which to covertly procure EU items critical for the war effort has become a central concern in the EU. Such activity is called “circumvention” in sanctions law parlance. . Such activity involves deceiving sometimes unwitting EU businesses into selling and exporting items to third countries that, in fact, are then re-routed to Russia. In addition, sanctions avoidance in support of the Russian war effort has also become prominent. This involves direct cooperation between Russia and other states as a substitute for obtaining resources lost by EU prohibitions.
The Council’s response has been to expand listing authorities in its financial sanctions regulation on Russia. The Council can now sanction a range of non-Russian targets who either provide material support to Russian sanctions targets or engage in a wide range circumvention and avoidance activities to aid the Russian war effort.
While the Council’s messaging of its embrace of prototypical secondary designations has been subtle, its change of course signals a monumental shift in EU sanctions policy. Thus, in a piece last year, and upon a detailed assessment of the new listing criteria and related listing practice of the Council in its Russia sanctions, two co-authors and I proposed that EU policymakers embrace such a tool and introduced a new taxonomy for such listings. In particular, we considered the evolution of the EU’s practice in the context of terminology used by the EU and proposed that EU secondary sanctions be called “ancillary listings”.
However, even with the EU’s now ostensible repudiation of its objection to the extraterritoriality of sanctions, the EU has retained a key sanctions law promulgated in opposition to U.S. secondary sanctions: Council Regulation (EU) 2271/96 (the “Blocking Regulation”). The Council issued the Blocking Regulation on 23 November 1996 to “provide[] protection against and counteract[] the effects of the extra-territorial application of” U.S. secondary sanctions. In particular, the Blocking Regulation was originally intended to forestall the consequences of U.S. prescriptive jurisdiction against European Union companies for causing violations of U.S. sanctions against Cuba.
Further, on 7 August 2018, the Council expanded the Blocking Regulation to add U.S. sanctions against Iran reimposed upon the U.S.’s withdrawal from the Joint Comprehensive Plan of Action (JCOPA). For the first time, the Blocking Regulation and underlying EU policy expressly signaled overt EU objection to the threat that EU companies could be targeted by the then-novel threat of secondary designations in U.S. sanctions. In particular, new authorities in U.S. sanctions on Iran allowed for the designation of non-Iranian entities for both providing material support to and bank facilitation of significant transactions involving U.S.-designated Iranian targets. While the EU feared the practical consequences of its businesses losing access to the U.S. financial systems if sanctioned pursuant to secondary designation authorities, the basis of its legal objection was rooted in the international law principle of sovereign equality and non-intervention. Practically, EU policymakers have framed their objection to U.S. secondary designation risk as a form of implied punishment on the basis that losing access to U.S. markets has a punitive effect.
The Blocking Regulation – although largely relegated to political rhetoric – remains law, and EU policymakers maintain the broad position that EU sanctions are not extraterritorial. This stands in stark contrast with the EU’s embrace of ancillary listings in its Russia sanctions.
Furthermore, aside from U.S. secondary sanctions, EU policymakers also have long objected to the burgeoning exercise of expansive extraterritorial U.S. enforcement jurisdiction that they also have incorrectly also coined as “secondary sanctions”. Such practice risks EU companies being either administratively or criminally punished in the U.S. for causing U.S. companies to violate sanctions. This risk arises mostly when EU companies transact in U.S. dollars via the U.S. correspondent banking system with U.S. sanctioned targets. As discussed at length in the above-referenced EU Law Live piece, secondary sanctions have long been construed by sanctions academics and punditry to include both secondary designations and expansive extraterritorial enforcement of U.S. sanctions violations against those not directly subject to U.S. jurisdiction. This is incorrect: secondary sanctions are, as described by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) in numerous frequently asked questions (FAQs) as limited to secondary designations.
The sanctions listing of non-primary targets who aid primary targets in sanctions circumvention and avoidance is a powerful tool. This has been clearly evidenced as ancillary listings have become a central element of EU sanctions against Russia. Further to this, the broad policy objection to such practice that serves as the foundation of the Blocking Regulation has dissipated; thus, the Blocking Regulation no longer has substantive merit and should be abandoned. Moreover, EU sanctions will continue to evolve and ostensibly include ancillary listings to address future, heretofore unknown foreign policy challenges. To build upon its largely reactive successes in ancillary listings practice on Russia sanctions, the EU should construct a coherent strategy for future listings by embracing a formal taxonomy and policy framework around ancillary listings.
*Jeff Nielsen is a sanctions and export controls lawyer with over 25 years’ experience practicing both United States and European Union sanctions and export controls on both sides of the Atlantic and both at law firms and in house. He also writes extensively on sanctions and export controls, including in published law review articles and in a weekly sanctions and export controls brief published on Medium and LinkedIn. Mr. Nielsen’s legal academic research on sanctions and export controls focuses on jurisdictional paradigms unique to the field, developments in EU sanctions law and – more broadly – on the role of private enterprise as both an instrument and object of sanctions lawmaking.
