European Sanctions: Mandatory Contract Clauses, New Criminal Penalties

Background

Following Russia’s occupation of Crimea in 2014 and invasion of Ukraine in 2022, global allies including the UK, US and EU, Canada and Australia, acted in concert to impose stringent sanctions and export control restrictions designed to stem the flow of investment into the Russian war machine. These included wide restrictions on the goods and their components found on the battlefield in Ukraine, and is reflected in the G7 agreed list of Common High Priority Items.

The two years since have seen the growth of a shadow “evasion” economy, used by supporters of the Russian state to circumvent restrictions on investment in, and the continued manufacture of weapons. Two recent reforms within EU Member States point towards the global response to these attempts to undermine sanctions controls.

On April 12 2024, the Council of the European Union approved measures mandating Member States to create criminal offences for the punishment of sanctions violations and circumvention. Previously enforcement was a matter for member states independently: certain actions will now be punishable with between 1-5 years’ imprisonment in all EU member states. The UK operates a unilateral sanctions and export control regime, under which it has been a criminal offence since 2018 to breach sanctions or export control regulations, punishable by up to 7 years’ imprisonment.

A further significant reform was introduced by the EU on 20 March 2024, which obliges EU businesses to include a specific “no re-export to Russia” clause in EU commercial contracts, prohibiting, on pain of breach of contract and punitive damages, the re-export to Russia of goods subject to the contract (Article 12g of Regulation (EU) No 833/2014). This seeks to enforce, in unequivocal terms, the restriction on goods in the G7 agreed list of Common High Priority Items and their components found on the battlefield in Ukraine.

The “No Re-export to Russia” Clause

EU guidance published in February 2024 provides a template clause, but parties are free to decide on wording appropriate to the contract in question, provided that it meets the requirements of Article 21g.

The "no re-export to Russia" clause must be included in all EU contracts relating to sales, supplies, transfers, or exports to third countries. It applies to high-risk goods, including those used in the aviation sector, firearms, and other Common High Priority items listed in the annexes to the Regulation, as well as goods which could be put to an alternative, prohibited use.¹

The obligation does not extend to goods bound for designated "partner" nations, including the US, the UK, Japan, South Korea, Australia, Canada, New Zealand, Norway, and Switzerland, which are deemed to have implemented export restrictions akin to those of the EU, mitigating the risk of illicit re-export to Russia.

Consequences of Breach

Non-EU operators found in breach of this clause face contractual remedies such as termination or penalties, and EU exporters are obliged promptly to report any breaches to their national authorities. An EU operator who fails to include the mandatory clause when required could face criminal prosecution and imprisonment. In addition, any distribution of listed goods that ends up in Russia indirectly (i.e. through third country distributors) may be considered as circumvention of EU sanctions, which could also lead to criminal or administrative sanctions under EU law. The same conduct could, depending on the location of participants and funds, amount to the circumvention of UK and US sanctions.

What does this Mean for the UK?

Whilst the UK has not opted to impose a specific “no-re export to Russia” clause in UK contracts, the UK government’s “end-use” controls operate to similar effect, imposing significant restrictions on the export of goods within high-risk categories. The breach of any of the export or sanctions provisions under UK law has, since 2018, been liable to criminal prosecution, punishable by up to 7 years’ imprisonment. Taken together with wider global regulatory risk, UK businesses are strongly advised to conduct due diligence to mitigate against the risk of the onward export to Russia of controlled goods, and to ensure that contractual terms prohibit onward exporting to Russia in the clearest possible terms.

¹ Annex XI (aviation and space items);

 Annex XX (jet fuel and fuel additives);

Annex XXXV and Annex I to Regulation (EU) No 258/2012 (firearms and ammunition); and

Annex XL (‘Common High Priority’ items). This is a subset of items already prohibited for export to Russia but which have been identified by the G7 as posing the highest risks of re-export from third countries for use by the Russian military.