Council regulations imposed by the EU
In response to the developments in Ukraine unfolded by the Euromaidan protest movement in early February 2014, the EU Council on 5 March 2014 decided to impose restrictive measures against individuals who have been identified as being responsible for the misappropriation of Ukrainian State funds and/or human rights violations (Council Regulation (EU) No. 208/2014). On 17 March 2014, additional sanctions were announced by both the EU (Council Regulation (EU) No. 269/2014) and the United States (United States Executive Orders of 6 March 2014 and 17 March 2014) against certain Russian individuals associated with the declaration of the independence of Crimea. The EU further increased the scope of sanctioned individuals on 20 March 2014.
While the further course of political and diplomatic developments in Ukraine cannot be foreseen, the EU sanctions were set into force immediately, thus challenging EU businesses1 to revisit their relations with designated persons and the entities deemed to be associated with them.
Freezing of funds
The regulations impose the freezing of funds owned or held by any of the designated persons. Further, non-designated entities are subject to such a freeze in the event that they are held or "controlled" by a designated person.
As to proper procedure for determining whether an entity is "controlled" or not, the available guidance can be unclear. Parameters to be taken into account include, inter alia, whether the designated individual has a majority of voting rights, the right to appoint or remove a majority of the entity's board, or other rights to exercise dominant influence.
Challenge yourself: Am I exposed to the risk of being under control of a designated party from either an equity (e.g. majority voting interest) or debt (e.g. hard covenants, profit participation, share pledges) perspective?
Prohibition to make payments
EU businesses2 are prohibited from making available any funds (e.g. by way of payments) to designated persons and controlled entities irrespective of the designated persons' or controlled entities' nationality, residence, or corporate seat.
Thus, in order to avoid any risk of negligence, know your client ("KYC") due diligence needs to be performed for each individual transaction potentially involving a designated person or controlled entity.
Challenge yourself: Am I performing business transactions diligently by applying to comprehensive KYC standards? Can I rule out that payments -- especially those in the Ukrainian region -- are not being made to controlled entities or designated persons?
In case an entity deems itself as being under the control of a designated party, the management obligations stipulated by the Regulation may require the firm to give notification to the competent authorities in order to avoid being in breach of the Regulation.
Also, negligently making funds available to a designated person or controlled person may constitute a violation of the Regulation.
Violations of any of the regulations – sanctioned under applicable national laws3 - may constitute a criminal offence. In Austria, such violations may be punished with imprisonment of up to two years or a fine of up to 360 daily rates.
Further, US sanctions may also be applicable, constituting additional obligations under US law.
Also, it is worth noting that under Ukrainian law, transactions with and payments to Ukrainian entities may be qualified as criminal offences if it is proven that such Ukrainian entities' managers committed criminal violations (e.g., money laundering, tax evasion or fictitious entrepreneurship). In order to minimize the risks from Ukrainian law perspective, it is necessary to undertake due diligence and circumspection and exercise due caution and prudence when dealing with such Ukrainian entities.
Information on Russian and Ukrainian individuals who have been designated under the respective Council Regulations is available on the EU's Eur-Lex website (http://eur-lex.europa.eu).