Recent developments in the European Union (EU) as well as political demands indicate that the criminal prosecution of sanctions violations in the EU will be further intensified and possibly even centralized:

  • On November 28, 2022, the Council of the European Union (“Council”) decided, to extend the list of EU criminal offenses to also include the violation of restrictive measures of the EU (“Sanctions”). Thereby, particularly violations of Sanctions with respect to Russia will, in the future, be criminal offenses within the meaning of EU law (Art. 83 para. 1 Treaty on the Functioning of the European Union – TFEU). With this, violations of Sanctions will thereby be conceptually equated on a level with terrorism, human trafficking and sexual exploitation of women and children, illicit drug trafficking, illegal arms trade, money laundering, corruption, counterfeiting of means of payment, computer crime, and organized crime.
  • On November 28, 2022, the German Federal Minister of Justice Dr. Marco Buschmann and his French counterpart Éric Dupond-Moretti demanded, that the responsibility of the European Public Prosecutor’s Office (“EPPO”) be extended to include the investigation of sanction violations in order to more effectively enforce the EU regulations on the sanctioning of Russia.
  • On November 29, 2022, the Ministers of Justice of the G7 countries (Canada, France, Germany, Italy, Japan, United Kingdom, and the United States) declared at a summit meeting with the Minister of Justice of the Ukraine, the EU Commissioner of Justice, and the chief prosecutor of the International Criminal Tribunal, as well as the Public Prosecutor of the Ukraine and the Chief Federal Prosecutor, that the international cooperation to investigate and prosecute war crimes in Ukraine should be intensified.
  • On December 2, 2022, the European Commission presented a proposal for a directive on the definition of criminal offenses and sanctions for violations of restrictive measures of the EU. The draft directive contains, among other things, regulations on penalties, the liability of legal entities, the competence of the individual member states, and procedural regulations, including the cooperation of national and European law enforcement agencies.
  • On January 23, 2023, the EU Commissioner of Justice, Didier Reynders, stated that the European Commission is currently assessing what role the European Public Prosecutor's Office could play in the investigation and prosecution of violations of EU sanctions.

In this Client Alert, we will cover:

  • How Sanctions against Russia are enforced in the EU;
  • Which powers the EPPO currently has;
  • What consequences an extension of the responsibilities of the EPPO could have; and
  • How companies should react to this.

Violations of Sanctions as EU criminal offenses – harmonization and intensification of the enforcement of EU Sanctions

Divergences and deficits in the enforcement of EU Sanctions by Member States

Since the beginning of Russia’s war of aggression against Ukraine in February 2022, the EU has adopted nine Sanctions packages with restrictive measures against Russia. These comprise Sanctions against individuals, companies, and organizations, as well as economic and trade sanctions that are particularly intended to thwart the technical and financial preconditions for the continuation of Russia’s military aggression. The enforcement of the EU sanctions, including the criminal prosecution of Sanctions violations, falls within the responsibility of the competent authorities of the Member States, who take action based on their national administrative and criminal laws.

So far, the requirements of EU sanctions regulations concerning their enforcement by the Member States have been rather general in nature. Regulation (EU) No. 269/2014 (and the other EU Sanctions regulations) in particular requires the following of the Member States:

  • As regards Sanctions violations, there must be “penalties, including as appropriate criminal penalties,” which must be effective, proportionate, and dissuasive. In addition, all necessary measures have to be taken to ensure that the Sanctions are implemented.
  • Mutual information, especially about frozen funds, authorizations granted, measures taken in connection with the Sanctions regulation, as well as about violations, enforcement problems, and judgments, and all to ensure that the regulation is effectively implemented.

The divergences in the actual implementation of the EU Sanctions against Russia are revealed through a look at the scope of the frozen assets: According to information from the EU Justice Commissioner Didier Reynders at the end of October 2022, essentially only seven EU Member States were responsible for the freezing of assets of Russian origin in the amount of about €17 billion (on December 16, 2022: about €18.9 billion).

With respect to the enforcement of Sanctions violations, the picture is similar: As depicted in more detail in a comparative study from December 2021, there are considerable differences in the enforcement and criminal prosecution of EU Sanctions violations between the Member States, also resulting from the lack of harmonization of applicable laws at the EU level.

Steps already taken to tighten the enforcement of EU Sanctions against Russia

The EU has already introduced various measures for implementation at the Member State level intended to ensure a more uniform and effective enforcement of its Sanctions against Russia.

This in particular applies to the reporting of frozen funds and assets of sanctioned individuals and companies. In so far, the EU Sanctions against Russia (unlike numerous other sanction regimes) now stipulate the following:

  • An explicit obligation of all EU citizens and companies (such as financial institutes) to inform Member State authorities and the European Commission about possible sanctions violations, especially with respect to frozen funds or assets (i.e., to the extent assets “have not been treated as frozen,” for example by transferring them to third persons).
  • Broader obligations of the competent authorities of the Member States to exchange information.
  • For sanctioned persons, a reporting obligation toward the competent national authorities on their frozen funds and economic resources situated in the EU.

The alignment also relates to the prosecution of Sanctions violations:

  • The violation of the newly created obligation of sanctioned persons to report their frozen assets is treated as a separate Sanctions violation (namely, a violation of the prohibition to circumvent Sanctions).
  • The enforcement-related provisions in Regulation (EU) No. 269/2014 have been expanded to include an obligation of the Member States to provide for appropriate measures of confiscation of the proceeds of Sanctions violations.

Here, a second driving force behind the changes besides striving toward maximum effectiveness of the EU Sanctions against Russia becomes apparent: The rebuilding of Ukraine should, after the end of the Russian war of aggression, also be financed from frozen assets of sanctioned Russian oligarchs and companies. In the case of violations of penalties, frozen assets can be seized and confiscated. Leading in the same direction is the Proposal for a Directive on asset recovery and confiscation of the European Commission, which, among other things, wants to simplify the deprivation of proceeds from violations against Sanctions.

Implementation in Germany: Sanctions Enforcement Acts I and II

The German Sanctions Enforcement Act I (Sanktionsdurchsetzungsgesetz I), effective since May 28, 2022, is designed to implement the requirements of EU Sanctions, in particular by granting the competent national authorities the necessary powers to deal with frozen funds and economic resources of sanctioned persons:

  • Sanctions Enforcement Act I in particular creates the legal bases for administrative measures to investigate assets (information requests, interrogations, seizure, search powers) and seize and safekeep assets and funds until their ownership has been clarified in the Foreign Trade and Payments Act (Außenwirtschaftsgesetz). This is intended to prevent inadmissible dispositions of frozen funds or assets of sanctioned persons. Further, the responsibility of the federal states’ authorities for carrying out these tasks is clarified.
  • Amendments to the German Money Laundering Act (Geldwäschegesetz) expand the access to the German Transparency Register as well as to account inquiries at the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) to include sanctions authorities. The changes also assign sanctions enforcement tasks to the Financial Intelligence Unit (Zentralstelle für Finanztransaktionsuntersuchungen – FIU). Moreover, the German Banking Act (Kreditwesengesetz), Securities Trading Act (Wertpapierhandelsgesetz), and Financial Services Supervision Act(Finanzdienstleistungsaufsichtsgesetz) have been expanded to include legal bases for the enforcement of EU sanctions. In particular, BaFin can prevent trading with financial instruments if required for the enforcement of trade restrictions adopted by the EU. Finally, the powers for data transmission between the involved authorities have been expanded.
  • A reporting obligation for sanctioned persons pertaining to their funds and economic resources toward the German Central Bank (Bundesbank) and the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle – BAFA) has been introduced in the German Foreign Trade and Payments Act. In case of violations, the law stipulates imprisonment of up to one year or a financial penalty; however, it also provides the possibility of remediation through voluntary self-disclosure.

The German Sanctions Enforcement Act II (Sanktionsdurchsetzungsgesetz II), in force since December 28, 2022, contains further measures to increase the effectiveness of EU Sanctions enforcement in Germany. In particular, a central authority for the enforcement of Sanctions (Zentralstelle für Sanktionsdurchsetzung – ZfS) has been established based on the new law as of January 2, 2023, as directorate XI of the Federal General Customs Directorate to ensure the enforcement of Sanctions without prejudice to the responsibilities of BAFA and Bundesbank as defined by the Foreign Trade and Payments Act, and to cooperate with foreign authorities. Furthermore, the new law provides for specific powers of the central authority for the investigation and seizure of assets of sanctioned individuals and companies, introduces procedural rules for reporting obligations of sanctioned persons, and creates a corresponding register for assets. The new law also establishes a contact point for information on Sanctions violations; provides for far-reaching monitoring powers of the central authority in the case of suspicion of Sanctions violations, including the appointing of a special representative for companies; and introduces numerous changes to ensure the transparency of ownership structures and transactions (such as transferring real estate data into the transparency register; a reporting obligation of foreign associations regarding existing real estate in Germany; a prohibition on cash payment for real estate transactions; making ownership and control structure overviews utilizable for authorities; and the obligation to provide a detailed explanation for reporting a deemed beneficial owner under German anti-money laundering law, amongst others).

Decision of the Council on designating Sanctions violations as an EU criminal offense, and next steps

In view of the differences of Sanctions enforcement between the Member States, the Council has expressed concerns that despite the steps already taken, Member States would not enforce Sanctions against Russia in a sufficiently effective manner. Against this backdrop, the Council decided on November 28, 2022, to add violations of Sanctions to the list of “areas of crime” defined in Art. 83 para. 1 Treaty on the Functioning of the European Union (TFEU). These “EU crimes” are meant to include areas of particularly serious crime with a cross‑border dimension resulting from the nature or impact of such offenses or from a special need to combat them on a common basis. This had been preceded by a corresponding Proposal of the European Commission dated May 25, 2022. The Council decision could be the basis for further measures to align and tighten the prosecution of Sanctions violations:

  • In particular, harmonized rules concerning the definition of criminal offenses and penalties for the violation of EU Sanctions at the Member State level can now be established by way of an EU directive. The European Commission already published a proposal for a Directive on the definition of criminal offenses and penalties for the violation of Union restrictive measures on December 2, 2022, which in particular provides for the precise definition of certain criminal offenses in the form of violations of Sanctions and administrative obligations (intentional or in case of gross negligence, and also including specific cases of circumvention of Sanctions, which Germany currently does not prosecute as criminal offenses). The draft Directive also contains provisions on penalties, the liability of legal persons, the jurisdiction of the Member States, and procedural rules, including the cooperation of national and European criminal prosecution authorities. The draft Directive must now be adopted by the Council and the European Parliament through the ordinary legislative procedure.
  • Moreover, the inclusion of Sanctions violations in the group of EU crimes opens up the possibility of transferring criminal prosecution of such crimes to the EPPO in the future under Art. 86 para. 4 AEUV. The Ministers of Justice of France and Germany, Éric Dupond-Moretti and Marco Buschmann, only recently called for this step in a joint publication: They stated that the extension of the competence of the EPPO to include Sanctions violations was necessary for EU’s restrictive measures to be fully effective, especially in the context of the Russian invasion of Ukraine. In addition to the consent of the European Parliament and consultation of the European Commission, this requires a unanimous European Council decision.

Areas of competence of the EPPO

In the very short time since the beginning of its operative work in June of 2021, the EPPO has shown itself to be an extremely powerful new investigating authority for cross-border cases of white-collar crime related to the EU. It can be expected that the EPPO, due to its institutional autonomy and its special expertise and legal competence, will be established Europe-wide as the leading investigating authority in the coming years. Companies that operate across borders in Europe should be familiar with the EPPO’s methods of working, in order to deal appropriately and anticipatorily with cases of suspicion that fall within the area of competence of the EPPO. Should the political demand for the competence of the EPPO for violations of Sanctions become reality, the EPPO would only increase in importance.

Jurisdiction of the EPPO

As the independent public prosecutor of the EU, the EPPO is the court with jurisdiction for cases involving criminal investigations, prosecution, and judicial proceedings in relation to criminal offenses affecting the financial interests of the EU (Art. 86 para. 1 TFEU).

The EPPO has the power to investigate on account of the following offenses:

  • Cross-border value added tax fraud with a total loss of at least €10,000,000;
  • Other forms of fraud detrimental to the financial interests of the EU;
  • Corruption through which the financial interests of the EU are harmed or could be harmed (e.g., bribery of EU officials);
  • The unlawful obtaining of funds or assets of the EU through a public official (e.g., subsidy fraud); and
  • Money laundering and organized crime, as well as other criminal offenses that are inextricably linked to one of the aforementioned categories.
  • Were wholly or partially committed in the territorial region of one or more participating EU Member States;
  • Were committed by a citizen of a participating EU Member State; or
  • Were committed by a person who was subject to the statute or the Conditions of Employment for the officials of the European Union.

Twenty-two countries of the 27 EU Member States belong to the EPPO zone. Hungary, Poland, Sweden, Denmark, and Ireland have not transferred competencies to EPPO so far.

For criminal offenses that do not fall within the investigate powers of the EPPO, the national prosecution authorities remain responsible.

In Germany, the EPPO can also conduct investigations against legal entities and associations of individuals due to a regulatory offense, to the extent the regulatory offense is inseparably connected with a criminal offense against the EU budget, or insofar as the EPPO, due to its jurisdiction, is already conducting a preliminary investigation against an executive of the company in question.

Besides the EPPO, there are other institutions at the EU level that are responsible for combatting crime and with whom the EPPO works in close collaboration.

  • OLAF: The European Anti-Fraud Office (OLAF) is responsible for investigations in administrative matters when there is suspicion of fraud and similar unlawful acts in connection with EU funds. Due to lack of its own prosecution powers, OLAF works closely together with the EPPO.
  • Eurojust: The European Union Agency for Criminal Justice Cooperation (Eurojust) links national judicial authorities of the EU Member States as well as non-member countries and coordinates the cross-border law enforcement to combat serious organized crime.
  • Europol: Europol coordinates police investigations throughout Europe and can, in special cases, also conduct investigations itself.
  • EJN: Additionally, the European Judicial Network (EJN) serves as a network of contact points for cross-border judicial cooperation.

Organization of the EPPO

The central EPPO authority with its headquarters in Luxemburg is led by the European Chief Public Prosecutor Laura Kövesi (Rumania). Together with one public prosecutor from each of the 22 participating Member States, she forms the College of the EPPO. This College is responsible for strategy and the internal rules of the authority.

At the national level, the Delegated European Public Prosecutors are active in the 22 participating Member States, as well as in the Permanent Chambers. There, the European public prosecutors have regular discussions and make investigative decisions. In every Member State there are at least two Delegated European Public Prosecutors who, under the supervision of the central authority in Luxemburg and independent of their national authorities, investigate, prosecute, and press charges. Thereby, they continue to act while respecting their national criminal laws and criminal procedure laws. Different from their national colleagues, they investigate independent of any national authority to issue instructions. Rather, they are even entitled to a right to give instructions to the national authorities of the Member State. In Germany, the Delegated European Public Prosecutors have their office locations in Berlin, Frankfurt am Main, Hamburg, Cologne, and Munich.

Method of working of the EPPO

Should the EPPO become aware of circumstances that could fall within its scope of jurisdiction, it examines the initial suspicion and the powers of investigation. Thereby, reports can come from both citizens as well as national authorities. If the EPPO instigates investigations, the national authorities must refrain from making their own investigations in the same case (right of evocation of the EPPO).

The operational investigative work takes place at the national level. The delegated European public prosecutors investigate on the basis of the national laws of the Member States, and they apply for judicial decisions before the national courts.

Should the EPPO press charges, then the trial and, if applicable, the sentencing take place before a national court. For appeals, the national legal process is available.

The method of working of the EPPO is digital. Its “case management system” allows it to take on huge amounts of data, process it, and evaluate it. The system is fed from different sources (e.g., information from private persons, as well as European and national authorities). The access to international networks and the unbureaucratic exchange between Delegated European public prosecutors across national borders enables the investigators to achieve a swift conduct of proceedings. In the case of cross-border matters, the duplicate work of two national public prosecutors working simultaneously can be avoided, and instead, investigative skills can be pooled. For example, by cooperating with other international and national prosecution authorities, it is possible for hundreds of warranted searches to take place in different countries at the same time.

Practical meaning of the EPPO

The EPPO’s balance sheet so far demonstrates its clout:

  • According to official information, as of December 31, 2021, 515 preliminary investigations were pending, with an estimated total loss of €5.4 billion. Of this, around €2.5 billion relate to systematic VAT fraud. Most of the preliminary investigations led the EPPO to Italy and Bulgaria. In Germany, 54 proceedings were conducted.
  • On November 29, 2022, the EPPO announced that it had uncovered presumably the largest case of VAT fraud ever in the EU, which was based on the systematic sale of popular electronic goods. It said that hundreds of persons had been involved in over 30 countries. The investigations ranged from Portugal all the way to Asia. In 14 countries, under the direction of the EPPO, more than 200 warranted searches were conducted simultaneously. The total negative impact is thought to approach an approximate €2.2 billion.
  • However, the EPPO does not only investigate damages in the billions, but also consequently prosecutes less impressive sums: On January 10, 2023, the EPPO announced that it filed charges in Romania against an Italian construction company and its legal representatives for lying about “the quality and the quantity” of road works delivered as part of a contract with Romania’s rural financing agency. The company and its representatives are accused of submitting fraudulent invoices totaling €101,000 for non-existent work and therefore fraudulently obtaining EU funds by allegedly lying about its work. The defendants face prison sentences of up to seven years.

Requirements for an extension of the EPPO's jurisdiction over sanctions violations

The powers of the EPPO could, pursuant to Art. 86 para. 4 TFEU, be extended to include other cross-border criminal offenses. This would require a decision of the European Council to expand the prosecution powers to one or all of the “criminal areas” mentioned in Art. 83 para. 1 TFEU. Here, the current expansion of the list of EU criminal offenses to include violations of EU Sanction regulations would come into play. Since they are now part of the list in Art. 83 para. 1 TFEU, in a next step, the corresponding change to Art. 86 para. 1 TFEU could follow. The EPPO would then also be granted prosecution powers to that extent, which would have to be recognized by the Member States of the EPPO zone. Swift and uniform preliminary investigations could be the result. This would reduce the work burden of national public prosecutors who currently are entrusted with the processing of violations of Sanctions.

On the one hand, a company that conducts internal investigations based on indications that an internal corporate crime could have been committed should be aware that, in the case of suspicion of an EU criminal offense, not just national public prosecutors would investigate and, if applicable, undertake compulsory measures such as warranted searches of office premises. It can be expected that the EPPO would avail itself of its right of evocation and take the investigation upon itself if a matter falls within its responsibility. To be sure, domestic public prosecutors will continue to act and, in their investigations, cooperate with domestic prosecution authorities. However, the EPPO conducts the investigations within its own competence, almost independently. Should a company have indications of misconduct, then it should be clarified anticipatorily whether there are grounds for the responsibility of the EPPO. The conducting of internal investigations, and the decision as to whether there should be cooperation with prosecution authorities, must be adjusted to these new circumstances.

On the other hand, it remains to be seen whether the EPPO will also be given a mandate to prosecute sanctions violations. Irrespective of a possible expansion of the EPPO’s competence for sanctions violations, there are signs of more stringent and uniform prosecution throughout the Union in the area of sanctions enforcement. The European Commission’s draft directive on the definition of criminal offenses and sanctions in the event of violations of restrictive measures of the EU not only obliges the Member States to combat sanction violations in the future with the means of criminal law under threat of severe fines and imprisonment. According to the directive, Member State authorities, Europol, Eurojust, the European Commission, and the EPPO – where competent – are to cooperate and coordinate in the prosecution of sanctions violations.