The European Commission has recently issued three opinions regarding the interpretation of asset freeze provisions in certain sanctions legislation pertaining to Central African Republic, Ukraine, Libya and Syria. The opinions are also of relevance for other sanctions regimes which provide for the same or similar restrictions. Therefore, their practical relevance goes far beyond the sanctions regimes in the context of which they were issued and they therefore provide for helpful guidance regarding the required thresholds for sanctions compliance generally.
The opinions may be found here:
As readers no doubt are aware, asset freeze provisions are central components in most sanctions legislation. The consequence of an asset freeze provision is generally that it is prohibited to make funds or economic resources (i.e. any kind of tangible or intangible asset) available, directly or indirectly, to or for the benefit of a listed person or a person owned or controlled by such a person. This type of prohibition does not only apply to banks but all entities involved in an transaction.
The opinions should be read in conjunction with the EUs Best Practice for the effective implementation of restrictive measures
The takeaways from the opinions can be summarised as follows:
- The expression “owned and controlled” is not limited to de facto ownership of 50% or more but it also includes control by way of power to appoint decision makers or power to exercise other type of influence. It can also include the situation where a company guarantees another company’s liability. Hence, “owned and controlled” may not be readily identifiable and hence occasionally (see below) more thorough investigations may be required.
- If ownership or control is established there is a presumption that the listed entity will control the funds provided to the non-listed entity “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”.
- Entities are required to have in place due diligence procedures and conduct appropriate checks in order to avoid breach of asset freeze provisions/sanctions legislation. These procedures may include screening, risk assessment, multi-level based due diligence and ongoing monitoring. In case a transaction involve intermediaries, companies are requested to assess “all factual elements at their disposal” to analyze whether the asset will not benefit the listed entity
- Some sanction legislation contains a provisions to the effect that there is no liability for breach of the asset freeze provision if the entity did not know and had no reasonable cause to suspect that their action would infringe the prohibition. However, this does not excuse an entity from the obligation to apply appropriate due diligence procedures in order to ascertain the position as to ownership and control in relation to a transaction
Perhaps unsurprisingly, concrete guidance as to the exact ramifications of the due diligence requirements has not been provided. With reference to the second point above, however, it would seem that due diligence requirement appears to be fulfilled if it can be “reasonably determined, on a case by case basis using a risk based approach, taking into account all relevant circumstances, that the funds will not be used by or be for the benefit of the designated person”. What the required steps are in a given situation will depend on the prevailing circumstances. The key word here is “risk based”, which means that, for instance, in case an entity conducts business in a country where there are a significant number of EU restrictive measures in place, the entity is expected to make a more thorough investigation compared to if there are no or few such measures in place.