EU Targets Foreign Subsidiaries in New Sanctions Packages

On June 24 and 29, 2024, the EU adopted and published Council Regulation (EU) 2024/1745 and Council Regulation (EU) 2024/1865 (the "Amending Regulations"), imposing new sanctions relating to Russia and Belarus. The Amending Regulations include an obligation for EU operators to undertake their best efforts to ensure that non-EU companies they own or control do not participate in activities that undermine the relevant EU sanctions. This new measure establishes a new legal basis to hold EU parent companies liable for failure to take measures to prevent conduct of their foreign subsidiaries that is inconsistent with these EU sanctions.

According to the limited guidance provided by the recitals of the Amending Regulations, "best efforts" should be understood as all actions that are "suitable and necessary" to prevent foreign subsidiaries from undermining EU sanctions. The practical implications of this are somewhat unclear, but the recitals suggest that such actions may include adopting policies, controls, and procedures to effectively manage risks, taking into consideration the country in which the foreign subsidiary operates and the activities it undertakes. These actions should be feasible for the EU company in view of its nature, size, and certain factual circumstances, in particular the degree of control it has over the foreign subsidiary.

Additionally, under the new sanctions, as of December 26, 2024, EU companies involved in activities with listed "Common High Priority Items" in relation to Russia and Belarus are not only required to implement specific risk and compliance procedures for themselves, but also ensure that such procedures are adopted by their foreign subsidiaries involved in these activities. While this measure is narrower in scope than the "best efforts" obligation because it applies to specific limited activities, it further highlights the EU's increased interest in setting a culture of compliance with EU sanctions beyond its borders.

Although the EU maintains its current jurisdictional limits, it appears to be indirectly expanding its regulatory reach by requiring EU companies to use their ability to influence their non-EU subsidiaries. Overall, it underscores that the EU is taking a newly strengthened approach to closing the jurisdictional gaps between EU parent companies and their foreign subsidiaries. To this end, the new rules place the onus on the EU companies to assess their exposure to risk from the conduct of their foreign subsidiaries and take steps to ensure that such conduct does not undermine EU sanctions.