On 16 December 2014, the EU Commission issued a guidance note on the implementation of certain provisions of Regulation (EU) No. 833/2014, particularly the capital market related provisions of Article 5 of said Regulation. Also on December 30, 2014, the US Treasury Department’s Office of Foreign Assets Control released General License No. 5 authorizing certain activities related to the Crimea region of Ukraine that were otherwise prohibited by Executive Order 13685 of December 19, 2014. Below we summarize the main relevant developments.
EU Commission guidance note on sectoral sanctions relating to the crisis in Ukraine
The EU Commission issued a guidance note on the implementation of certain provisions of Regulation (EU) No. 833/2014. The guidance note is aimed at providing for uniform implementation by national authorities and parties concerned. It is neither legally binding, nor does it address all provisions exhaustively. Instead the guidance note represents the EU Commission’s understanding of the sectoral sanctions.
Financial assistance relating to arms, dual-use goods, and sensitive technologies in the oil sector (Articles 2 and 4)
- The Commission considers payment services and letters of guarantees/credit to be financial assistance when linked to a sanctioned underlying commercial transaction.
- Pursuant to the Commission, banks should exercise due diligence on payments carried out by their customers in order to comply with the prohibition on financial assistance. For correspondent banks, due diligence is limited to available information.
Capital markets (Article 5 (1) and (2))
- Derivatives are covered by the EU capital market sanctions if they give the right to acquire or sell a transferable security or money market instrument prohibited under Article 5 (1) and (2) Regulation (EU) No. 833/2014. This could apply to options, futures, forwards, or warrants whether or not OTC traded. By contrast, CDS, interest rate swaps, cross currency swaps and derivatives for hedging purpose in the energy market should not be covered.
- EU persons may not issue or deal in depositary receipts issued on or after the effective date (i) if they are based on new transferable securities or, alternatively, (ii) if they are based on pre-effective date transferable securities but issued under a deposit agreement with the sanctioned entity. In the latter case, the depositary receipts would be considered as being issued on behalf of that sanctioned entity.
- The capital market sanctions do not prohibit trade with depositary receipts where the sanctioned bank is acting as a custodian.
- Prohibited transferable securities or money market instruments may not be used as collateral when entering into repurchase agreements or securities lending agreements.
- The Commission considers repurchase agreements and securities lending agreements to be money market instruments covered by Article 5 (1) and (2) Regulation (EU) No. 833/2014.
- The Commission takes the view that EU persons are free to deal with pre-effective date transferable securities even if new transferable securities of the same pool of assets have been issued after the effective date of the sanctions. While the Commission takes account of the practical issues relating to the fungibility of these securities, it notes that EU persons bear the onus of ensuring that any trades they enter into do not involve the banned securities.
Loans (other than for trade finance or emergency funding, Article 5 (3))
- The factoring of claims under a pre-existing loan or credit to another sanctioned entity is permissible, if it does not involve any new loan or credit to any sanctioned entity.
- The Commission considers takeover by a sanctioned entity of the debt arising from a loan with a maturity exceeding 30 days to effectively extending a loan to that entity and, as such, to be prohibited.
- According to the Commission, (term) deposit services are no loans or credit unless they are used to circumvent the prohibitions on new loans and credit.
- Pursuant to the Commission, payment and settlement services, including through correspondent banking, should not be construed as 'making' or 'being part of an arrangement to make' a new loan or credit to a sanctioned entity.
- Providing collateral (e.g. in the form of guarantees, deposits, pledges, risk participations or funded participations) to sanctioned group entities for intra-group risk mitigation purposes is not prohibited, if it does not constitute a new loan or credit that sanctioned entity transferable security or money market instrument covered by Article 5 (1) and (2) Regulation (EU) No. 833/2014.
- Payment terms/delayed payment are not considered to be loans or credit unless used to circumvent the prohibitions on new loans and credit. Payment terms that do not conform with normal business practice or are substantial extension may indicate circumvention.
- EU persons may channel funds to non-sanctioned entities through a sanctioned entity, provided that the funds do not stay with the sanctioned entity for more than 30 days.
Trade finance (Article 5)
- The Commission makes it clear that also after 12 September 2014 EU persons may process payments, provide insurance, issue L/Cs, extend loans, to sanctioned entities, if these actions are covered by the trade finance exemption under Article 5 (3) Regulation (EU) No. 833/2014.
- Modifications of pre-existing loans or credit are permissible, if the action is still covered by the trade finance exemption under Article 5 (3) Regulation (EU) No. 833/2014.
- The trade finance exemption extends to third country content of goods or services. However, the expenditures arising therefrom must be necessary for the execution of the export or import contract to or from the Union.
- Goods transits through another third States do not foreclose the application of the trade finance exemption, provided that the export/import contract clearly stipulates that the imports or exports originate in or are destined to the EU
- The reference to a “third State” in Article 5(3) includes Russia.
- Official Export Credit Agencies (ECAs) in the EU may provide financing to sanctioned entities to support exports, including local costs, within the OECD limits.
- Trade between third States is not covered by the trade finance exemption of Article 5(3) Regulation (EU) No. 833/2014.
- In accordance with the understanding of the Commission, EU persons may, in principle, confirm or advise L/Cs and provide discounting or post-financing for them, unless the applicant of the L/C (the buyer or importer) is a sanctioned entity under Article 5.
- The trade finance exemption does not extend to the purchase of bonds intended for trade financing. Such purchase would be prohibited under Articles 5 (1) and (2) Regulation (EU) No. 833/2014.
- Interest Make-Up Agreement (IMUs) are considered to be interest rate swaps and as such not covered by the prohibitions in Article 5.
Emergency funding (Article 5)
- The Commission referred to the situation set out in Article 32(4) of Directive 2014/59/EU (Bank Recovery and Resolution Directive), as an example of emergency funding.
OFAC General License No. 5 – Authorizing Certain Wind Down Operations Related to Crimea
On December 30, 2014, the US Treasury Department’s Office of Foreign Assets Control (OFAC) released General License No. 5 authorizing certain activities related to the Crimea region of Ukraine (Crimea) that were otherwise prohibited by Executive Order 13685 of December 19, 2014. Executive Order 13685, among other things, prohibits US persons from making any new investment in Crimea; importing directly or indirectly to the United States essentially all goods, services or technology from Crimea; exporting to Crimea from the United States or by US persons most types of goods, services and technology; and facilitating any such transactions by non-US persons.
General License No. 5 carves out certain exceptions for activities involving Crimea that are “ordinarily incident and necessary” to:
- The “winding down or divestiture or transfer to a foreign person of a U.S. person’s share of ownership, including an equity interest, in pre-December 20, 2014 investments located” in Crimea;
- The “winding down of operations, contracts, or other agreements that were in effect prior to December 20, 2104, involving the exportation, re-exportation, sale, or supply of goods, services, or technology” to Crimea; and
- The “winding down of operations, contracts, or other agreements that were in effect prior to December 20, 2104 involving the importation of any goods, services, or technology from” Crimea into the United States.
Permission for these activities under General License No. 5 run through 12:01 a.m. (Eastern Daylight Time), February 1, 2015. The scope of this license is limited only to the above activities that are necessary to wind down operations, contracts, or other agreements involving Crimea. General License No. 5 does not authorize any new activities involving Crimea that are otherwise prohibited by Executive Order 13685 or by other Executive Orders, or any transactions or dealings with specially designated nationals. Any US persons conducting transactions authorized by General License No. 5 are required to file a detailed report with OFAC within ten business days after the wind-down activities conclude.