Euro SIFMANet Hague Report

In late March 2024, the Centre for Finance and Security (CFS) at RUSI, with the support of the Clingendael Institute, hosted a roundtable in The Hague. Held under the Chatham House Rule, the roundtable, along with a series of one-on-one meetings, discussed the state of sanctions implementation and enforcement in the Netherlands. The gatherings included representatives from national authorities with sanctions-related competences, as well as sanctions and compliance experts from financial institutions, the Dutch Banking Association and other advisers. These included, among others, the Dutch Ministry of Economic Affairs and Climate Policy, Ministry of Finance, Financial Intelligence Unit–the Netherlands, the Ministry of Justice and Security, Customs, Ministry of Foreign Affairs and other relevant agencies. This event was part of the in-country engagements conducted by the CFS-led European Sanctions and the Illicit Finance Monitoring and Analysis Network (SIFMANet), supported by the National Endowment for Democracy.

The roundtable discussion was rooted in a consideration of the current process of modernising the current Dutch Sanctions Act (Sanctiewet 1977). Under this Act, the minister of foreign affairs is responsible for the sanctions orders that bring Dutch regulations in line with UN and EU sanctions.

Although the law has been amended numerous times since it was initially enacted, the scale and challenge of the sanctions imposed on Russia prompted the minister of foreign affairs to establish a temporary national coordinator for sanctions compliance and enforcement. Further, the minister of foreign affairs has launched a wider effort to modernise the Sanctions Act, collecting pre-consultation comments in 2023.

Participants said that, although modernisation of the Dutch Sanctions Act is a long process, the consultation around the Sanctions Act has been a useful platform to discuss wider issues with sanctions compliance in the Netherlands, to which this SIFMANet roundtable hopefully also contributed.

Russia was a top-10 trading partner of the Netherlands before February 2022. Much of the discussion therefore focused on practical issues arising from the private and public sector challenges of enforcing sanctions while supporting the private sector in continuing to trade – this challenge featured particularly notably in the discussion. Other issues highlighted included international and local cooperation, as set out further below.

Criminalising Sanctions Evasion and Enforcement Tactics

The Netherlands has been among the most active EU member states in investigating and prosecuting sanctions evasion and circumvention since 2022. For example, in October 2023, a Dutch man was fined and sentenced to 18 months in prison for exporting microchips and other dual-use electronics to Russia, in violation of EU sanctions. Other arrests have occurred, and, as of early 2024, the government confirmed 192 ongoing investigations.

Participants said this reflected the Dutch Sanctions Act’s provision to criminalise sanctions infractions (something that is not the case in many EU member states) and allows for simple harmonisation with the upcoming EU directive’s criminalisation requirements. Dutch legislation also allows for administrative enforcement on certain sanctions breaches, but only in the financial sector. However, public bodies are considering how this can be harmonised given the perceived benefit of applying administrative penalties across industry as a way in which learning can be communicated to the private sector. No civil enforcement of material sanctions violations are known to this date.

A government official said that although the Netherlands has been one of the most active EU member states in enforcing sanctions, “most cases are settlements between prosecutor and company and in most cases not published”. Participants advocated for publishing such settlements, even on an anonymised basis, to provide greater visibility on sanctions evasions methodologies and current circumvention trends.

The Gatekeeper Role of the Private Sector

As in other countries, issues relating to ownership and control continue to plague the work of private sector actors to comply with sanctions. In the Netherlands, significant focus in 2022 fell on the yacht sector, but officials said investigating a single yacht took a significant amount of time due to complex ownership structures. The same is true for banking relationships and other private sector links with Russian-owned companies or others affected by sanctions. The Dutch Ministry of Economic Affairs has responded by setting up a “collaborative platform” to study the ownership and control of companies based in the Netherlands, working alongside the Ministry of Finance, minister of foreign affairs, Customs and other government bodies. This work feeds into Dutch investment screening, but information gathered is also shared with other government bodies. If a sanctioned person was identified as an owner or controller of a company, a government representative said they would share this information with the body maintaining Dutch corporate records. However, there is no audit process identified to ensure that these designations ultimately are added to company records.

In the financial sector, participants believed that large Dutch and foreign-owned banks operating in the Netherlands have high compliance standards, but smaller financial institutions require greater expert support. Further, participants referred to uneven compliance by other “gatekeepers”, such as accountants, notaries and private companies. Greater collaboration between industries would be beneficial, financial industry representatives said, particularly if it could be accompanied by further support by the public sector – such as a public–private partnership format.

Private sector representatives believed that a number of obstacles restrict information sharing. Participants perceived strict privacy rules as restricting the amount of information sharing that would be required to tackle sanctions circumvention and evasion more robustly. For example, in line with the 2022 decision by the European Court of Justice, the full Dutch register of ultimate beneficial owners (UBO register) cannot be searched publicly, which participants said substantially restricted their ability to conduct sufficient due diligence and other compliance procedures.

Added to this is the fact that many global companies are headquartered in the Netherlands, but the majority of their financial and trading activity occurs outside the country. Participants said both public regulators and private sector actors struggle to have sufficient visibility of the business outside the Netherlands. Informing companies headquartered in the Netherlands about their responsibilities under sanctions was also viewed as a challenge.

Implementing Trade Sanctions and Export Controls

The discussion then considered capabilities of Customs and the private sector to respond to trade sanctions, particularly in light of the December 2023 amendments to US Executive Order 14024. This Executive Order strengthened the US ability to sanction financial institutions facilitating and funding supplies to the Russian military–industrial complex.

Participants said the Netherlands’ high pre-2022 trading volume with Russia means that there is still a desire to continue to trade “legitimately” with Russia. Customs services check export declarations at the border for all exports to Russia directly, but their representative said that it is impossible to audit all exporters to see if they comply – particularly for goods declared as exports to third countries such as Kazakhstan. Further, those companies that had significant trade with Russia before 2022 had suffered commercially. In order to survive, many have explored new markets, which participants acknowledged has raised the risk that Dutch companies may be deliberately or unwittingly trading with Russia through new intermediaries.

A government official said they have addressed this by conducting onsite audits of companies to examine prior export records, seeking to identify potential signs of non-compliance. This is a robust measure, and the same official said they had uncovered a “spectrum” of issues, ranging from deliberate circumvention and evasion to lack of knowledge. These reviews also provide valuable insight on types of potential circumvention that cannot be detected in standard controls. One type of circumvention that can be identified in audits but not through border monitoring is brokering and strategic services supporting the movement of sanctioned goods.

Private sector participants also noted differing risk appetites between banks and corporates. Banks, they said, have a lower risk appetite because of regulatory enforcement risk, whereas corporates are more willing to pursue trade. One government representative noted that large corporates have compliance teams, but that smaller companies are sometimes unaware of the risk of exporting dual-use goods to Central Asia: “They just see the money”. There was a perception that this is further augmented by regulators’ focus on banks, which “makes corporates feel it’s the banks’ problem and if they do something illegal, the bank will tell them”.

This opens a gap, participants said, because banks lack both data and specialist export control expertise to monitor dual-use goods. Between trade finance, correspondent banking and other transactions, most banks lack sufficient information on the underlying trade. (One participant with a banking background said that banks have “only an invoice number” for many transactions.) At the same time, Dutch courts have ruled against banks when they enforce rules more strictly than legislation requires. A bank’s representative noted a case when they had exited a client due to suspicious transactions, only to be forced by a court ruling to take the client back.

Considering banking personnel expertise, one representative from the Dutch Banking Association said that there is further work to do to support financial institutions on trade sanctions and dual-use goods. A representative from Customs said the department had met with banks to explain dual-use and export controls.

Corporates also perceived the licensing application process to be a form of administrative enforcement, insofar as licences can be (and have been) refused. But the fact that manufacturers and corporates face only potential criminal charges (not administrative) may be a potential enforcement gap: criminal prosecutions often require a level of evidence and intent that can be difficult to obtain in a sanctions circumvention matter.

Despite these challenges, participants believed that the Executive Order 14024 did not have a significant impact on the industry because the compliance culture was already high.

Coordination and Measuring Impact

The roundtable’s assessment of coordination within the Netherlands was generally positive. Private sector participants did not raise concerns over a lack of coordination, despite numerous bodies involved in sanctions implementation and enforcement. Government participants acknowledged that there are many points of contact but referred to effective information sharing and relationship-building between departments. Some participants noted the need for a single point of contact, or for more centralisation. Nonetheless, several others noted that most sanctions enforcement contact is governed by industry regulators, who would continue to have oversight of other related issues. For example, a single national point of contact for sanctions would not replace financial sector regulators with overlapping requirements, including anti-money laundering.

Practical coordination with other member states was also seen generally positively. Law enforcement, coordination and information sharing that was carried out with other member states through existing mechanisms – such as Europol – were viewed positively. This is, however, one way in which the lack of a single point of contact could increase complication: each member state organises its sanctions mechanisms differently. Government participants said that the EU could provide more guidance and initiative, but that they have built their own networks.

Similarly, the Dutch Banking Association said it worked well with counterparts through the European Banking Federation. Private sector participants sought more information from the government, whose powers to share information on ongoing cases are constrained by law.

The differences among EU member states and lack of harmonisation frustrated participants, however. Member states interpreted the same facts differently, which caused challenges for implementation when Dutch company presence may be limited to a holding company, with assets in other EU and non-EU jurisdictions. Participants worried that different approaches to sanctions would become more of an issue with the advent of the instant credit transfer requirement within the Single Euro Payments Area, which would require financial institutions to rely on counterparties’ sanctions standards and screening.

There was frustration from both the public and private sector about the resources required to comply with sanctions, compared with the apparent impact. Customs authorities said they conduct risk assessments in considering which areas to prioritise when enforcing export controls. However, requests from other member states and other bodies take significant resources, even if they do not relate to high-priority goods. Some suggested impact assessments, to consider the cost of the regulation and whether it has been effective in stopping Russia’s military–industrial complex.

Conclusion

Dutch authorities have clearly demonstrated commitment to the effective implementation of sanctions in the public and private sectors, and the existing sanctions legislation has allowed law enforcement to undertake robust investigation and enforcement.

There was, however, some ambivalence in how to weigh sanctions against potential loss in trading and business partners. This was particularly true in the corporate sector, which is – in general – incentivised to maximise trade. Banks, then, have become the frontline in enforcing trade sanctions, but participants felt they lacked both the data and expertise to address the risk of trade sanction circumvention sufficiently.

The government has adapted with two steps to address practical issues. First, government participants highlighted that their collaboration to trace beneficial ownership for key Netherlands-registered companies is important, although private sector representatives raised concerns about how data protection restricts their ability to review ownership and control. Second, Customs described how their onsite audits of manufacturers and exporters are an important step to addressing the gaps in border detection alone.

There was support for greater harmonisation within the Dutch government and across the EU, but also practical questions from both private and public sectors about how this could be implemented given competing legislative priorities (particularly data protection).

Olivia Allison has more than 15 years’ experience carrying out complex, international investigations and supporting the development of integrity and governance for state-owned companies, international companies and international financial institutions. She has a wide range of financial crime and asset-tracing experience from leadership roles held in London, Moscow, Kyiv and Kazakhstan.