A recent judgment of the Court of Justice of the European Union (CJEU) addresses two significant weaknesses in the effectiveness of EU sanctions enforcement.

First, it makes it clear that an EU-wide ban on “brokering services” for military goods to or from Russia applies even when these goods do not physically enter EU territory.

Second, it clarifies that the administrative confiscation of proceeds of sanctions violations is compatible with EU law, in effect allowing for confiscation orders to be issued automatically rather than through drawn-out criminal proceedings.

The CJEU is the EU’s judicial authority, comprising the Court of Justice and General Court. The judgement is highly significant in the context of questions over the effectiveness of the EU’s enforcement of sanctions against Russia.

It is also relevant to the efforts of EU member states to confiscate assets that are involved in sanctions violations. As argued in our 2023 Working Paper, states should have in place robust legal mechanisms to target assets that are involved in sanctions violations, including proceeds generated by companies that operate in violation of sanctions.

The case: Russian military radios

The Romania-based company Neves 77 Solutions SRL brokered a transaction involving the supply of 32 radio sets, 20 of which had been manufactured in Russia, on behalf of two companies based in non-EU countries. Neves received over EUR 2.98 million for the transaction, and the radios never entered EU territory.

Even though the radios never physically entered the EU, the Romanian authorities still classified the deal as one involving “military goods” and ruled it a violation of EU sanctions under Article 2 (2) (a) of Council Decision 2014/512/CFSP, as well as a violation of Romania’s own sanctions laws.

The Article forbids the provision of brokering services related to military activities to persons and entities in Russia. Brokering services include “the negotiation or arrangement of transactions for the purchase, sale or supply”, as well as the selling or buying “of goods and technology or of financial and technical services”.

As a result, the authorities imposed an administrative fine of RON 30,000 (approximately EUR 6,000) and confiscated the entire proceeds of the transaction (i.e. EUR 2.98 million).

The Bucharest Regional Court referred to the CJEU seeking clarification on whether the prohibition on brokering services applied despite the goods never having physically entered the territory of the EU. It also asked whether Council Decision 2014/512/CFSP allowed for the confiscation of the entire proceeds of a brokering transaction.

Closing the "brokering" loophole

The CJEU considered that there is no requirement for goods to be imported into the EU in order for the deal to count as a sanctions violation under the above-mentioned Council Decision. This makes it clear that the prohibition on brokering services for military goods to or from Russia applies even if the latter never physically entered the territory of any EU member state.

According to the CJEU, this interpretation ensures the effectiveness of the EU’s sanctions regime by preventing someone from simply bypassing them by routing relevant goods outside the EU (paragraph 69 of the judgement).

Confiscating proceeds of sanctions violations

The CJEU found that the automatic confiscation of the proceeds in a brokering transaction through an administrative decision is compatible with EU law, provided it is based on clear legal provisions and serves the purpose of deterring violations. Ultimately, this also achieves the objectives pursued by Decision 2014/512/CSFP in response to Russia's actions in Ukraine (paragraph 89 of the judgement).

The Court also found that the confiscation was proportionate to the infringement, given the severity of the violation and the relatively low maximum fine under Romanian law (approximately EUR 6,000). In fact, the Court actually considered that the fine alone in this case would not be sufficient to deter such violations and that the confiscation of all the proceeds (over EUR 2.98 million) was necessary to dissuade companies from violating such prohibitions.

The Court also affirmed that the right to property enshrined in Article 17 of the Charter of Fundamental Rights of the European Union is not absolute and can be subject to restrictions justified by objectives of general interest pursued by the EU.

Finally, the CJEU called upon European Court of Human Rights case law to assert that where confiscation “is imposed separately from a criminal penalty” (paragraph 95 of the judgement), sufficient procedural safeguards should be put in place to allow such measures to be challenged effectively.

Why does this matter?

The Neves 77 Solutions judgement addresses some of the uncertainties competent authorities and companies face when dealing with sanctions in the context of Russia’s war on Ukraine, especially concerning the scope of prohibited conducts (such as brokering) and the consequences of violations.

The case also demonstrates how sanctions enforcement can lead to asset recovery: specifically, through the pursuit of the proceeds of sanctions violations.

The judgment ensures greater legal consistency across the EU. It strengthens sanctions enforcement by providing clarity and closing loopholes, and by affirming the possibility of confiscating proceeds from violations, including through administrative proceedings. It not only enhances the rule of law but also widens the toolkit to recover assets related to sanctions through established legal means.

Read more

Working Paper 42: ‘From sanctions to confiscation while upholding the rule of law’, by Andrew Dornbierer.