On 14 December 2023, the two EU co-legislators, the Council of the EU and the European Parliament, provisionally reached an agreement on the Corporate Sustainability Due Diligence Directive (CS3D). In essence, the Directive sets out an obligation for companies to comply with human rights and environmental due diligence and provides for an enforcement mechanism with penalties and civil liabilities for non-compliance. The Directive will apply to both EU and non-EU companies that meet certain thresholds with respect to turnover and number of employees. Below, we explain the key elements of the provisional agreement.

Background

On 23 February 2022, the European Commission presented a legislative proposal of CS3D. The Council adopted its General Approach on 1 December 2022 and the Parliament adopted its position on 1 June 2023. Following intensive inter-institutional negotiations, the two EU co-legislators, the Council and the Parliament, reached a provisional agreement regarding certain thorny issues, as explained below, on 14 December 2023. However, since technical negotiations on the final details are still ongoing, certain elements of the Directive may change. The legal text is not publicly available at the time of writing this alert. 

Key elements of the agreement

Scope (companies): The Directive will apply to both EU companies and non-EU companies that meet certain thresholds with respect to turnover and number of employees.

  • EU companies incorporated under the laws of EU member states:
    • EU companies with more than 500 employees and a net worldwide turnover of more than €150 million (large companies).
    • EU companies with over 250 employees and a net worldwide turnover of more than €40 million if at least €20 million is generated in one or more high-risk sectors (e.g., textiles, agriculture).
  • Non-EU companies incorporated under the laws of a non-EU country: Non-EU companies with a netEU-wide turnover of more than €150 million. The Directive will only become applicable to these companies three years after the entry into force of the Directive, and the Commission must publish a list of the non-EU companies that fall under the scope of the legislation.

Small and medium-sized enterprises (SMEs) remain excluded from the scope of the Directive, but could be indirectly affected by the due diligence conducted by the companies under the scope.

Scope (chain of activities): Due diligence obligations will apply to companies’ own operations, those of their subsidiaries, and those of their business partners. In other words, the Directive covers chain of activities that companies engage in themselves or through upstream and downstream partners. Due diligence on downstream partners seems to be limited to transport, storage and disposal of products with the exemption of the sale of products.

Financial sectors: Financial sectors are covered by the Directive, but only with respect to their upstream partners. The agreement temporarily excludes financial services from conducting due diligence on downstream partners (i.e., customers). However, as a compromise, a review clause was added to be able to include downstream partners in financial sectors in the scope based on a “sufficient impact assessment”.

Climate change: Companies will have to adopt and put into effect, through best efforts, a transition plan for climate change mitigation to ensure that their strategy is compatible with limiting global warming to 1.5°C. Companies with more than 1,000 employees could link additional financial incentives, such as variable remuneration, to the fulfilment of the climate change mitigation plan.

Civil liability:  Companies will be liable for breaching due diligence obligations and victims will have the right to be compensated for damages. However, the liability will be limited to where damages were caused by companies’ intent or negligence. Those concerned by adverse impacts, including trade unions or civil society organisations, may bring claims within five years. The provisional agreement limits the disclosure of evidence, injunctive measures and costs of proceedings for claimants.

Penalties: EU Member States will designate a supervisory authority for the enforcement of the Directive. The national authorities will exchange best practices and cooperate at EU level within the European Network of Supervisory Authorities established by the Commission. They will be able to launch investigations and impose penalties on non-compliant companies, including “naming and shaming” and fines of up to 5% of their net worldwide turnover. If a company fails to pay fines, several injunction measures could be taken.

Public procurement: Compliance with the Directive could be qualified as a criterion for the award of public contracts and concessions.

Directors’ duties: The directors’ duties, which were stipulated in Article 25 (Directors’ duty of care) and Article 26 (Setting up and overseeing due diligence) of the Commission proposal, have been deleted.

Looking ahead

After technical negotiations, the Council and the Parliament will officially adopt the final text, which is expected to take place in the first quarter of 2024. Once the Directive enters into force (i.e., 20 days after its publication in the Official Journal of the European Union), the EU Member States will have two years to transpose the Directive into national law.

Mandatory supply chain due diligence in the EU

Various supply chain due diligence schemes already govern the placing of goods on the EU market, and several more are currently being adopted by the EU. In the context of the EU Green Deal, Carbon Border Adjustment Mechanism (CBAM), Deforestation Regulation and Battery Regulation entered into force in 2023. The EU is also currently working on Forced Labour Regulation. Other supply chain due diligence schemes are already in force, including Conflict Minerals Regulation, Timber Regulation,  Forest Law Enforcement, Governance and Trade (FLEGT) Regulation and Kimberley Process Certification Scheme for conflict diamonds. All of these schemes have one important thing in common: they all require manufacturers to obtain detailed information from their suppliers and from importers to know how the products they place on the EU market have been manufactured and be able to present documentary evidence to demonstrate it.

Selected list of our publications on due diligence

Any questions? Please do not hesitate to get in touch with Reed Smith’s trade, environment and ESG teams in Brussels or Munich Office, or your usual contact at Reed Smith. 

On 18 December, the EU announced their 12th round of sanctions targeting Russia. This comes against the backdrop of a flurry of Russia sanctions related activity; namely, widely reported price cap investigations by the G7; release of the U.S. updated quint-seal guidance on maritime sanctions compliance; and a number of designations of third country actors believed to be engaged in price-cap circumvention.

In coordination with the EU, the UK and the U.S. have also updated their respective Oil Price Cap Guidance, materially altering the attestation model adopted to date. It is anticipated that the U.S. will follow, shortly.

The full text of the EU 12th Package can be found here, the updated Oil Price Cap Guidance for the UK can be found here, and the updated Oil Price Cap Guidance for the U.S. can be found here. The main takeaways are as follows:

Continue Reading Christmas comes early for G7 operators – EU adopts 12th package of sanctions against Russia, changes to the Price Cap Model

International efforts to seize assets of sanctioned Russian oligarchs and dispose of them in a timely fashion continue to face obstacles. Among these assets are the TANGO and AMADEA, two superyachts that were seized in the spring of 2022. More than a year and a half later, the TANGO and AMADEA are stuck in legal limbo. Taxpayers fund the staggering cost of upkeep, which (for full upkeep) can per annum be ten percent of a yacht’s total value. The costs include wages for a skeleton crew, insurance, docking fees, diesel supply and general maintenance.  Licenses from multiple jurisdictions are often needed to process transactions relating to a frozen asset, making payment for these services even more complicated and time consuming. 

Continue Reading Superyacht seizures and financing risk associated with sanctions

We are conducting a short, anonymous survey to find out your thoughts on sustainable fuel sources in the transportation industry, including your understanding of the various options, potential challenges, and expected timings for full conversion to sustainable fuel sources. Please take 5 minutes to complete the survey.

We know this topic is top of mind for many of our trade clients, particularly with the increasing focus on decarbonization in supply chains and the EU’s Carbon Border Adjustment Mechanism (CBAM).

We look forward to sharing the results of this survey in a report in the next few months.

After many rumors of potential changes to the U.S. policy on Venezuela, on October 18, 2023 the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued four general licenses, representing a significant shift in its Venezuela sanctions program.  Most pertinent for the shipping industry, certain sanctions that were in place against Petróleos de Venezuela, S.A. (PdVSA) and the Venezuela oil, gas and mining sectors have now largely been relaxed.

Continue Reading Shipping briefing: Drill, baby, drill? A new Venezuelan wave for the shipping industry

After Venezuela’s government and its political opposition agreed on electoral guarantees for 2024 presidential elections, the Office of Foreign Assets Control (OFAC) issued four general licenses suspending select sanctions:

  • General License 44 temporarily authorizes all transactions related to Venezuelan oil and gas sector operations, including producing, lifting, selling, and exporting oil or gas from Venezuela and new investment in oil or gas sector operations. The authorization includes transactions involving Petróleos de Venezuela, S.A. (PdVSA) or any entity in which PdVSA directly or indirectly owns a 50% or greater interest.

    The license expires on April 18, 2024. OFAC will only renew the license if Maduro’s government follows through with its commitments and continues taking measurable steps toward democratic elections in 2024.
  • General License 43 authorizes transactions involving CVG Compania General de Mineria de Venezuela CA (known as Minerven), the state-owned gold mining company.
  • General License 3I and General License 9H remove the secondary market trading bans on buying certain Venezuelan sovereign bonds, as well as pre-2017 PdVSA bonds or equity.
Continue Reading Overview: U.S. eases Venezuela-related sanctions after election deal

At the forefront of addressing the global challenge of climate change is the effort to reduce carbon.

In their latest podcast, Pittsburgh’s energy transactional partner, Ryan Haddad and Brussels’ international trade and customs partner, Yves Melin explore how Carbon capture, utilization, and sequestration (CCUS) and the Carbon Border Adjustment Mechanism (CBAM) could interact in the U.S. and EU. Their discussion includes:

  • Economic incentives linked to carbon capture in the U.S.
  • Conditions imposed by the CBAM on U.S. exporters of goods to the EU
  • How the CBAM incentivizes the decarbonization of industrial processes beyond the EU

The full podcast is available for listening on reedsmith.com.

The recent English Court of Appeal judgment on Mints & others v PJSC National Bank Trust & PJSC Bank Otkritie Financial Corporation [2023] EWCA Civ 1132 (“Mints”) on 6 October 2023 discussed several fundamental issues pertaining to concepts under the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”) and the secondary sanctions regulations thereunder, in particular the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Regulations”). The judgment can be found here.

Continue Reading UK Sanctions – What is “Control”?

October 12, 2023, witnessed perhaps one of the most fast-paced days since the introduction of the price cap restrictions on Russian crude oil and petroleum products almost a year ago. Namely, the G7 and Australia (the “Price Cap Coalition”) issued a joint statement, which was followed by the issuance of a maritime advisory and the first sanctions imposed by the Office of Foreign Assets Control (“OFAC”) for breach of the Russian oil price cap. As we are nearing the one-year anniversary of the price cap, this should serve as an important reminder to operators across the industry that enforcement will be coming.

Continue Reading A little less conversation, more action

As a follow-on to last week’s quint-seal guidance, the Bureau of Industry and Security (BIS) published best practice guidance to help prevent high-priority items from being diverted to Russia. The latest guidance focuses on exports of the following high-priority items to counterparties in countries outside the Global Export Controls Coalition (GECC):[1]

HS CodeHS Description and Representative Part
8542.31Electronic integrated circuits: Processors and controllers, whether or not combined with memories, convertors, logic circuits, amplifiers, clock and timing circuits, or other circuits
8542.32Electronic integrated circuits: Memories
8542.33Electronic integrated circuits: Amplifiers
8542.39Electronic integrated circuits: Other
8517.62Machines for the reception, conversion and transmission or regeneration of voice, images, or other data, including switching and routing apparatus
8526.91Radar apparatus, radio navigational aid apparatus and radio remote control apparatus: Radio navigational aid apparatus
8532.21Other fixed capacitors: Tantalum capacitors
8532.24Other fixed capacitors: Ceramic dielectric, multilayer
8548.00Electrical parts of machinery or apparatus, not specified or included elsewhere in chapter 85

BIS recommends that exporters ask counterparties for a signed export control certification that includes the following information:

  • Customer’s full name, address, website, and role (e.g., purchasers, intermediate consignee, ultimate consignee, end user).
  • Activity the customer intends to take with the item (e.g., consumed, transformed into a different item, maintained for stock, resold, etc.).
  • Name and address of the known end user (if not the customer).
  • List of items covered by the transaction.
  • Customer confirmation that the item requires a license to export or reexport to Russia or Belarus.
  • Confirmation the customer will comply with the Export Administration Regulations (EAR).
  • Confirmation the customer will flow the EAR requirements down to its customers and other parties in subsequent transactions, including:
    • Screening subsequent parties against the Consolidated Screening List before any reexport or transfer (in-country) and comply with any restrictions on the parties;
    • Not providing the item for end use by or to end users of Russia’s or Belarus’s military, intelligence, or national police;
    • Not providing the item for end use by or end users tied to nuclear weapons, chemical and biological weapons, or missiles or unmanned aerial vehicles capable of a range of at least 300 kilometers (or when such range is unknown); and
    • Not providing the item for ultimate end use in Russia or Belarus or the temporarily occupied Crimea region of Ukraine or the so-called DNR or LNR regions of Ukraine.
  • The name, title, phone number, email address, and signature of the customer’s representative making the certification.

The guidance includes a sample written certification, which can be for the exporter’s industry. Exporters can also incorporate these items into their existing customer certifications or end-user statements. Exporters should review the information provided by the customer for errors, omissions, or “red flags.”


[1] The GECC countries are 27 EU member states, Australia, Canada, Iceland, Japan, Liechtenstein, New Zealand, Norway, South Korea, Switzerland, Taiwan, the United Kingdom, and the United States.