On June 8, 2021, the European Commission (“Commission”) adopted an opinion that clarifies the scope of the asset freeze measures imposed against listed individuals and entities pursuant to Council Regulation (EU) No 269/2014 (“Opinion”).1 The Opinion focuses on the applicability of asset freeze measures to non-designated entities that are controlled by designated individuals or entities (“Designated Persons”) and provides useful guidance on related due diligence requirements, in particular for banks in the European Union (“EU”).
The Opinion follows requests received from a National Competent Authority (“NCA”) with regard to the permissibility of direct and indirect transactions with non-designated entities, inside or outside the EU, that are controlled by Designated Persons. While based on the EU restrictive measures in view of the situation in Ukraine, it is relevant for all asset freeze measures imposed by the EU.
1. The Opinion confirms the applicability of asset freeze measures to non-designated entities that are controlled by Designated Persons, including through their governance members.
The Opinion refers to the position previously adopted by the Commission regarding the situations in which a Designated Person is considered to “control” a non-designated entity and the corresponding impact this has on the applicability of asset freeze measures to the controlled non-designated entity2:
- Control exists when a Designated Person “is able to and effectively asserts a decisive influence over the conduct of the other entity in question”;3 and
- Where a non-designated entity is controlled by a Designated Person, it is presumed that:4
(i) such control extends to all assets nominally owned by the non-designated entity, which must therefore be frozen; and
(ii) making funds or economic resources available to the non-designated entity equates to making them indirectly available to the Designated Person.
Although the Commission stresses that the existence of “control” is to be determined on a case-by-case basis by NCAs, the question referred to by the NCA related to whether a non-designated entity should be considered subject to asset freeze measures when the chairman of its board of directors is a Designated Person. The Commission therefore does not exclude that the designation of the chairman of the board of directors of a non-designated entity may have far-reaching consequences for the latter.
2. Asset freeze measures extend based on indirect ownership or control but also cover indirect purchases via non-designated intermediaries.
When addressing the specific transactions referred to by the NCA, the Opinion provides two important clarifications:
- Asset freeze measures can be extended based on indirect ownership or control.5 Asset freeze measures are presumed to extend to not only non-designated entities that are directly controlled by a Designated Person but also the subsidiaries and the assets of the non-designated entity. In other words, asset freeze measures are presumed to extend throughout the ownership or control chain.
To rebut the presumption, a non-designated subsidiary can, however, demonstrate that some or all of its assets are outside the control of the parent entity or that the latter is, in fact, not controlled by the Designated Person.
- Asset freeze measures cover indirect purchases from non-designated intermediaries of goods produced by Designated Persons.6 As it is assumed that the intermediaries have paid or provided some form of consideration to the Designated Person, the acquisition of goods from and making payments/offering some form of consideration to intermediaries indirectly allows funds/economic resources to be channeled to the Designated Person.
Importantly, the question referred to by the NCA also covered a situation where an EU operator would purchase goods from another EU operator. The Commission indicates that “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.” Thus, even intra-EU transactions relating to goods manufactured by a Designated Person (or the entities they own/control) can run afoul of the EU’s asset freeze measures.
3. The Opinion emphasizes the due diligence obligations of EU operators and, in particular, EU banks.
The Opinion highlights the importance of due diligence in relation to (i) ownership/control by Designated Persons and (ii) indirect purchases of goods produced by Designated Persons:
“All EU operators, including banks, must put in place the required due diligence procedures and conduct the appropriate checks in order to avoid breaches of [EU sanctions]. These procedures may include screening, risk assessment, multi-level based due diligence and ongoing monitoring.”
“… EU operators should assess all factual elements at their disposal. Such elements may include inter alia: 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.”
The Commission also states that, while the EU operator engaging in a contractual relationship “bears primary responsibility,” all EU operators, including banks, must meet their obligations under EU restrictive measures and conduct the appropriate checks.
Notably, EU banks must:
- Apply due diligence mechanisms to ensure that processing a payment linked to an underlying transaction does not result in a breach of the EU’s asset freeze measures (including as a result of the involvement of non-designated entities that are owned or controlled by Designated Persons or because the underlying transaction involves indirect transactions with Designated Persons);
- Refrain from processing a transaction in a situation where they are aware or have reasonable grounds to believe that the transaction would amount to making funds or economic resources directly or indirectly available to a Designated Person; and
- Inform NCAs and the Commission immediately when they hold information which relates to compliance with the EU’s asset freeze measures.
Throughout the Opinion, the Commission also states repeatedly that EU operators are not allowed to circumvent EU restrictive measures, i.e., by participating “knowingly and intentionally, in activities the object or effect of which is to circumvent the [relevant restrictive measures].” However, the Commission equally emphasizes that their actions shall “not give rise to any liability of any kind on their part if they did not know, and had no reasonable cause to suspect, that their actions would infringe the [relevant restrictive measures].”
4. While non-binding, the Opinion will have far-reaching implications for economic operators subject to EU sanctions laws.
The Opinion provides welcome clarifications on the scope of application of the EU's asset freeze measures and the expected due diligence requirements for EU operators, including banks. While it is not binding, it provides guidance for the uniform implementation of EU law and is thus likely to be followed by member state NCAs.
In light of this Opinion, economic operators subject to EU sanctions laws should stand ready to reinforce, where needed, their due diligence and compliance processes. And Mayer Brown stands ready to assist in this regard.
2 In particular, the Commission refers to the answer to question 9 in Frequently Asked Questions on EU restrictive measures in Syria. The Commission also refers to Commission Opinion on Article 2 of Council Regulation (EU) No 269/2014 of 19.6.2020 (C(2020) 4117 final), which was discussed in a previous Legal Update, available at:
3 This is to be assessed by reference to non-exhaustive criteria, namely: “a. the power to appoint or remove a majority of the members of the administrative, management or supervisory body of such legal person or entity; b. using all or part of the assets of a legal person or entity; c. sharing jointly and severally the financial liabilities of a legal person or entity, or guaranteeing them; d. having influence as regards corporate strategy, operational policy, business plans, investment, capacity, provision of finance, human resources and legal matters; e. putting in place or maintaining mechanisms to monitor the commercial conduct of the legal person or entity; f. other indicia such as sharing a business address or using the same name which could cause third parties to have the impression that the two entities are in fact part of the same undertaking.”
As indicated by the Commission, these criteria are not identical but similar to those mentioned by the Council of the European Union at paragraph 63 of the EU Best Practices for the effective implementation of restrictive measures.
4 These presumptions can be rebutted by demonstrating that (i) the relevant assets are in fact not controlled by the Designated Person or (ii) the funds or economic resources concerned will not be used by, or be for, the benefit of the Designated Person.
5 In the concrete example provided in the Opinion, making payments to the subsidiary of a non-designated entity that is controlled by a Designated Person would run afoul of the EU’s asset freeze measures unless it is demonstrated that the relevant payment will not be used by, or be for, the benefit of the Designated Person.
Of note, the Opinion stresses that making payments to the subsidiary of an entity controlled by a Designated Person amounts to making them available to the controlled entity, and to the extent that entity is controlled by the Designated Person, the payments can be considered indirectly made available to or for the benefit of the Designated Person. Thus, a demonstration that the relevant payment will not be used by, or be for, the benefit of the Designated Person should evidence that this will not be the case directly or indirectly (i.e., via the non-designated parent that is controlled by the Designated Person).
6 In the concrete example provided in the Opinion, goods are not produced directly by a Designated Person but, rather, a non-designated entity controlled by a Designated Person against which the asset freeze measures are presumed to extend. The Commission states that purchasing goods produced by that controlled entity, even if via non-designated intermediaries, would run afoul of the EU’s asset freeze measures unless it is demonstrated that the relevant funds will not be used by or be for the benefit of the Designated Person.
While not specifically spelled out in the Opinion, it appears that this would hold true even if the intermediary is not related to any Designated Person, directly or indirectly.