Switzerland and Sanctions – an Assessment of the Current Situation in a Complex Environment

The Russian invasion of Ukraine in 2022 has led to fundamental discussions in Switzerland about the Swiss understanding of neutrality. This aspect is evident in the discussion about the delivery of war material and corresponding re-export bans by Switzerland (art. 18 War Mat Act [WMA]), but especially with Switzerland's adoption of EU sanctions. While neutrality is an extremely central element for the Swiss economy and foreign policy, which may also need to be renegotiated and redefined today, sanctions raise very fundamental and important questions, the political and legal discussion of which has so far only begun.

Sanctions must comply with the principles of the rule of law. In particular, sanctions must be suitable for achieving their intended purpose (principle of proportionality) and must define clear legal framework conditions for all economic operators. This should be uncontested. However, Switzerland's current sanctions policy only partially fulfills these requirements. The reason for this is that Switzerland has adopted the EU sanctions at least to some extent without proper review (blind adoption). This article discusses this issue and shows that the resulting, and legally untenable, consequences of this can be avoided if Switzerland pursues its own independent and active sanctions policy.

Violation of the principles of legality and proportionality

The Federal Constitution clearly states that the basis of all state action is the law (art. 5 para. 1 Federal Constitution) and that any such state action must be proportional (art. 5 para. 2 Federal Constitution). In English-speaking countries, these basic requirements are often summarized by reference to the “rule of law”. Restrictions on fundamental rights cannot be imposed lightly, but require a legal basis and must be in the public interest and proportional (art. 36 Federal Constitution).

However, in the context of the adoption of the EU sanctions, insufficient attention was paid to proportionality. This applies to both financial sanctions (i.e. sanctions that are directed against specific persons/entities) and sectoral sanctions (i.e. sanctions that, to put it simply, prevent the exchange of certain goods or services).

Financial sanctions are generally based on the following considerations: the closer a sanctioned person can be assigned to the center of power of the state that is committing violations of international law, the more likely it is that sanctioning this person is an appropriate and necessary way to effectively take action against the violations of international law by this state.

The Federal Council is responsible for issuing sanctions regulation based on the Embargo Act. In order for the Federal Council to be able to carry out an effective proportionality assessment, it must have the relevant information at its disposal. In the EU, the sanctions lists are prepared by the EU Commission. As far as can be seen, the Commission appears to base its work on the papers such as of the Stanford University International Working Group on Russian Sanctions (The International Working Group on Russian Sanctions | FSI) and on intelligence information. The draft lists and regulations are submitted to the EU member states for consultation, and the revised lists and regulations are then submitted to the European Parliament and the Council of the European Union. As a non-EU member, Switzerland is not involved in this process and, as far as the authors are aware, is not given access to the relevant documents and files. It is therefore very difficult for Switzerland as a sovereign state, to verify the justifications given in the EU sanctions lists. Under these circumstances, it is more than questionable if the Federal Council is at all in a position to carry out proportionality assessments with regard to the listing of individuals/entities against this background. In this respect, Switzerland's sanctions policy seems to boil down to a blind adoption of the EU sanctions lists. This approach is only partially compatible with Switzerland's self-perception as a sovereign state that upholds the principle of proportionality.

The partially questionable effects of Switzerland's blind adoption of EU sanctions are also evident in the case of sectoral sanctions. It is realistic to assume that the EU imposes sectoral bans based on its own interests with regard to the EU internal market. It decides independently which levers to apply to Russia, for example, and in which sectors it will exercise restraint in its own interests (e.g. oil, gas). However, Switzerland's interests do not always coincide with those of the EU. This can be seen, for example, in certain global trade bans.

The ban on importing certain products of Russian origin into the EU and Switzerland is an effective sanction. The Swiss and EU markets are closed to these raw materials, which – depending on the commodity – can be problematic for Russia as it has to rely on or develop other markets. To increase the impact of such measures, it would of course be desirable for as many countries as possible to take and implement similar measures.

The EU sanctions include global trade bans. Switzerland has also adopted these (blindly). In global commodity trading, companies based in the EU tend to play a rather marginal role. Such bans therefore have little impact on companies based in the EU. The situation in Switzerland is fundamentally different. Switzerland is one of the world's leading commodity trading countries. The Swiss commodity industry continues to play a major role in the Swiss economy. In Switzerland, around 950 companies with more than 10,000 employees are directly or indirectly involved in the commodity industry (Commodity trading and finance). Consequently, the Swiss economy is significantly affected by global trade bans. At first glance, it could of course be argued that the global trade bans give Switzerland additional and effective leverage against Russia's violations of international law, and that it is right to impose these. The fact that sanctions also have some undesirable economic effects on Switzerland itself is inherent in the nature of (sectoral) sanctions. These undesirable economic effects on Switzerland are to be considered proportionate insofar as they are suitable for achieving the objective of the sanctions (economic sanctioning and weakening of Russia). However, experience has shown that this is not the case with global trade bans. A Russian seller finds a buyer for his raw materials outside the EU or Switzerland – in the future simply without having a Swiss trader/distributor in between. In addition, the globally active, highly mobile traders decide to relocate their headquarters to countries that have not imposed sanctions against Russia and generally have little or no regulations in place. Russia will therefore suffer little or no damage as a result of a global trading ban implemented by the EU and subsequently Switzerland. However, such global trading bans have a negative impact on Switzerland’s economy. Jobs and tax revenues will be lost and the geopolitical economy will suffer as traders will focus on relocating their activities to jurisdictions that are as unregulated as possible, thus also evading the pressure of meaningful regulation in the medium and long term. Of course, these circumstances can be assessed differently from a political point of view. From a legal point of view, the authors are of the opinion that the blind adoption of EU sanctions raises some justified questions as to whether the principle of proportionality is being observed. An active and independent Swiss sanctions policy could make a difference.

Overcompliance and legal uncertainty

Due to a lack of clear wording in the Swiss Ukraine Ordinance, it is often unclear how certain terms or concepts are to be understood (according to conventional Swiss law, independently according to the Sanctions Ordinance or according to foreign sanctions law). In addition, the Swiss Ukraine Ordinance is frequently amended. It is challenging to comply with the provisions, some of which are enacted immediately, without knowing or being able to grasp their exact scope.

These circumstances result in legal uncertainty, causing economic operators to behave in an “overly cautious” manner, i.e. not fulfilling contracts, terminating contractual relationships or keeping assets blocked without any legal basis or necessity. This is referred to as “overcompliance”.

This legal uncertainty may sometimes be intentional on the part of the legislator because the over-caution or “over-compliance” on the part of the economic operators makes it possible to achieve the greatest possible effect with the sanctions, at least in an initial phase. Of course, it could be argued whether such “deliberate ambiguity” of the provisions does not already represent a violation of the principle of proportionality.

Even though the understanding of terms and concepts is subsequently clarified by SECO as the authority responsible for the enforcement of the sanctions, this practice is at least partially not public. SECO has published only a relatively small number of guidelines in the form of FAQs and the consolidated document “Auslegungshilfe für Sanktionsmassnahmen” (available only in German, French and Italian). This is in contrast to the EU. Although the enforcement of sanctions in the EU is the responsibility of the member states, the EU Commission has published comprehensive FAQs that serve as an “interpretative guide” for the member states.

Legal uncertainty combined with over-compliance have direct and significant consequences for day-to-day business. Some economic operators are now pursuing a strategy of abandoning their contractual obligations or suspending their fulfillment in case of doubt by means of adventurous argumentation vis-à-vis their business partners who are now perceived as “unpleasant” in the context of the Russian invasion of Ukraine. Quite often, these business partners have no other choice than to refute the argumentation by submitting a request to receive comfort from the authorities, in particular to SECO. Since SECO has too few resources to deal with the unprecedented adoption of sanctions, responses to such requests take longer. The consequences are sometimes drastic, for example because insurance coverage is no longer available, or employees do not receive their salaries.

Financial institutions in particular often behave in an over-compliant manner and, when currently faced with even the slightest connections to Russia, they assume that a certain sanction provision is or could be applicable. As a result of such over-caution the fundamental rights of natural or legal persons are factually restricted without any legal basis. The effects of such a restriction of fundamental rights without legal bases are neither foreseeable nor controllable. The consequences of over-compliance are not covered by the purpose of the sanction and do not lead to the desired effect of the sanctions on the target. Natural and legal persons affected by overcompliance suffer damage that is not easily remediable. Overcompliance does not fulfill the conditions for a lawful restriction of fundamental rights and cannot be intended by the legislator.

Of course, it is at the discretion of economic operatorsand not the state of how an economic operator decides to act (freedom of contract, freedom of action). However, by setting out clear rules and regularly publishing comprehensive FAQs, the state has the means to reduce or eliminate legal uncertainty and thus curb the excesses of overcompliance to the detriment of the Swiss economy.

Conclusion: an independent and active sanctions policy

Sanctions can be an appropriate and useful means of sanctioning violations of international law. However, the end does not justify the means. Switzerland is expected to uphold the principles of the rule of law, even in the face of political pressure. This includes, in particular, compliance with the principle of proportionality when fundamental rights are restricted. To achieve this, Switzerland must:

• be able to justify and document sanctioning measures against individuals in a legally sufficient manner with regard to the principle of proportionality;
• examine individual measures of foreign legal systems for their effectiveness and proportionality before adopting them (or in urgent cases also after adoption, but as quickly as possible), taking into account the specific Swiss circumstances. Measures that are overwhelmingly disadvantageous for Switzerland and its economy, while having little or no effect on the intended target, should be adapted or, if necessary, not adopted at all.
• stand for the highest possible legal clarity and certainty. Specifically: unclear provisions should be avoided, the interpretation by the authorities should be published and, if necessary, ordinances should be adapted.

Switzerland must actively fulfill the responsibility and task it has taken upon itself as a sovereign state to advocate for the rule of law. It cannot be the case that Switzerland pays too little attention to its own principles (in particular the principle of proportionality) when attempting to sanction other states' violations of international law and human rights. Especially not, when it is not an active, well-considered decision by Switzerland, but a blind and unquestioned adoption of foreign sanctions. The means of choice for this is an independent and active sanctions policy.

Fortunately, the first signs of a change in approach are already visible: SECO is continuously building up capacities and know-how, and the Federal Council has decided not to implement art. 8a of Regulation (EU) 833/2014 in accordance with the EU's 14th sanctions package. This would have required Switzerland to ensure that Swiss sanctions were observed by subsidiaries abroad (see our detailed article on this subject: No extraterritorial extension of Swiss sanctions). It would be desirable for the future that other Swiss policymakers also become aware of the aforementioned problems and support the move towards an independent and active sanctions policy.