EU Secondary Sanctions

The EU sanctions regime consists of a vast number of regulations and decisions, outlining specific sanctions of various types and purposes. These sanctions can generally be divided into primary sanctions and secondary sanctions, with the former accounting for the majority of EU sanctions. While secondary U.S. sanctions have faced significant criticism, including from EU institutions, and have sparked an extensive legal debate, secondary sanctions are also a component of the EU sanctions regime.

Under certain circumstances, non-EU financial institutions and other firms risk becoming subject to secondary EU sanctions and subsequently being included on one of the EU sanctions lists. In case of a listing and depending on the specifics of each case, EU persons are prohibited from selling, supplying, transferring, or exporting specific goods to the sanctioned firm, engaging in business relationships with it, or providing it with funds or economic resources—these measures described as the "Wall Street equivalent of the death penalty" (Lohmann, SWP Comment, 5/2019).

Third-country firms are therefore advised to carefully assess their individual risk of being sanctioned by the EU. If there is a potential risk, they should implement robust risk mitigation measures—particularly at a time when the EU is continuously tightening its sanctions.

Difference between Primary and Secondary Sanctions

Primary sanctions are imposed on specific groups of persons, organisations, or entities (POEs), including government bodies, when the sanctioning state considers it necessary to protect its security or geopolitical interests. These POEs may be linked to a particular state (e.g., Russia under Regulation (EU) No 833/2014), a non-state organisation (e.g., Al-Qaida and the Taliban under Regulation (EC) No 881/2002), or other specific targets (e.g., cyber-attacks under Regulation (EU) 2019/796).

Secondary sanctions, on the other hand, do not target POEs that directly threaten the sanctioning state's security or geopolitical interests. Instead, they are intended to suport primary sanctions by penalising third-party POEs that significantly support or maintain close ties with POEs subject to primary sanctions. As a result, secondary sanctions may be imposed on POEs that are not located in the sanctioned state, are not part of the sanctioned non-state organisation, or do not pursue the sanctioned behaviour themselves.

Secondary sanctions, like primary sanctions, generally do not impose direct obligations on the sanctioned POE. This would not make sense, as the sanctioned POE is not subject to the sanctioning state's jurisdiction. However, persons that are under the sanctioning state's jurisdiction are subject to certain obligations. These obligations may include the prohibition to sell, supply, transfer, or export specific goods to the sanctioned POE, or even to have a business relationship with it, or to provide to the sanctioned POE funds or economic resources, or to freeze funds or economic resources within the sanctioning state's jurisdiction. As a result, the sanctioned POE is effectively excluded from the sanctioning state's market, in whole or in part, which may lead to significant financial losses.

Examples for EU Secondary Sanctions

The EU has so far taken a modest approach to imposing secondary sanctions. However, it has already implemented such sanctions or at least established the legal basis to impose them in the future. The following examples illustrate some EU secondary sanctions.

Trade Restrictions for Companies with Close Links to the Russian or Belarusian Defense and Security Sector

Asset Freezing and Provision Ban for Supporting the Circumventions of Sanctions Against Russia or Belarus

Transaction Bans for Using the Russian Payment System while Supporting the Circumventions of Sanctions Against Russia

Export Bans on Certain Goods to Specific Third Countries

Risk Mitigation Measures

International banks and financial institutions, as well as other companies not located in the EU, should carefully assess their individual risk of being affected by EU secondary sanctions, particularly if they maintain business relationships with states or companies sanctioned under the EU sanctions regime. This analysis should consider all business areas, goods produced, and services provided, as well as their potential impact under the various EU sanction regulations and decisions.

If a potential risk of being targeted by EU secondary sanctions is identified, the firm should implement specific risk mitigation measures. Depending on the firm's risk appetite, it could either fully mitigate the risk by refraining from certain business relationships or, if accepting a certain degree of risk is deemed reasonable, manage the risk through targeted measures. Such measures may include establishing a sanctions risk management function, incorporating special clauses in the firm's general terms and conditions (GTC) or individual contracts, a documentation of the risk management system and procedures, and more. The aim of these measures is also to be able to demonstrate to the authorities, if necessary, that any potential act against the EU sanctions regime was not intentional and that all reasonable steps have been taken to prevent it. However, the type and intensity of these measures depend on the firm's individual circumstances.

Kronsteyn Legal Services

Kronsteyn provides specialized advice on German and European financial markets law, including financial sanctions law. The German law firm assists with all matters related to financial sanctions, such as administrative or civil law proceedings and the provision of legal opinions. For any inquiries, please contact Attorney at Law Dr. Hendrik Müller-Lankow.