What are international sanctions?

Political conflicts and war situations can lead to the imposition of international sanctions (also called restrictive measures). The imposition of international sanctions is an attempt to prevent conflict, respond to an impending or existing crisis, or influence the behavior of countries or individuals and companies. In the European Union, sanctions are imposed through regulations prepared by the Commission. Restrictive measures are an important tool of the EU’s Common Foreign and Security Policy (CFSP). The EU can adopt sanctions autonomously, but restrictive measures are often also the result of United Nations resolutions (UN resolutions).

What is the purpose of imposing sanctions?

Contrary to what the name “sanctions” suggests, international sanctions are not intended to punish. The imposition of restrictive measures is intended to promote international peace and security, prevent conflict, support democracy and the rule of law, and protect human rights and the principles of international law. Sanctions are therefore not punitive in themselves. Of course, this does not mean that restrictive measures are not perceived as punitive. And of course, it should not be forgotten that it is a criminal offense to act contrary to the obligations resulting from the sanction measures. EU sanctions measures oblige Member States to include in their national legislation sanctions (penalty clauses) which apply to breaches of the provisions of the measures. These penal provisions must be “effective, proportionate and dissuasive”.

It is inherent in international sanctions that they have an impact in third countries. After all, they are part of the EU’s common foreign and security policy. The sanctions are directed against third countries or against persons or entities in these countries. However, EU sanctions law only applies where the EU has jurisdiction. It applies within the territory of the EU, on board any aircraft or vessel under the jurisdiction of a Member State, to all nationals of Member States and to any legal person, entity or body, inside or outside the EU, which is incorporated or incorporated under the law of a Member State, and to business transactions carried out wholly or partly within the EU.

The supervision and enforcement of EU sanction measures is the responsibility of the competent authorities of the Member States. They therefore investigate cases of possible non-compliance.

Different types of penalties

Sanctions can be directed against the government of third countries, but also against natural or legal persons, entities, bodies, groups and institutions. Sanctions legislation is “tailor-made”. Sanctions must of course be effective and proportionate to the objectives pursued by the measures. They are aimed at those responsible for policies or behavior that the EU seeks to influence through sanctions, while minimizing collateral damage for others. Although the purpose and nature of sanctions can vary widely, sanctions can be divided into:

• Arms embargoes
• Visa and travel restrictions
• Financial sanctions (freeze of assets)
• Economic sanctions (e.g. import or export restrictions and sanctions against certain sectors)

Financial penalties

When financial sanctions are imposed, the funds and economic resources of the sanctioned persons are frozen and EU persons and companies are prohibited from providing or offering financial services. The prohibition to make funds or economic resources available, directly or indirectly, to sanctioned persons or to any natural or legal persons, entities or bodies linked to them is equivalent to a de facto total ban on doing business with these people.

In practice, it can be difficult to know whether a sanctioned person is involved in a transaction. After all, sanctioned individuals often no longer wish to do business in public after being blacklisted, but may attempt to put in place constructs and structures to be able to continue doing business behind the scenes. This therefore obliges companies to carry out prudent actions Know your customer surveys to find out who really pulls the strings of the company they intend to do business with.

Economic sanctions

Economic sanctions involve a wide range of measures that generally amount to restricting trade in certain goods and related services. The imposition of economic sanctions generally aims to specifically target certain sectors of a sanctioned third country. For example, a ban on the sale, supply and export of products that can be used in the oil sector or other raw materials, but also on the supply of services and the sharing of knowledge and expertise. The import of products originating from sanctioned third countries into the EU may also be restricted.

Acute effects of a political instrument

Sanctions are increasingly used as an instrument in political conflict. And this does not facilitate the determination of the exact scope of the sanctions, to whom they will apply and especially when. In practice, the imposition of sanctions often has a direct impact on business activities in or with the countries against which the sanctions are directed.

Export controls

In addition to sanctions legislation, companies must also consider export controls. Export controls are used to monitor, among other things, the export of strategic goods and services. These are goods, including technology and software, to which, due to international agreements or for security reasons, such strategic importance is attached that export is not permitted, or only under strict conditions.

Strategic goods are military goods or so-called “dual-use goods”. Dual-use goods are goods that can have both military and civilian application. In September 2021, Regulation (EU) No 2021/821 establishing a Union regime for the control of exports, brokering, technical assistance and transfer of dual-use items entered into force. In the Netherlands, the Central Import and Export Office (CDIU) oversees the control of strategic export goods and services. In many cases, prior export authorization is required or notification must be made.

Export controls and sanctions are not the same, but export controlled items may also be subject to sanctions. An example of this is the ban on the sale, supply, transfer or export of dual-use goods and technology to a (legal) person in Russia or for use in Russia, as listed in Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine. In case of overlap, international sanctions prevail.

Export controls and sanctions can present companies with complex and acute problems. Especially if export controls and sanctions apply.

Sanctions issues are legally complex and cut across multiple areas of law

International sanctions and export controls are legally complex and touch on different and diverse areas of law. Think, for example, of customs legislation. When exporting goods from the EU, sanctions and export control legislation must be taken into account. The CDIU evaluates license applications; the POSS team (Legislation Precursors, Origin, Strategic Goods and Sanctions) ensures compliance with the rules for the export of strategic goods and conducts investigations.

The Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM) oversee the financial sector in the Netherlands. They monitor whether banks and other financial institutions apply sanctions correctly and check whether the people and companies they do business with are on sanctions lists.

Sanctions legislation and export controls also have an impact on contractual relations between civil parties. For example, what happens if a sanction no longer allows the conclusion or execution of a contract? Does this result in breach of contract or liability? Businesses would be advised to consider the possible implications of restrictive measures in their contracts and terms. This also applies to companies in the logistics sector.

And then, of course, there is criminal law. Violation of sanctions or export control legislation is a criminal offense and may result in prosecution and conviction. It can also lead to considerable reputational damage. Sanctions are enforced in the Netherlands through the Sanctions Act 1977 and the Economic Crimes Act.

Issues surrounding sanctions and export controls may be relevant, for example:

• Financing a joint venture or business projects
• Contracts with suppliers and customers
• Mergers and Acquisitions
• Anti-bribery and anti-corruption policies and compliance programs in general