Germany and others have been reluctant to close loopholes for their exporters, but that is slowly starting to change.
The United States’ history of using economic sanctions as a means of coercion has not only outraged its adversaries but also upset its friends. Washington’s allies have long been concerned about its liberal use of so-called secondary sanctions, which are extraterritorial restrictions that penalize foreign companies that do business with U.S. adversaries, even if the companies are based in friendly countries. In the 1980s, the West German government was outraged when the Reagan administration sanctioned European firms involved in constructing a pipeline to bring natural gas from the Soviet Union to West Germany. More recently, U.S. secondary sanctions have targeted European companies for doing business with Iran, Chinese banks suspected of money laundering for North Korea, and the entities involved in the construction of Nord Stream 2, another pipeline to bring Russian gas to Germany.
Until recently, Washington was the primary user of secondary sanctions. However, the sanctions landscape is shifting, and European allies that previously rejected the use of extraterritorial sanctions have suddenly discovered their merits. In response to Moscow’s persistent evasion of sanctions imposed since Russia launched its invasion of Ukraine, the European Union and Britain have quietly strengthened their regulations, introducing measures with extraterritorial effects. While these measures lack the teeth of true secondary sanctions, a gradual European shift toward Washington’s more expansive approach to sanctions is becoming evident. With primary sanctions so obviously falling short, the EU and Britain are increasingly willing to adopt measures that reach beyond their borders.
Historically, extraterritorial sanctions have been controversial. Their legality has been widely disputed, and they have strained transatlantic relations multiple times. With European firms often facing hefty fines, potential embargoes, and the threat of being cut off from the dollar-based financial system, European allies have accused the United States of waging economic warfare against them.
Russia’s successful circumvention of Western sanctions—especially export restrictions intended to keep military and dual-use technology out of Russian hands—has forced Europe to reassess its approach to sanctions enforcement. Since many critical items procured by Russia are of Western origin, European regulators are now focusing on the main weak spot in EU export controls: Western companies’ subsidiaries in third countries, which were left free to trade with Russia through middlemen, since sanctions only affected their parent companies at home. An overwhelming majority of military-relevant items imported by Russia are sourced from third countries via Western subsidiaries there.
These flows include both reshipments of goods produced by the parent company, as well as goods produced by the subsidiary itself. As key transshipment hubs, the countries of Central Asia and the South Caucasus have sharply increased their technology and machinery imports from the EU. For example, German exports to Kyrgyzstan skyrocketed more than tenfold after the EU imposed sanctions on Russia in 2022, and similar trends can be seen for other countries close to Russia and other EU exporters. There is little doubt that many of these shipments end up in Russia, often through middlemen and other obscure channels that make tracing difficult and offer plausible deniability to the Western companies whose products are being shipped.
In response, the EU introduced a “no-Russia” clause, requiring EU companies to prohibit the reexport of critical goods to Russia when dealing with third-party business partners. Its most recent sanctions package—the 14th since the start of the Russia’s invasion of Ukraine—requires non-EU subsidiaries that are owned or controlled by EU companies to make “best efforts” to ensure compliance with EU sanctions. What exactly constitutes “best efforts,” however, is still to be defined by member states, and the regulation allows noncompliance if a parent firm does not have decisive influence over its subsidiary.
Still, the new requirement means that EU companies will worry about a greater risk of liability. They are now expected to instruct their non-EU subsidiaries to comply with sanctions as if they were EU entities. That alone is a drastic shift in the EU’s position on extraterritoriality. The new rule stipulates that companies can be held liable for sanctions breaches even if they did not intentionally evade sanctions but were aware that their activities could have such effects. To protect themselves against liability, companies will need a greater level of due diligence concerning the activities of their subsidiaries.
In parallel, the EU has harmonized rules for punishing sanctions violations across all member states, including stricter penalties and higher fines on both companies and individuals. For example, trading in sanctioned goods or making prohibited transactions is now punishable by a maximum term of imprisonment of at least five years or more if goods or transactions valued at 100,000 euros (approximately $109,000) or more are involved.
Britain has also quietly broadened its Russia sanctions regime, granting the government authority to target foreign financial institutions that facilitate transactions involving Russian strategic sectors. This allows London to target entities outside its jurisdiction and potentially block them from using the British pound. It remains to be seen how aggressively Britain will enforce these provisions; the United States has so far refrained from targeting foreign banks.
The EU is also considering targeting financial institutions that facilitate the diversion of battlefield items to Russia. The aim of targeting foreign banks—as opposed to foreign subsidiaries—is to curb flows from Southeast Asia, where countries are producers and not just transit points. A package of new sanctions issued in June lets the EU target financial institutions extraterritorially if the European Council determines that they facilitate transactions that support Russia’s defense-industrial base.
Neither the EU nor Britain explicitly labels these provisions as secondary sanctions. In fact, the EU has rejected claims that its sanctions extend beyond its borders. Yet both sets of measures have clear extraterritorial effects, and both borrow from Washington’s playbook of economic statecraft. While British measures rest on London’s centrality in global financial markets, EU measures mimic U.S. export control rules that prohibit the reexport of technology via third countries.
The EU’s new oversight of non-EU entities marks a significant policy shift. In 2019, when European Commission President Ursula von der Leyen announced a more geopolitical role for the EU, a key goal was to reject “unlawful” extraterritorial sanctions imposed by the United States. The Trump administration had severely impacted EU member states when it reimposed secondary sanctions on Iran, prompting the EU to explore means of evading Washington’s reach, such as strengthening the international role of the euro. These plans were sidelined when the Biden administration prioritized repairing transatlantic relations.
Today, France and the Netherlands appear to support sanctions with extraterritorial effects to block Russia’s access to sensitive items, whereas Germany is opposed in order to protect its corporate interests. Berlin’s reservations were the main reason that a stronger sanctions package was watered down, replacing a crackdown on foreign subsidiaries with the “best efforts” clause. The watered-down package gives the European Commission the option to impose stricter measures if sanctions circumvention continues, but likely German opposition would need to be overcome.
The evolving EU and British stance on extraterritorial sanctions carries significant policy implications. As geopolitical competition intensifies—and as the United Nations sanctions regime has broken down due to paralysis on the Security Council—more countries are resorting to sanctions as part of their statecraft, either on their own or as part of a bloc, minilateral group, or ad-hoc coalition. The increasing use of secondary sanctions adds a new layer of complexity to the trend of an eroding and fragmenting international sanctions framework.
While the EU’s and Britain’s moves toward extraterritorial sanctions may appear to align them more closely with Washington, forming coalitions around these types of sanctions will remain challenging. National interests are bound to clash, as demonstrated by Berlin’s fierce protectiveness of its export companies. Different legal systems with varying approaches to extraterritoriality also complicate coordination. For now, EU and British measures with extraterritorial effects are limited to the Russia sanctions regime. If these policies are extended to other countries and conflicts, multinational corporations will face even more complexities regarding compliance. International businesses will have to navigate growing uncertainty and an increasing burden of due diligence when managing subsidiaries in third countries as they attempt to remain compliant with overlapping, and sometimes conflicting, regulations.
There is a risk that the new EU and British extraterritorial measures will remain a paper tiger. Without active enforcement—and without proactive implementation by the private sector—the measures will have a diminishing effect in deterring Western affiliates from committing violations. Compared to the United States’ aggressive enforcement posture, EU member states have been especially slow to impose civil and criminal penalties for sanctions violations. With each member state making its own legal interpretation of the “best efforts” clause, they can further water down the measure.
EU regulators could benefit by emulating recent policy changes in Washington and London. The U.S. Commerce Department recently created a chief of corporate enforcement position and strongly encourages voluntary self-disclosure by companies. Washington’s newly adopted approach aims to change the dynamic by encouraging companies to take responsibility for misconduct and report it before federal regulators knock on their doors. This October, Britain launched a newly created Office of Trade Sanctions Implementation, which will have the power to impose significant civil fines for sanctions violations. With the creation of this new agency, London has signaled to companies that a more proactive approach to enforcement is coming.
In the never-ending cat-and-mouse game of sanctions evasion, it is an arduous task for regulators to stay one step ahead. Ever so gradually, Britain and the EU seem to be coming to the conclusion that forcing companies to be liable for the end use of their goods is a better way to play the game.
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