Questions Surround EU's New Russia-Related Due Diligence Rules, Lawyers Say

One new requirement, included in the EU’s 14th sanctions package published in June, calls on EU parent companies to take “best efforts” to make sure their third-country subsidiaries aren’t participating in activities that enable sanctions evasion (see 2406240024). Companies have so far found that language to be ambiguous, said Michael Ruck, a lawyer with K&L Gates.

Companies are asking, for example, whether the EU will interpret a subsidiary’s sanctions violation as a signal that their EU parent company failed to take those “best efforts," he said.

“I struggle to think that it should be interpreted that way,” Ruck said during a webinar this week hosted by the law firm and Lexology. But he also said he believes there’s a “risk that it will be.”

“That's causing, certainly from the questions we've had, a lot of clients a headache in terms of: what is this actually going to mean?” Ruck said. He added that companies may need to wait for “one or two enforcement cases” to get a “feel for what that ‘best efforts’ needs to look like.”

Petr Bartos, also a lawyer with K&L Gates, also said companies should gain a better understanding of the EU’s expectations after it issues an initial set of penalties.

“Authorities are reluctant to take the bit more ambiguous cases," he said, so he's expecting "they'll take the clear-cut cases where it was obvious that a subsidiary was breaching the EU sanctions, yet the parent company took no efforts in driving the EU compliance.” But Bartos also said he’s advising European companies to “really start ensuring” that their third-country subsidiaries are aware of EU sanctions obligations, and even those administered by the U.S. and the U.K.

Rosie Naylor, a K&L Gates lawyer based in London, said it’s “hard to say” whether the U.K. will adopt a similar “best efforts” requirement for U.K. parent companies and their third-country subsidiaries. “I think at the moment we're staying in a bit of a gray area in terms of prescriptive measures that may be put in place,” she said. “But I think it is helpful to have some clarity, particularly on these issues such as ownership and control, and sort of what's expected of entities that conduct business internationally.”

Ruck also said he’s seeing “quite a few questions” from clients about the EU’s new no-Russia and no-Belarus clauses, requirements that force exporters to insert language in their contracts that prohibits customers from reexporting certain sensitive goods to either country (see 2402270046, 2407010025 and 2407150041). The EU has published guidance on those clauses (see 2407150041), including examples of the language that companies should include in contracts, but Ruck said the example wording “was pretty extreme, I think by comparison, to what's actually kind of the requirement.”

“And so we've seemed to have a lot of questions around the idea of, to what extent do we need to monitor” the “reexport chain?” Ruck said. “And practically, how do we do that" to comply with the clauses?

Bartos said the new requirement could cause “significant issues” for companies renegotiating contracts that may not have previously had no-Russia or no-Belarus clauses.

“That you are not directly exporting to Russia or Belarus does not mean that you are out of scope of the Russia or Belarus sanctions regimes,” he said. “That's a very peculiar, very peculiar development.”