Economic sanctions

Economic sanctions – a new issue that entrepreneurs must take into consideration
The application of sanctions in economic relationships with Russia and Belarus is a major challenge for businesses. Although legislation on restrictive measures has been enacted in the European Union for several years, it has not previously had such an impact on business as it has had since the end of February 2022. The scope of sanctions applied because of Russia’s aggression against Ukraine makes the exchange of goods, the provision of services, transportation, and financial settlements, not only with business entities from Russia and Belarus, but also from other countries, more complicated. Further, the question of how much and to what extent they can continue or what consequences arise from their prohibition requires additional analysis.

The legal order in this area is based on EU regulations (Council decisions and regulations) and the provisions of the Law of 13 April 2022 on special solutions to prevent support for aggression against Ukraine and to protect national security. The practice of applying the regulations is only beginning to take shape. The estimation of how the sanctioning provisions affect the business of a given entrepreneur may vary depending on whose control a current or potential contractor is under, when the contract was concluded, for what purpose the goods are planned to be sold, or to what extent a supplier or subcontractor would participate in the performance of a public contract. Further “sanctions packages” and decisions to subject individuals and companies to restrictive measures require constant attention to these issues.

A change in the legal status in this area is expected in the near future as the Polish Parliament has already started work on amending the Law of 13 April 2022. If the proposed amendments are enacted, the entities on the Polish sanctions list may be placed under compulsory administration and their assets disposed of. This will have consequences for the cooperators and customers of these entrepreneurs.

Examining the compliance of transactions and counterparties with restrictive measures
As the sanctions’ regulations, for those imposed both at the EU and Polish levels, are highly dynamic, entrepreneurs have found themselves in a situation where it has become necessary to assess the compliance of transactions with the introduced restrictions. In view of the penalties related to violating the introduced prohibitions, the start of cooperation should be preceded by a comprehensive examination of the new counterparty, its ownership structure, as well as the subject of the transaction and the individual contractual terms. Sometimes, such examination should be repeated before concluding a new agreement or deciding to participate in a new transaction even with an already known partner. It can be said that there is a new standard of examining business transactions and counterparties with sanctioning restrictions.

Nowadays, entrepreneurs more and more often conduct relationships with multinational entities that have a complex ownership structure. However, the determination of this structure requires a deeper analysis and a detailed verification. Only by doing so is it possible to determine whether a counterparty is not directly or indirectly subject to sanctions.

The necessity to examine transactions and counterparties does not refer only to the future and new business relationships as, many times, it is also necessary to verify existing suppliers or customers. Also, there is a necessity to examine a given contract in the context of whether continuing a given contract will not expose one to the risk of violating sanctions.

The entrance into force of the sanctions’ restrictions is, each time, preceded by a transition period. Therefore, a timely study allows action to be taken, e.g. modifying the existing supply chain, finding a new market, or starting cooperation with a contractor with whom business can be done without conflicting with the sanctions’ regulations.

Possibility to apply for permission to perform certain sanctioned activities
The imposition of the sanctioning regulations on a given entity or category of goods or services, whether at the EU level or through national measures, is a significant interference in business operations. This can lead to negative contractual and financial consequences resulting from the loss or disruption of existing supply chains for goods or services.

For this reason, it is very important for entrepreneurs to know about the currently existing opportunities to prevent the negative consequences of the restrictive measures being introduced which, in addition to striking at the Russian Federation’s financial and economic interests, may also target businesses unrelated to support for the ongoing Russian aggression in Ukraine. One of the most common means of potentially preserving existing models of cooperation is to obtain authorisations from the relevant public authorities to carry out a certain activity, or to exempt it, based on the authorisation provided by the EU’s legal acts.

To examine the possibility of using the envisaged exemptions from the sanctions’ regulations, it is necessary to analyse the legal relationships linking businesses exposed to losses and those potentially subject to restrictive measures. The key issues are to determine the potential ties linking the affected counterparty to areas excluded by EU and national regulations, and to verify whether a “gateway” in the form of the ability to apply for an exemption is guaranteed for the subject matter in question. After examining these issues, it remains to identify the competent authority authorised under national regulations to consider applications within the scopes of competence indicated by the regulations. Only an analysis prepared in this way will make it possible to take appropriate measures to mitigate the negative effects of sanctions.

Putting a counterparty on the sanctions list and the impact on the contract
The inclusion of a counterparty on a sanctions list will not, in every case, entail the termination of the contract binding an entrepreneur to such counterparty. This applies especially to those contracts where a non-monetary obligation is performed for the counterparty’s benefit (e.g. perform a service, rent space). Although the prohibition on providing economic resources to sanctioned entities is exceptionally broad, not all services performed for such an entity will violate this prohibition. Some of the services performed will not constitute economic resources as defined under the provisions introducing restrictive measures. Each entity with an interest in this may also apply to the competent authorities for permission to provide the sanctioned entity with certain resources. Such a possibility is not available only to the sanctioned entity itself.

Not in every case will the termination of a contract concluded with a contractor included in the sanctions lists be justified. Key are, i.a. the provisions of the specific contract in force between the parties and the bases providing for the unilateral termination of contractual obligations by authorised parties. Each case should be approached on a case-by-case basis and analysed on the terms of the applicable contract and the nature of the sanctions introduced, and their impact on the continuation of the contract. It is also worth remembering that the inability to continue the performance of a contract entered into with an entity subject to restrictive measures will not necessarily be a case of the inability to perform which would lead to the contract being terminated by law.

It is also worth remembering that the scope and nature of the measures that can be taken against a counterparty subject to restrictive measures may change when the counterparty declares bankruptcy. The risk of bankruptcy for sanctioned entities is highly likely.

Criminal liability for violating sanctions
Infringement of some of the prohibitions established by EU regulations can raise the risk of incurring criminal liability – and harsh levels of liability at that. The punishment of imprisonment that can be imposed on the offender is to be no less than three years, i.e. this is a crime under the Polish Penal Code. As a consequence, the upper limit of the threat of punishment is fifteen years’ imprisonment. The same applies to the import into Poland or the transit of coal originating from the territory of Russia or Belarus.

The perpetrator of criminal liability – if the violation of the prohibition occurred within the scope of the entrepreneur’s activities – is to be the person responsible for concluding the transaction itself.

Therefore, the circumstances of a particular case will determine who will be considered the person responsible for concluding a given transaction, i.e. if it is a formally authorised person or the person actually engaged in contracting, or both, or neither of them.

Compliance policies for sanctioned areas and verifying the scope of delegated authority, supervision of employees, as well as the contracting decision-making process itself and its documentation are thus of special importance.

It should also be noted that the aforementioned penalty is also provided for actions that have the purpose or effect of circumventing the prohibitions of EU regulations and the Polish Sanctions Act. This means that far-reaching caution is recommended when changing the parties to a contractual relationship, especially after the effective date of the law’s provisions, so as not to expose oneself to criminal liability for circumventing the prohibitions.

Administrative liability for non-compliance with sanctions
If a breach of the sanctions imposed on an entity occurs, the person committing the infringement is subject to administrative liability in the form of a fine imposed in an amount of up to PLN 20,000,000. The monetary penalty is provided for by the regulations for the following actions against a person or entity included by the Minister of the Internal Affairs in the sanctions list:

• violating the provisions of EU law imposing sanctions, in particular, consisting of failing to comply with the obligation to freeze funds, funds or economic resources; violating the prohibition on making funds, funds or economic resources available; and violating information obligations; as well as taking actions to knowingly or intentionally circumvent these sanctions;
• participating in a public procurement procedure or competition by an entity excluded from such participation or a subordinate entity to the excluded entity;
• introducing or moving banned coal originating from Russia or Belarus into or through the territory of Poland; or
• failing to have documentation for the origin of coal subject to movement to or through the territory of Poland.

Fines are imposed on an individual, legal entity, or other entity by administrative decision. In most cases, the penalty is imposed by the Head of the National Fiscal Administration up to PLN 20,000,000 (the penalty under item d. above is imposed by the Inspector of Trade Inspection up to PLN 10,000,000; and the penalty under item b. above is imposed by the President of the Public Procurement Office up to PLN 20,000,000). When issuing a decision, the authority should take into account all the circumstances of the case, including those in favour of the offender. The addressee of the decision, who does not agree with it, may demand that their case be reconsidered by the authority that imposed the penalty or, within 30 days, file a complaint to the provincial administrative court.