On 8 April 2022, the European Council adopted another sanctions package against the Putin regime in response to Russia's attack on Ukraine. Currently, five sanctions packages against Russia are in force. The sanctions aim to ramp up economic pressure on the Kremlin and cripple its ability to finance its invasion of Ukraine.
All five sanctions packages were implemented by amendments of Council Regulation (EU) No 833/2014 ("Reg 833") and Council Regulation (EU) No 269/2014 ("Reg 269"). However, there is no consolidated version of these two regulations that also includes the latest package.
The newest, fifth sanctions package contains the following measures:
- import bans on goods listed in Annex XXI pursuant to Art 3i of Reg 833 (e.g. all forms of Russian coal, wood, spirits);
- export bans of goods listed in Annex XXIII pursuant to Art 3k of Reg 833 (e.g. means of transport and chemicals);
- a full ban on Russian and Belarusian freight road operators working in the EU as well as an entry ban on Russian-flagged vessels to EU ports;
- exclusion of Russia from public contracts and European money;
- expansion of individual financial sanctions: in total, the asset freeze and prohibition to make economic funds available as per Art 2 Reg 269 now apply to more than 1,000 individuals (politicians, oligarchs, managers, influencers and selected relatives) and 80 entities. The latest sanction package also included an additional four Russian banks – VTB, Novikombank, Sovcombank and Otkritie Bank.
In the absence of case law and literature, the interpretation of the scope of sanctions has proven to be a challenge. Some guidance is available from the Q&A of the European Commission (here) and national authorities, including the Austrian National Bank (here), which are updated repeatedly based on questions posed by national authorities. Looking at the latest versions of the Q&A, the following guidance seems particularly relevant:
1 Aggregation rule in the context of non-listed entities
The financial sanctions mentioned above concern the comprehensive obligation to freeze funds and economic resources belonging to or owned by designated persons and entities directly or indirectly. The concept of "indirectly making available" is not defined in the Regulation but has been interpreted to include entities that are "owned" or "controlled" by listed persons. "Ownership" is understood to mean possession of more than 50 % of the proprietary rights of an entity or having majority interest in it.
In this context, the European Commission has recently stated that it should take into account the aggregated ownership of the entity. For example, if one listed person owns 30 % of the entity and another listed person owns 25 % of the same entity, the entity should be considered as owned and controlled by listed persons.
The criteria to be taken into account when assessing whether a legal person or entity is controlled by another person or entity, alone or pursuant to an agreement with another shareholder or other third party, could include inter alia voting rights, dominant influence, having the right to use all or part of the assets of a legal person or entity and so on (see the non-exhaustive list of criteria here).
2 Refutable presumption regarding non-listed companies
If any of the criteria mentioned above are satisfied, there is a refutable presumption that the legal person or entity is controlled by another person or entity. If control has been established over a group of companies, such a presumption extends to all entities forming this group.
It is for each affected company then to demonstrate on a case-by-case basis that some or all of its assets are outside the control of the listed person, and/or that funds or economic resources made available to it would in fact not reach the listed person.
In this context, the EU Council has clarified that if an economic resource that was made available to a non-listed person or entity is used merely to generate profits which might be in part distributed to a listed shareholder, this will not be regarded as impermissibly making the funds available to such an entity.
3 Dividends from and voting rights in non-listed companies
The Austrian National Bank has made clear that the "freezing of funds" of a listed person means not only that a sale of shares that a listed person holds in a non-listed entity is not permitted, but also that the exercise of all rights associated with the shares, such as convocation or participation in the Annual General Meeting, the exercise of voting rights, etc. is prohibited and there is also no (longer) a right to receive dividends.
This seems overly strict and in contrast to what the EU Q&A states. Shares of listed shareholders qualify as "funds" and therefore must be frozen if belonging to, owned, held or controlled by a listed person, but an exercise of such voting rights is prohibited only insofar as it could lead to any change in relation to these shares (e.g. in their volume, amount, location, ownership, possession, character, destination, etc.).
Also, the EU has clarified that there is no absolute prohibition to pay out dividends, but they may be paid to the frozen accounts of listed shareholders within the EU. In that case, the dividends must also be immediately frozen.
4 Due diligence obligations on EU businesses
The EU Commission has made clear that there is no one-size-fits-all model of due diligence. It may depend – and be calibrated accordingly – on the specifics of the business and related risk exposure. It is for each economic operator to develop, implement and routinely update an EU sanctions compliance programme that reflects their individual business models, geographic and sectoral areas of operations and related risk assessment.
Due diligence may consist in screening the beneficiaries of funds or economic resources against sanctions lists and adverse media investigations. Adverse media investigations refer to searches on the internet and news (media investigations) to find evidence that a contractual counterpart, even if not designated (so it passes the screening against the sanctions list), is actually controlled by a designated person, e.g. news on local press that a company is controlled by a listed businessperson.
5 Execution of pre-existing contracts
There is no general prohibition for EU businesses to make payments towards legal entities registered in Russia. It is important, however, to ensure that the payment does not breach other prohibitions, for instance, that it is not in favour of a listed person or does not serve to settle a transaction prohibited under Reg 833/2014.
In addition, there is no general prohibition on receiving payments from Russian entities. If the goods or services that are provided to Russian business are non-prohibited, an EU entity is not restricted from receiving payments. Should the object of a contract be the provision or acquisition of goods or services subject to an export or an import ban, it may still be possible to perform the contract and receive or make payments until a certain date, subject to the relevant provision in Regulation 833.
The Fifth Sanctions Package immediately banned the export and import of several types of goods and services, but allowed for a grace period regarding pre-existing contracts. The term "contract" refers to a binding commitment between parties. Such an agreement should contain all the necessary elements for its validity and the execution of a transaction, such as indication of the parties, price, quantities, delivery dates, modalities of execution, etc. Most framework contracts that do not specify the quantities or the price would therefore not be considered a contract for the purpose of the exceptions foreseen for the execution of prior contracts.
As we have seen, authorities tend to interpret prohibitions extensively and strictly. As much as the EU is trying to safeguard a uniform interpretation of EU Regulations, it is ultimately down to national authorities to apply them. While interpretation practice will develop in the future, it is advisable to regularly check the Q&A of the European Commission and national competition authorities as well as further updates on their websites.