knowledge 28 January 2021 |

New Sanctions Measures Planned to Strengthen EU’s Economic and Financial System

Overview

The Commission’s new strategy is set out in a Communication, “The European economic and financial system: fostering openness, strength and resilience”, which was published on 19 January, together with a number of other documents, including a Q&A (here). The Communication sets out how the EU can reinforce its open strategic autonomy in the macro-economic and financial fields through 15 key actions. Insofar as sanctions are concerned the Communication addresses both the design, implementation and enforcement of EU sanctions as well as protecting against the unlawful extraterritorial application of third country sanctions, in key actions 7 and 9 – 15.

Design, Implementation and Enforcement of EU Sanctions

Regarding the design and implementation of sanctions, the Commission’s proposed measures include increased monitoring of the effectiveness of sanctions regulations, and improving information exchange between Member States and the Commission through the development of a Sanctions Information Exchange Repository. The Commission is also proposing to:

• improve co-ordination on certain cross-border sanctions-related matters so that Member States are informed of parallel requests for sanctions authorisations made in other Member States, and of any decisions made; and
• review practices that circumvent and undermine sanctions, including the use of cryptocurrencies and stablecoins - the results of this review will inform possible legislative proposals or implementation guidelines from 2022.

Measures regarding sanctions enforcement include setting up a dedicated system to allow for anonymous reporting of sanctions evasion, including whistleblowing. Moreover, in 2021, the Commission will work with Member States to establish a single contact point for enforcement and implementation issues which have cross-border dimensions.

Third Country Sanctions

In relation to third country sanctions, the Commission’s key actions include improving the EU’s Blocking Statute, taking specific measures to protect financial market infrastructures from third country sanctions and identifying further measures to combat extra-territoriality.

The Blocking Statute

The Blocking Statute seeks to protect EU operators from the extra-territorial application of third countries’ measures. Its most important provisions include Articles 4, 5, and 6, and the Commission is proposing a number of measures which will impact on each of these Articles as follows:

• strengthened national measures to block the recognition of foreign decisions and judgments under Article 4;
• more streamlined processing for authorisation requests under Article 5(2), including a review of the information requested;
• clearer procedures and rules for applying Article 6, which allows an EU person to recover in court damages caused by extra-territorial sanctions  (in particular, to facilitate the recovery of a defendant's assets across the EU);

The Commission is also proposing possible involvement in foreign proceedings to support EU companies and individuals.

Financial Market Infrastructures

Financial market infrastructures, such as payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories play a strategic role in the financial system.  The Commission is proposing to develop measures to shield EU operators in the event a third country compels EU-based financial-market infrastructures to comply with its unilaterally adopted sanctions, or through other means that interfere with legitimate EU operations. This will include testing and developing the business models of financial market infrastructures and then developing tools to counteract the effects on EU operators of the extraterritorial application of third country sanctions.

Foreign Direct Investment

Regulation (EU) 2019/452, which became fully operational in October 2020, establishes a framework for the screening by Member States of foreign direct investments into the EU on the grounds of security or public order and a mechanism for cooperation between Member States, and between Member States and the Commission, with regard to foreign direct investments likely to affect security or public order.

According to the Communication, when assessing the impact of foreign direct investments into the EU on security and public order, the Commission will also consider the likelihood that the transaction results in the unlawful extra-territorial application of sanctions adopted by any third country to the EU target. For example, when reviewing the acquisition of control over EU companies by a third country investor, the Commission may need to assess, in cooperation with the Member States’ national authorities, whether this would render the EU target company more prone to abide by such extra-territorial sanctions, regardless of the country that imposed them.

Further Measures

More broadly, the Commission will launch a general reflection on policy options to modernise the EU’s toolkit to counter the effects of the unlawful extra-territorial application of third country unilateral sanctions to EU individuals and entities.

This includes setting up an expert group of representatives of Member States on sanctions and extra-territoriality. The group’s mandate will cover issues related to the technical implementation of EU sanctions and of the Blocking Statute.  In addition, the group will serve as a forum to carry out further work on the EU’s resilience to the effects of the unlawful application of extra-territorial unilateral sanctions adopted by third countries.

Comment

The focus on sanctions as a key element in the Commission’s strategy to promote the openness and resilience of the EU’s economic and financial system is surprising and suggests that the Commission may intend to adopt a much more active role in EU sanctions than before.

It appears clear that the EU intends to build on the Blocking Statute to counter the extra-territorial application of third country sanctions to EU entities. How this will play out remains to be seen. However, measures to expand on the Blocking Statute may not be widely welcomed by EU firms, who may see it as potentially increasing their exposure to competing risks under conflicting sanctions regimes.