(Maritime) economic sanctions – On the way to calmer waters?!

This is the second insight of our economic sanctions series on the review and overview of Russia sanctions and their addressees.

Economic sanctions have been on everyone’s radar since Russia’s attack on Ukraine in February 2022. Three years into the war, the legal landscape has gained an almost entirely new practice area and learned that sanctions have an impact across almost all areas of law. The focus remains on the EU restrictive measures against Russia which also exist against other states, such as Iran. 

The EU Directive 2024/1226 on the definition of criminal offences and penalties for violation of Union restrictive measures (hereinafter referred to as the “Directive”), which is the focus here, obliges the EU member states to take measures by 25 May 2025 to standardize the legal consequences of breaches of restrictive measures on the one hand and to tighten them on the other. The EU is thus sending a clear signal to market participants: Make sure you are compliant!

In this article, we would like to reiterate what the restrictive measures essentially entail and who has to comply with them.[1]

Key regulations

Scope of application

The restrictive measures apply in principle within the territory of the Union, on board aircrafts and vessels under the jurisdiction of an EU Member State, to persons who are nationals of an EU Member State and to legal persons, entities and bodies incorporated or constituted under the law of an EU Member State, inside and outside the territory of the EU, and to legal persons, entities and bodies in respect of transactions in whole or in part within the EU.

Financial sanctions under Regulation (EU) 269/2014

Financial sanctions apply to natural and legal persons, entities and bodies that are included (“listed”) in Annex I of Regulation (EU) 269/2014 (“designated POEs”). Being a designated POE has primarily two legal consequences. On the one hand, they lose the privilege to dispose over their funds and economic resources which are located in the EU (Art. 2 para. 1 Regulation (EU) 269/2014). These are “frozen”. On the other hand, no funds or economic resources shall be made available to them (Art. 2 para. 1 Regulation (EU) 269/2014).

This “prohibition on making funds available” renders almost any transaction with designated POE illegal. No goods can legally be delivered or payments made to and no contracts be legally concluded with a designated POE.

The prohibition extends to making funds and economic recourse indirectly available to designated POEs. That means it is illegal to make funds and economic resources available even to non-designated POEs if those are likely to forward them to designated POEs. As a rule of thumb, this is assumed, inter alia, if they are not based within the EU and majority-owned or controlled by a designated POE. The details are rather complex.

Market participants must ensure to document that they follow a strict compliance procedure to anticipate potential sanctions breaches. As per Article 10 para. 2 Regulation (EU) 269/2014 actions by natural or legal persons, entities or bodies shall not give rise to liability of any kind on their part, if they did not know, and had no reasonable cause to suspect, that their actions would infringe the measures set out in this Regulation (cf.: below).

Sector-specific sanctions

Sector-specific sanctions aim to limit the movement of goods and the provision of services in specific sectors / trades. The initial focus on “dual-use goods and technologies” was gradually abandoned. The prohibitions contained particularly in Regulation EU 833/2014 cover a large variety of goods and focus, inter alia, on transport / shipping and related insurance services.

The transportation of sanctioned goods is largely prohibited. Market participants from the shipping industry are particularly affected. This is because transport bans target buyers and sellers of illicit goods and almost every other actor along the supply chain including, most importantly, charterers and shipowners.

Whilst shipowners must ensure that “their ship” is not involved in illicit transports, charterers and shippers must ensure that shipowners / ships are not listed as designated POE.

Often, sector specific sanctions extend to the provision of “financial assistance” related to an illicit activity. This has a large impact on the insurance industry because all types of insurance and reinsurance are considered as financial assistance. In addition to cargo insurance, this includes maritime liability insurance as offered by P&I Clubs; maritime legal protection insurance in the form of Freight, Demurrage & Defense insurance (FD&D) and even hull insurance. Related brokering services may also be covered.

If illicit activities are not excluded from the provision of insurance cover (e.g. by appropriately drafted sanctions clauses), there may be a risk of a punishable breach of the sanction’s regime.

Bans on circumvention

Any action is prohibited if it is evident that they have the direct or indirect purpose or effect of circumventing sanctions provisions. This includes circumvention strategies such as the use of straw men, third countries or front companies to circumvent the sanctions. They are explicitly prohibited.

Everyone’s duty

Everyone is obliged to provide the competent authorities with information that facilitates the implementation of the sanctions regulations, in particular information on potential sanctions violations. There are no exceptions of this duty other than the one for privileged communication between lawyers and their clients.

Standard of liability

Market participants are responsible for ensuring that they do not act in contravention of the sanctions regime. Their actions shall not give rise to liability of any kind on their part, (only) if they did not know, and had no reasonable cause to suspect, that their actions would infringe the restrictive measures. The European Commission states in its FAQ (on page 386) that the

"[...] responsibility for a sanction breach does not depend on its value or gravity, therefore minor breaches or breaches where the risk of infringement was low (and therefore no or limited due diligence was carried out) do not exclude or limit the liability, unless the absence of reasonable cause of suspicion can be shown."

To minimize the liability risk market participants are specifically required to:

• carry out sanctions compliance practices, such as contractually agreeing that the counterpart will not breach sanctions in relation to the economic resources provided or requesting a declaration that the counterpart is not listed or subject to sanctions whatsoever.
• not rely on the declaration of the counterpart but to carry out (and document) its own verifications.

The sanctions have a deep impact on international supply chains and require precise compliance work from market participants, especially in the maritime industry.

[1] The analysis is based on what are generally referred to as the EU’s “Russia sanctions” in Regulations (EU) 269/2014 and (EU) 833/2014