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Sanctions and Public Procurement – A Few Tips to Consider in Your Tendering

Since 24 February 2022, the European Union has adopted new and more restrictive sanctions against Russia because of the new phase in the War in Ukraine. The unprecedented economic impact and the geographical proximity means that the sanctions need to be considered in European public procurements as well. This article will be focused on highlighting the potential pitfalls and countermeasures contracting authorities in the EU need to take into account. While the EU sanctions are not completely identical to sanctions adopted by the United Kingdom, the general rules are applicable in both countries.

The sanctions adopted by the European Union have been extended in scope since the beginning of Russo-Ukrainian hostilities in 2014. Particularly harsh sanctions have followed since the Russian invasion in 2022. The new sanctions have particularly aimed at restricting exports to Russia, but restrictions have also been placed on imports. Additionally, the EU has frozen the assets of several have been consolidated into four distinct regulations.

· Council Regulation (EU) No 269/2014, of 17 March 2014

· Council Regulation (EU) No 692/2014, of 23 June 2014

· Council Regulation (EU) No 833/2014, of 31 July 2014

· Council Regulation (EU) 2022/263, of 23 February 2022

Violation of sanctions legislation is punishable by up to four years in prison

It may be easy to approach sanctions purely as a hamper to international trade with Russia and Russian firms. However, the European Union has also sanctioned multiple other countries for human rights violations or other infringements. For example, sanctions have been placed on Venezuela, Nicaragua and Myanmar. Tin the future, these sanctions can be expanded, or new sanctions may be adopted against other current trade partners. This means that any long-term trade relationship should potentially take sanction measures into consideration.

The sanctions regulations prohibit all financial actors from procuring embargoed products or services or doing business with another party targeted by sanctions. Generally, violating the sanctions can lead to criminal prosecution, with the exact consequences being determined by national legislation. Under Finnish Criminal Code, for example, such a violation could result in anything from fines to up to 4 years in prison, depending on the circumstances and the severity of the violation. In the UK, as noted in section 146 of the Policing and Crime Act 2017, the Treasury may impose monetary penalties to parties in violation of the sanctions (Of particular note is the recently fast-tracked Economic Crime Act 2022, which has made it easier for the Treasury to impose these penalties).

Compliance with sanctions legislation at the procurement unit's own risk

It is worth noting that the current EU public procurement legislation does not contain any provisions relating to sanctions. Therefore, it is the procurement units that are responsible for complying with the regulations governing sanctions within their tendering. This requires procurement units to actively maintain knowledge of the existing sanctions and evaluate on a case-by-case basis whether some special measures should be adopted if there is a risk that a particular tendering could lead to sanction violations. Some products and industries are more prone to sanctions than others. If a procurement is evaluated to be risk-free, it may not require any special attention. On the other hand, even unlikely risks may be realized at a later date. A less costly alternative is to draft general terms to be used in all sanctions and invest the more detailed contract clauses to those procurement contracts which are evaluated to be highly risky or which are expected to last longer.

When evaluating the risks, it is worth investigating whether essential products or raw materials related to the procurement are under sanctions may fall under sanctions in the future. Raw materials in particular are usual targets for sanctioning. At the time of writing, Russian steel and military exports to Europe have been sanctioned, but it is possible that sanctions will continue to be extended. Other raw materials such as oil and natural gas are then very possible targets.

Sanction risk assessment is important already during the preparation of the contract

In addition to setting limitations on particular products, sanctions also affect the procurement unit’s ability to sign contracts with the winning tenderer. As it stands, sanctions also prohibit any actor from providing funds to a sanctioned individual. This means that such contracts, if fulfilled, are in violation. What makes this particularly problematic is that the current exclusion grounds do not apply in cases where one tenderer is under sanctions or is within the ownership or control of such an individual. If no precautions were taken, the procurement unit cannot exclude such a tenderer from the competition. Investigating the applicability of sanctions is not easy. If the ownership or control is discovered after the contract has entered into force, the procurement unit may find it difficult to terminate the contract. This means that it is advisable to include relevant clauses in the contract and the invitation to tender.

For now, the procurement units may find themselves alone when dealing with the effects of sanctions. Evaluating the risks beforehand and maintaining up-to-date information is key to avoiding most of the pitfalls. However, when dealing with long-term contracts or riskier industries it is advisable to prepare necessary clauses to avoid difficulties with price increases or the contract fulfilment.

Finnish Procurement Lawyers provide procurement-related training as well as legal services.


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