The effects of Russia's invasion of Ukraine on the architecture and implementation of UK and EU sanctions have continued to be felt in 2023, along with an increased focus on closing loopholes in existing sanctions legislation and cracking down on those that circumvent, or facilitate the circumvention, of sanctions. While aligned on these goals, the path to implementation and enforcement in the UK and EU has varied, a trend we expect to continue.
Businesses operating across the UK and the EU in 2023 saw increased evidence of divergence in the formulation and implementation of otherwise closely coordinated sanctions measures. For example, Russia services sanctions vary both in the conduct that they seek to restrict and the exceptions that they offer (or not, in the case of the UK) to support intragroup shared service provision. These developments continue to create additional compliance complexity for international businesses, despite sustained efforts by the UK and EU to align their approaches to the extent possible given variances in their post-Brexit sanctions architecture.
These differences are nowhere more apparent than in the divergence seen in recent months over the interpretation of the "ownership and control" test for the purpose of asset freeze sanctions. The control test has always led to significant uncertainty in both the EU and the UK as to when a person is to be considered subject to asset freeze sanctions, but a series of English court judgments and clarificatory guidance from sanctions agencies has made this fundamental matter even less clear.
Sustained focus on ensuring sanctions effectiveness and curbing circumvention throughout 2023 raises the prospect of increased enforcement action in 2024. In the first half of 2023, over 100 British companies reportedly made voluntary disclosures of Russia sanctions breaches to the Office of Financial Sanctions Implementation (OFSI). The UK also has announced the formation of a new trade sanctions civil enforcement body (scheduled to go live in early 2024) that will, in the near term, focus its efforts on the investigation and enforcement of Russia sanctions evasion, underscoring the UK's commitment to robust enforcement as a cornerstone of an effective sanctions policy. In the EU, the eleventh sanctions package introduced a new anti-circumvention tool, allowing the EU to restrict trade with all companies and persons located in third countries found to facilitate Russia's access to sanctioned goods and technology. The increasing focus on enforcement has led, amongst other things, to a political agreement between the European Parliament and the Council at the end of 2023 on the Commission's proposal to harmonize criminal offences and penalties in EU Member States.
There is little evidence to suggest that the ongoing transformation of UK and EU sanctions will recede in 2024. The Iranian government's supply of drones to Russia, and involvement in backing hostile activity by armed groups, appears likely to result in additional designations and sanctions such as those introduced by the new UK Iran sanctions regime. As the stance of the UK and EU continues to harden toward China, one or both may follow the lead of the US in imposing sanctions.
For further updates on sanctions visit our International Compliance Blog and dedicated Russia Sanctions Developments webpage.
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