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12 June 2018
Schoenherr publication

Russia Sanctions: Frequent questions and answers

The sanctions against Russia are bringing up many new legal questions for businesses. Here you can find information and answers which we are regularly updating.

When an EU exporter knows or has reason to believe that its product will end up with a designated person, such export must be viewed in the same way as direct exports. For example, if your trade partner who is based in a third country makes the product available to a sanctioned entity, it amounts to a prohibited case of indirectly making economic resources available to a sanctioned party, and you as the exporter could be liable, if you know or should have good reason to know.

Sanctions apply to entities incorporated under EU Member State law, or which must be considered part of a EU Member State law legal person due to its non-independent legal nature. A branch is a typical example of a non-independent part of a legal person.

In contrast, the Regulation does not directly apply to a legal person constituted under the law of country subject to sanctions, or a third country, even if it is a subsidiary in the direct ownership of a EU legal person.

However it should be noted that even in cases where the subsidiary is not considered EU legal person, the EU parent company has the obligation to comply with the regulation at all times, and therefore it is prohibited from giving its subsidiary instructions or orders which are designed or may result in the evasion of any of the provisions of the Regulation.

In addition, when trade activity is conducted on behalf of the EU company, EU sanctions must be fully complied with, i.e. measures must be taken to ensure that the export does not include sanctioned products and that the trade partner is not named on a sanctions list or acting on behalf of a listed person or entity.

Furthermore, all EU citizens must comply with the regulation also in activities outside the EU.

Sanctions imposed and supervised by authorities of non-EU States impose obligations on companies subject to the jurisdiction of that State, but as such they are not legally binding on European companies in operations that have no links to that State.

However, if the trade activity has any links to that State, its laws may be applicable. For instance, if the business activity in question has links to the United States, or if your exported product contains technology originating from the United States, U.S. sanctions must be complied with.

U.S. sanctions may also impose obligations on any U.S. citizens employed by your company, and of course any US companies involved in the business activity in question. If your trade activity does not involve any such links, the sanctions imposed by non-EU states are not legally binding on your company. However, they may have other implications in matters such as the availability of banking services, future access to the market of the third state in question, as well as PR implications.

The prohibition of indirectly making available means that export is also prohibited in cases where the goods, technology or know-how being exported would end up being used or exploited by a designated person or entity through an intermediary.

If ownership or control is established on the basis of appropriate due diligence, the making available of funds or economic resources to non-designated legal persons or entities which are owned or controlled by a listed person or entity will in principle be considered as making them indirectly available to the latter, unless it can be reasonably determined, on a case-by case basis using a risk-based approach, taking into account all of the relevant circumstances, that the funds or economic resources concerned will not be used by or be for the benefit of that designated person or entity.

The place of incorporation of such subsidiaries, and specifically whether they are incorporated in a Member State or in a third country, bears no impact on this assessment, unless the EU legal acts laying down the restrictive measures contain an explicit provision in this regard.

Transferring funds to a designated person

In the Commission’s view, the EU operator that entered into a contractual relationship and initiates the related transfer of funds bears primary responsibility for such transfers.

Nonetheless, each EU operator must meet its own obligations under EU restrictive measures and conduct the appropriate checks. Consequently, EU banks must apply due diligence mechanisms to ensure that processing a payment linked to an underlying transaction does not result in the indirect making available of funds to a designated person. By failing to comply with this obligation, the EU bank in question can be in breach of Article 2(2) of the Regulation. In addition, the EU bank should inform the NCA and the Commission immediately, as required by Article 8 of the Regulation.

EU banks must apply the appropriate due diligence procedures to avoid that a payment made to a certain non-designated entity results in the indirect making available of funds to a designated person.

Crediting accounts of a designated person

If a financial institution discovers that it runs an account belonging to a person or entity whose identification details match those of a designated person or entity, it must immediately freeze the funds, i.e. prevent any access to or dealing with the funds. The discovery should be notified to the NCA. 

Processing payments from the national accounts of EU operators to the accounts of the mentioned non-EU entities, if these transactions are based on invoices issued for the products of Entity B controlled by the designated person?

Should an EU bank be aware, or have reasonable grounds to believe, that a transaction it is processing would amount to making funds or economic resources directly or indirectly available to a designated person, it must refrain from processing the transaction, freeze the amount and inform the NCA and the Commission immediately, in order not to violate Articles 2(2) and 8 of the Regulation.

If the products in question were purchased by an EU operator from an operator in another Member State that, in its own right, had acquired them from another non-EU entity, would this represent a breach of the Regulation by the purchasing operator? Similarly, would the processing of the underlying transactions by an EU bank represent a breach of the Regulation?

Article 2(2) and Article 9 of the Regulation do not refer in any way to the location of the party receiving the funds. Therefore, all EU operators, including banks, are prohibited from making payments to any entity, irrespective of where it is based, if this would entail making funds or economic resources available, directly or indirectly, to or for the benefit of a designated person

Freezing

Must banks separately assess whether the designated person has control over each asset (e.g. bank account) of the controlled entity in order to freeze them?

In the Commission’s view, if the designated person is determined to have control over the Entity, it can be presumed that the control extends to all assets nominally owned by the latter.

The Entity may obtain the lifting of the freeze on some or all of its assets by demonstrating that these are in fact not “controlled” by the designated person, for instance because safeguards are put in place preventing the designated person from having access to them

If EU economic operators find indications that their clients or counterparts, although non-designated, may be controlled by a designated person, they are required to provide such information immediately to the NCA and the Commission, and to cooperate with the NCA in any verification thereof.

Must EU economic operators block all financial transactions only to bank accounts of the Entity, or both to and from said bank accounts?

All transfers to (by EU persons) and from the frozen accounts of the designated Entity must be blocked, unless otherwise authorised by the NCA pursuant to one of the applicable derogations provided for in the Regulation.

However, financial or credit institutions may credit frozen accounts in the event of transfers from third parties, provided that any such additions are also frozen. The NCA must be duly informed about any such transactions without delay.

prohibition extends to payments made to any account of the Entity, including those not frozen, unless (a) the payments are authorised in advance by the NCA pursuant to one of the derogations provided for in the Regulation, or (b) it is reasonably determined that such payments will not be made available to the designated person. As mentioned above, EU banks may credit frozen accounts insofar as the incoming funds are also then frozen

Designation means that any deliveries to the designated company which have been agreed on or are currently in progress must be halted immediately (unless there is a grace period provided for in the Regulation), even if it amounts to breach of a contract that is binding on the export company.

Sanctions regulations typically include provisions on the limitation of liability, which are designed to protect export companies from claims arising from breaches of contract caused by unforeseen changes in sanctions.

Companies trading with entities based in sanctioned countries should always aim to protect themselves by contractual means against risks related to sanctions and their amendments.

In practice, the prohibition on making funds available to named persons or entities means that all forms of economic activity with these persons and entities is prohibited.

The listing also means that deliveries to the listed company which have been agreed on or are already in progress must be halted immediately.

However, regulations typically include a provision that enables companies to receive payments on obligations that were created before the listing. The transfer of the funds requires prior authorisation from the NCA.

The sanctions regulation prohibits making all types of funds available (i.e. any immovable or movable, material or immaterial property which has financial value) to a listed person or entity, either directly or indirectly.

Therefore, no payments to a listed entity are permitted. In some cases, an exception to the prohibition of the transfer of funds can be made with prior written authorisation

Payments are therefore prohibited, unless authorised by the NCA pursuant to one of the derogations provided for in the Regulation, or unless it is reasonably determined, on a case-by-case basis using a risk-based approach, taking into account all of the relevant circumstances, that the funds will not be used by or be for the benefit of the designated person. EU banks must apply the appropriate due diligence procedures to avoid that a payment made to a certain non-designated entity results in the indirect making available of funds to a designated person.

To the extent that the supplying Entity is controlled by a designated person, the related transaction ultimately amounts to making funds and/or economic resources indirectly available to the designated person. Any other conclusion would imply that Article 2(2) of the Regulation could be circumvented by setting up shell companies, whether in Member States or in third countries, through which funds or economic resources could be indirectly channelled to designated persons or entities through an entity controlled by the latter.

Factors to consider whether the funds might be made available to the designated person:

  • the intervention of numerous intermediaries in the chain leading from the manufacturer to the end-user;
  • the mismatch between the country of origin of the goods and the one where an intermediary company is located;
  • the shipment of the goods into the EU from such a third country;
  • and the existence of EU restrictive measures targeting a significant number of natural or legal persons in either country.

Making payments in favour of Third-Country Intermediaries for products originating from an entity of a designed person can be considered as making funds indirectly available to the designated person, given that (i) the Third-Country Intermediaries have provided consideration in exchange for the goods, and (ii) the Entity is controlled by the designated person, hence it is presumed to channel to or use the funds and economic resources for the benefit of the latter. Such payments are therefore prohibited, unless authorised by the NCA pursuant to one of the derogations provided for in the Regulation or unless it is reasonably determined, on a case-by-case basis using a risk-based approach, taking into account all the relevant circumstances, that the funds will not be used by or for the benefit of the designated person.

Due under a contract also includes satisfying a guarantee claim

The purpose of the derogation is not only to enable the Designated Person to comply with its pre-existing contractual commitments or obligations, but also to permit the exercise of pre-existing (contractual) rights by non-designated persons. The purpose is not to make it conditional on the consent of the Designated Person.

This understanding is confirmed by the national practices of the EU Member States, which appear to endorse this interpretation, as shown by the EU Best Practices for the effective implementation of restrictive measures (“Best Practices”). The Best Practices state that it is for the interested parties, not only for the Designated Person, to request authorisations for access to frozen funds or economic resources in accordance with national procedures.

the NCA needs to ascertain that the other conditions are fulfilled, particularly, whether the payment in question is due under a contract or agreement concluded by or under an obligation that arose for, the Designated Person before its listing. A judicial, administrative or arbitral judgment, decision or award recognizing the right of the non-designated entity to execute the guarantee on the basis of a pre-existing contractual obligation will facilitate this assessment.

However, in the Commission’s view, the Regulation empowers the NCA to decide whether to grant the authorisation also in the absence of such a pronouncement, based on all the factual and legal elements at its disposal.

Designated Person should, to the extent possible, be informed of such requests, and that the ordinary procedures to determine the validity of claims against the Designated Person continue to apply.

“intended exclusively for payment of fees or service charges for routine holding or maintenance of frozen funds or economic resources”. This provision enables the routine holding of the funds in order to, on the one hand, allow the holding bank to be paid for the maintenance and service it continues to provide, and, on the other, to avoid outcomes causing a disproportionate burden on the designated person, which would go beyond the objectives of restrictive measures.

The right to levy fees or service charges remains in general governed by the terms of the contractual agreement between the account owner and the bank, together with the applicable national legislation. However, certain exceptional holding fees or service charges, particularly those that had not been mutually agreed prior to designation, may not fulfil the purpose of maintaining an existing frozen account. In such cases, Article 4(1)(c) of the Regulation does not open the way to payments derogating from Article 2.

This is determined on a case-by-case basis. Usually, the deciding factor is whether the restricted product is an integral part of the system and whether it can be reasonably (without damage) removed from the system. If that is the case, the banned component cannot be exported as part of the production line.

Furthermore, banned products must not be disguised for export purposes by exporting them as part of a bigger system. If there is a possibility that the product may include restricted components, the exporter should exercise extreme caution and obtain an expert opinion on the legality of the export.

Certain countries, such as the United States, have restrictions in place on the re-exportation of components and technologies produced or developed in that country. Exporters are advised to ascertain whether any products and technologies sourced by it from other countries are subject to these types of restrictions.

broad interpretation given by the Court of Justice[1] , the provision of labour and services can be considered as economic resources, and can thus enable a designated person to obtain benefits. In order to assess the applicability of Article 2(2) to the provision of specific labour and services, the NCA should determine whether the activity in question can be used, directly or indirectly, by the designated person to obtain funds, goods or services.

Therefore, the Commission takes the view that providing services to or working for the Entity can be considered as making economic resources indirectly available to the designated person exerting control over the Entity, insofar as it enables the latter to obtain funds, goods, or services

[1]     Judgment of the Court of Justice in case C-117/06, Möllendorf, paragraphs 56 and 62.

Christoph
Haid

Partner

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