Accountants and their clients within the EU have had to avoid trading with an increasing number of sanctioned individuals and companies, especially in Russia, following its invasion of Ukraine. Now, with sanctions evasion being criminalised across the EU under a proposed new law, the risk of exposure to sanctions for EU companies and their accountants and auditors has risen further – both when dealing with actors subverting these measures and when undermining sanctions themselves.
‘It is a lot of work for everybody across the entire economic landscape,’ says Angela Foyle, anti-money laundering (AML) working party chair for Accountancy Europe.
Under a directive backed in principle by the EU Council of Ministers and European Parliament in December 2023, individual sanctions evaders will be jailed at least five years, where they undermine measures targeting funds or property worth at least €100,000. Where evasion is conducted by a company or other organisation, these legal persons may face penalties of 5% total worldwide turnover or €40m.
‘The Russian invasion benefits from crooks breaking the law in Europe. They must be caught’
Significant impact
The law will have a significant impact given that sanction evasion is today often a civil offence across the EU. A report from the Ukraine-based Institute of Legislative Ideas said that while Croatia, Denmark, Finland, France, Hungary, Latvia, Luxembourg, Malta, the Netherlands, Portugal and Sweden have fully criminalised sanctions evasion (along with non-EU Norway, Switzerland and the UK), other countries have not.
Slovakia and Spain treat all cases civilly, while Austria, Belgium, the Czech Republic, Estonia, Germany, Greece, Ireland, Lithuania, Poland, Romania and Slovenia only criminalise more serious cases. Terms of imprisonment for sanction evaders also vary widely, from 12 years in Malta and 10 years in Hungary, to four years in Denmark and two years in Cyprus, according to the Institute.
‘There has been concern that certain jurisdictions have turned a blind eye to workarounds that undermined the effectiveness of the sanctions,’ Foyle says. ‘It’s not a complete sea change, as for many jurisdictions this was already criminal – but we now have standardisation to put it beyond doubt.’
Closing loopholes
The European Parliament backed this new directive formally in March 2024, with a final Council of Ministers vote expected soon. ‘The Russian invasion benefits from crooks breaking the law in Europe. They must be caught,’ says Sophie in ’t Veld, the ‘rapporteur’ MEP coordinating the parliament’s votes. The Dutch liberal says that sanction evaders should not benefit from some EU member states having a lighter touch towards undermining these measures, given ‘diverging national approaches have created weaknesses and loopholes’.
Under the legal text, as it stands, member states must criminalise the violation and circumvention of EU sanctions – for example, by providing prohibited or restricted economic and financial services to sanctioned individuals and companies. Similarly, transferring funds to a third party or providing false information to conceal funds that should be frozen would be a crime, as would failing to freeze assets and breaching travel bans and arms embargoes. The law would also enable member states to freeze and confiscate sanctioned assets once identified, including if they have been moved and are managed by evaders.
In analysis released in February, Deloitte Romania warned that legal persons found violating sanctions could lose public procurement contracts, grants and concessions, commercial licences, permits and authorisations, as well as the closure of the units helping commit the offence. Deloitte agreed that national loopholes had aided evaders, especially ‘groups of companies operating on the territory of several states’.
‘Ukraine has added complexity that accountants are working hard to solve’
The risk of helping evade sanctions has been highlighted by a scandal in Cyprus involving PwC staff allegedly helping Russian clients evade sanctions. The issue was raised in a December 2023 European Parliament question from socialist MEPs, which noted: ‘If this is true, it is a very serious matter and should, needless to say, have immediate and severe consequences.’
In response to the allegations, a PwC spokesperson said: ‘We take sanctions-related matters very seriously and we would welcome any measures taken by the EU aiming at further strengthening compliance with sanctions laws and regulations.’
Added complexity
An October 2023 note from the Association of International Certified Professional Accountants stressed that managing sanctions is tough: ‘Ukraine has added complexity that accountants are working hard to solve. Compliance with sanctions on Russia is complicated because it can be difficult to trace relationships and transactions that are associated with businesses and individuals based in Russia,’ said the association.
The note highlighted advice from the US Financial Crimes Enforcement Network, the country’s financial intelligence unit, about how corporates and their professional advisers can detect attempts to evade sanctions against Russia. Evasion tactics include:
- using corporate vehicles to obscure ownership, source of funds, or countries involved in a transaction;
- using shell companies to conduct international wire transfers;
- utilising third parties to shield the identity of persons;
- accounts in jurisdictions or financial institutions suddenly rising in value;
- and new company formations on jurisdictions previously associated with Russian financial flows.
‘Some businesses are between the devil and the great blue sea on this’
Foyle notes that companies have to be mindful of ISA 250, Consideration of Laws and Regulations in an Audit of Financial Statements, which includes compliance with sanctions. Auditors will need to understand disclosure requirements for financial statements if there is a sanctions evasion problem. Moreover, financial statements may have to reflect whether sanctions have a material impact on commercial performance, including the cost to a company of complying with them.
Companies will now have to look closely at new sanctions evasion crimes emerging from the EU directive, to see if executives have personal criminal responsibility for evasion conducted by their company, even if a lower-level member of staff took the key decisions.
Foyle concludes that the tightening of legislation may make companies and executives more risk averse: ‘I do feel that some businesses are between the devil and the great blue sea on this.’
