Restrictive measures or ‘sanctions’ are an essential tool of the EU’s Common and Foreign Security Policy. They are used to fulfil the EU’s key objectives, such as safeguarding the EU’s values, interests and security and preserving peace.
Sanctions are one of the EU's tools used to promote the objectives of the Common Foreign and Security Policy (CFSP). These include safe-guarding the EU's values, its fundamental interests and security; consolidating and supporting democracy, the rule of law, human rights and the principles of international law; preserving peace; preventing conflicts and strengthening international security.
Sanctions are part of a political arsenal seeking to bring about change in the policy or conduct of those targeted. They can be used against:
groups or organisations (such as terrorist groups), or
In the EU, decisions regarding sanctions regimes are taken by the Council of the European Union on the basis of proposals from the High Representative of the Union for Foreign Affairs and Security. The EU Commission, together with the High Representative, gives effect to these decisions through joint proposals for Council regulations.
In the EU, sanctions decisions take two forms:
Council Decisions, which are directly binding on EU Member States, and
Council Regulations, which are binding on any person or entity under EU jurisdiction and do not require transposition into domestic law.
Compliance with EU sanctions is enforced by EU Member States.
These measures only apply within the EU jurisdiction, which means within the territory of the Union, and to so-called “EU Operators” – who are EU nationals (individuals or companies), EU residents or persons conducting their business in the EU (even if just in part). The EU refrains from adopting sanctions having extra-territorial application in breach of international law.
Since Russia’s invasion of Ukraine, the EU has adopted a number of sanctions packages that significantly affect trade between Russia and the EU, throughout various business sectors (including the provision of legal services). Sanctions were first adopted in 2014 (after Russia’s annexation of Crimea) and then considerably bolstered after Russia’s invasion of Ukraine in February 2022.
The EU enacts both geographic sanctions (for example, sanctions enacted following Russia’s actions destabilising the situation in Ukraine) and thematic sanctions (for example, the EU’s restrictive measures against serious human rights violations and abuses).
In addition to its autonomous set of sanctions, the EU also implements sanctions adopted by the United Nations Security Council under Chapter VII of the UN Charter.
Sanctions measures adopted by the UN are binding on all UN Member States. They are typically implemented in the EU through EU measures (such as Council Decisions and Council Regulations), in order to ensure their consistent implementation in all EU Member States. There may also be aspects of UN sanctions resolutions that are not addressed at EU level because they fall within the competence of the Member States.
One of the key questions to answer when assessing the impact of the listing of a Designated Person on the EU’s sanctions list is to determine whether such a Designated Person “owns or controls” other entities or assets.
If this is the case, then the funds and economic resources of these entities that are owned or controlled will also be subject to asset freezing measures, despite not being listed directly on the sanctions list.
The criteria that will be taken into account are (i) ownership or (ii) control. This is a similar approach to the UK. However, this significantly differs from the US, which only looks at ownership and does not care about control.
Regarding ownership: The EU’s version of the 50% Rule is similar to the UK’s - EU sanctions will extend to any entity owned by a Designated Person that “possesses more than 50% proprietary rights of an entity or has a majority interest in it”.
Regarding control: the question to be addressed is whether the Designated Person “is able to and effectively asserts a decisive influence over the conduct of the other entity in question.” This analysis is fact based, assessed on a case-by-case basis. There are various criteria to be considered, for example:
The power to appoint or remove majority of board members,
The power to use the entity’s assets;
Sharing financial liabilities;
Having influence on the entity’s corporate strategy or operations;
Monitoring the entity’s commercial conduct;
Sharing a joint business address or any other indicia that would suggest that the two entities are in fact part of the same undertaking.
Once one criterion is met, control is deemed established and the controlled entity’s assets must be frozen immediately.
It is possible to rebut this assumption by providing factual evidence that there is no such control in practice, for example when specific safeguards are put in place for that purpose.
Companies and individuals need to be aware of the sanctions risks they face.
This can only be achieved by careful due diligence to be aware of all sanctions that have been – or may about to be – imposed and may impact your business activities.
It can be necessary to consult specialists who are up to speed with the current situation, especially as sanctions may affect you if your shareholding structure includes Designated Persons (as ultimate beneficial owners for example) or if you deal with Designated Persons or non-designated entities that are owned or controlled by Designated Persons.
It is essential for businesses to proactively assess the impact of sanctions and ensure they do nothing that could lead to accusations that they have been circumventing sanctions.
As regards Russia specifically, corporates should:
Assess the ownership rights and effective control held by Designated Persons within their corporate structure.
Consider diluting the stake held by Russian shareholders to below the 50% threshold, and implement (and document) steps to mitigate control.
Carefully monitor sanctions in business sectors that may impact your business activities (e.g., if you’re dealing in the oil business, or if you are providing certain services to Russian entities, or if you’re dealing with Russian trusts).
When necessary, file an authorisation request with the appropriate EU authorities. Such authorisation is necessary to deal with otherwise prohibited transactions or Designated Persons.
Be proactive, act in good faith and in compliance with the spirit of the regulations and document, document, document all steps taken to mitigate risks.
Indeed, establishing a documented paper trail that shows a bona fide approach to sanctions and the steps taken to reduce their impact (while preventing designated persons circumventing them) will be important when dealing with the relevant authorities.
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Corporate Crime: Detection & Reaction
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Thu 15th Feb 2024