New EU Commission FAQs on the "Best Efforts" Obligation in Art. 8a of Regulation 833/2014 - Much Ado About Nothing (?)

On 22 November 2024, the EU Commission finally published its long-awaited guidance on the interpretation of the so-called "best efforts" obligation in Art. 8a of Regulation 833/2014. While the guidance contains some helpful information for EU operators, it generally reiterates the already known and established standards of sanctions compliance without clearly addressing the crucial issue of the scope of extraterritorial effects of EU sanctions.

I. Background

Art. 8a of Regulation 833/2014 requires EU Operators to use their "best efforts" to ensure that their non-EU subsidiaries do not engage in activities that "undermine" EU sanctions.

Originally conceived as a provision imposing strict liability on EU Operators for sanctions violations committed by their non-EU subsidiaries, the provision was reduced - largely due to German opposition in the legislative process - to liability for failure to use best efforts to ensure compliance by non-EU subsidiaries.

EU companies tasked with implementing measures to ensure full compliance with the newly introduced Art. 8a have faced some difficulties in determining the nature and scope of appropriate measures. Questions arose regarding the notions of "undermining" and "best efforts", particularly in cases where the level of control over non-EU subsidiaries was limited or where compliance with EU sanctions was restricted by national law. With respect to the material scope, EU companies questioned whether their non-EU subsidiaries had to comply with EU sanctions in all cases or only where the territorial scope of Regulation 833/2014 applied. The only guidance they had so far were recitals 29-30 of Council Regulation (EU) 2024/1745 of 24 June 2024, which introduced Article 8a.

II. The EU Commission's FAQs

1. Territorial scope of EU sanctions: What non-EU subsidiaries can and cannot do

The EU Commission clearly states in the new FAQs that EU sanctions do not impose obligations on non-EU subsidiaries. Translated into terms of international law, this would mean that the EU does not exercise extraterritorial jurisdiction to prescribe. While this seems to be the case, Art. 8a and the Commission's FAQs seem to paint a more nuanced picture:

EU operators must take measures to prevent non-EU subsidiaries from "undermining" EU sanctions. According to the EU Commission “undermining” is different from "circumventing" because it does not imply covering activities in respect of which it appears, on the basis of objective factors, that, under cover of a formal appearance they enable the operator to avoid the constituent elements of a sanctions provision, but rather measures that counteract the "effect" that EU sanctions are intended to prevent. While this distinction appears to be limited to terminology, it is in fact quite substantial: Non-EU subsidiaries are not bound by EU sanctions and therefore cannot "circumvent" sanctions. At the same time, non-EU subsidiaries can disrupt the impact of EU sanctions by engaging in business activities that ultimately exploit the restrictions imposed by EU sanctions.

However, the FAQs did not explicitly clarify the thorny issue of whether third-country subsidiaries would no longer be allowed to sell, supply, export or purchase restricted goods to or from Russia under Regulation (EU) No 833/2014 in the case of transactions with no EU nexus, i. e. whether they would be treated in the same way as EU companies within the Union. It states that "EU sanctions do not impose any obligations on such an entity in Russia or any other third country", and gives examples of EU operators' obligations to use their best endeavors to avoid undermining sanctions where there is a nexus to the EU (e. g. the goods in question are produced on the basis of, for example, intellectual property rights or trade secrets transferred by the EU operator to the non-EU entity). However, this does not clarify which rules apply when there is no EU nexus other than the company's governance structure. Here, it would have been desirable to clarify that EU companies are (only) obliged to ensure that their controlled non-EU subsidiaries do not engage in activities that fall under Regulation 833/2014 because of their connection to the EU.

2. Best Efforts: What EU Companies need to do

The EU Commission's guidance on the interpretation of the "best efforts" obligation is unsurprising, and fully in line with established compliance standards. It is therefore not surprising that EU companies must take actions that are "appropriate and necessary to achieve the result of preventing the undermining of the restrictive measures in Regulation (EU) No 833/2014". These measures may include, for example, the implementation of appropriate policies, controls and procedures to mitigate and manage risks effectively.

In practice, the EU Commission's guidance on the required level of control is more helpful:

• EU companies may be able to justify a lower level of control, for example, where the local laws of non-EU subsidiaries either prevent the exercise of such control or - de facto - prohibit compliance with EU sanctions, e. g. through local antitrust regulation.
• Conversely, this mitigation of liability does not apply if control over the non-EU entity is lost for reasons that the EU operator caused itself. In this respect, operators should be aware that Russia is a country where the rule of law is virtually not applied anymore, and that the Russian state has adopted several pieces of legislation unjustly targeting assets of companies from ‘unfriendly countries’, including EU Member States. In such circumstances, inadequate risk assessment and management, coupled with risk-prone decisions of the EU operator, can be considered as a factor that contributed to the loss of control.
• EU companies operating in highly regulated sectors are usually equipped with a variety of compliance tools, which they are expected to apply to their non-EU subsidiaries.
• EU companies could require their non-EU subsidiaries to publicly declare their intention not to engage in activities that risk undermining EU sanctions. This will, however, not be possible in countries whose laws prohibit the compliance with EU sanctions.

In addition, the EU Commission will work with Member States on a further publication setting out a clear set of expectations for EU operators on the required compliance measures.

III. Practical Implications for EU Companies

In the light of the newly published FAQs, EU companies should expect an increased awareness on the part of the competent national authorities regarding the implementation of the Art. 8a "best efforts" obligation. As enforcement authorities increasingly tend to rely on the EU Commission's interpretation of EU sanctions - a worrying trend from a constitutional point of view - enforcement activities are now more likely. As a result, EU companies with non-EU subsidiaries should, inter alia:

• review their existing compliance measures;
• identify and define restrictions imposed by EU sanctions that may be relevant to their non-EU subsidiaries, e. g. restrictions on importing certain products into the EU. Until the EU Commission clarifies the scope of Art. 8a, EU companies should assume that their best efforts obligation applies to all EU sanctions restrictions;
• implement sanctions policies, either at group level or for relevant subsidiaries that specifically address the obligations under Art. 8a;
• provide training on EU sanctions to non-EU subsidiaries and regularly update them on EU sanctions developments;
• review and, where necessary, restrict non-EU subsidiaries' access to intellectual property or trade secrets that could be used to counter the effects of EU sanctions.

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