(Source: Mayer Brown, 22 Jun 2020)
On June 19, 2020, the European Commission issued an opinion that shed light on the scope of application of asset freeze measures (“Opinion”) [FN/1] The Opinion provides welcome clarifications on the application of asset freeze measures to non-sanctioned entities controlled by sanctioned persons. It also confirms that the concept of “economic resources” can cover services and labor.
On its face, the Opinion has been issued in relation to Council Regulation (EU) No 269/2014, which provides for restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. It is, however, equally relevant for all asset freeze measures imposed by the European Union (“EU”), regardless of the applicable sanctions regime.
(1) Applicability of asset freeze measures to non-sanctioned entities that are controlled by sanctioned individuals or entities
Asset freeze measures are typical sanctions tools, which target specifically listed individuals and entities (“Designated Person”). As a result of these measures, all funds and economic resources belonging to, owned, held or controlled by a Designated Person must be frozen, and no funds or economic resources shall be made available to or for the benefit of a Designated Person.
Through FAQs and best practices, both the European Commission and the Council of the European Union clarified that asset freeze measures may also, at least in part, extend to non-designated entities that are “owned” or “controlled” by a Designated Person. [FN/2] Both institutions took the view that making available funds or economic resources to a non-designated entity that is owned or controlled by a Designated Person would amount to making such funds or economic resources indirectly available to the Designated Person. This would consequently be prohibited under EU sanctions laws unless it can be reasonably determined, on a case-by-case basis using a risk-based approach, that the funds or economic resources concerned will not be used by or be for the benefit of the Designated Person. [FN/3] There remained, however, considerable uncertainties with regard to whether asset freeze measures as a whole, and in particular the requirement to actually freeze funds and economic resources, extended to the funds and economic resources of non-designated entities that are owned or controlled by a Designated Person. For instance, the Council’s Best Practices hinted that this would not be the case (emphasis added) [FN/4]
In principle, the freezing should not affect funds and economic resources which are neither owned by or belonging to, nor held or controlled by designated persons and entities. Thus, for example, the funds and economic resources of the non-designated employer of a designated person are not covered, unless they are controlled or held by that person. In the same vein, the funds and economic resources of a non-designated entity having separate legal personality from a designated person or entity are not covered, unless they are controlled or held by the designated person or entity. However, even so, funds and economic resources jointly owned by a designated person or entity and a non-designated one are in practice covered in their entirety.
Member states-which are responsible for the enforcement of EU sanctions, including asset freeze measures-adopted diverging positions in that regard. For instance, in the United Kingdom, the Office of Financial Sanctions Implementation (“OFSI”) had already taken the view that asset freeze measures extend in full to non-designated entities that are owned or controlled by a Designated Person [FN/5]
[A]n asset freeze and some financial services restrictions will also apply to entities that are owned or controlled, directly or indirectly, by a designated person. Those entities may not be designated in their own right, so their name may not appear on the consolidated list. However, those entities are similarly subject to financial sanctions.
By contrast, the French Treasury considered that asset freeze measures do not extend in full to non-designated entities simply because of their shareholding or control structure [FN/6]
Unless otherwise provided, the fact that a legal person affected by a freezing order owns/controls a subsidiary does not automatically lead to the implementation of the freezing measure with regard to the subsidiary.
The Opinion clarifies that funds and economic resources of non-designated entities controlled by a Designated Person must be frozen unless it is demonstrated that the relevant assets are in fact not controlled by the Designated Person (e.g., because safeguards are put in place to prevent the Designated Person from accessing them).
The position expressed in the Opinion is therefore analogous to the one adopted vis-à-vis restrictions on the making available of funds and economic resources: there is a presumption of prohibition unless it is established that the Designated Person cannot be indirectly concerned or positively affected by the transaction.
As a result, making payments to or receiving payments from a non-designated entity that is owned or controlled by a Designated Person is prohibited, unless it is:
- Authorized by national competent authorities pursuant to one of the derogations set forth in the applicable Regulations; or
- Established, based on the particular facts of the case, that the specific bank account is not controlled by the Designated Person or that the payment will not be used by or be for the benefit of the Designated Person.
Under most EU sanctions regimes, EU banks would remain entitled to credit frozen accounts provided that any such additions are also frozen and that the competent authorities have been informed of such crediting.
While the Opinion already brings much welcome clarifications as to the scope of the EU’s asset freeze measures, two additional points must be considered:
- Although the Opinion focuses on non-designated entities “controlled” by a Designated Person, it should be equally valid for non-designated entities “owned” by a Designated Person; and
- The factual background of the Opinion discusses a situation where an individual, who is a Designated Person, has a management role in a non-designated entity. This indicates that non-sanctioned entities managed by sanctioned individuals may become subject to sanctions if, as a result of their management position, the Designated Person is able to exercise control over the relevant entity.
The clarifications made by the Opinion reinforce the requirement-under EU sanctions laws-to conduct thorough and comprehensive checks on the shareholding and control structure of counterparties so as to ensure no dealing is conducted with an asset freeze target.
To assist with these due diligence procedures, the Opinion calls on businesses and member states to cooperate. On the one hand, EU economic operators are reminded of their obligation to immediately inform the European Commission, directly or through their national competent authorities, of any indications that their clients or counterparts that are non-designated may be owned or controlled by a Designated Person. On the other hand, to facilitate the due diligence efforts of EU economic operators, national competent authorities are asked to publish their conclusions on the relationship of control between Designated Persons and controlled entities, including where they have determined that assets of a given entity are not controlled by a Designated Person.
(2) The provision of services or labor to sanctioned persons may breach asset freeze measures
Economic resources are typically defined as “assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but may be used to obtain funds, goods or services.” The provision of such economic resources to Designated Persons and entities owned or controlled by Designated Persons would typically run afoul of the EU’s asset freeze measures.
Whether the definition of “economic resources” could include “services” or “labor” has been the subject of much debate. For instance, in guidelines approved by the UN Al-Qaida Sanctions Committee on February 24, 2015, it was considered that “internet hosting or related services” would constitute “economic resources.” [FN/7] By contrast, OFSI recently took the view that it is not prohibited to provide services to Designated Persons (except financial services to those designated under Terrorist Asset Freezing etc. Act 2010), although a license would be required to receive payment for services. [FN/8]
The Opinion confirms labor and services can be considered as economic resources insofar as such labor and services can be used, directly or indirectly, by a Designated Person to obtain funds, goods or services.
In other words, asset freeze measures will not apply to any and all provision of services or labor. Providing services to or working for a Designated Person or for an entity that is owned or controlled by a Designated Person would be prohibited only insofar as it enables the latter to obtain funds, goods or services.
This position is not new, as it was already included, in relation to telecommunications services, in drafts of the Council’s Best Practices but was eventually dropped from the final document. It is nonetheless the first time that an EU institution expressly confirms that labor and services can potentially be covered by asset freeze measures.
Importantly, however, the circumstances in which services or labor would indeed entitle a Designated Person to obtain funds, goods or services remain largely unclear and subject to interpretation. In practical terms, economic operators subject to EU sanctions will need to carefully consider whether and to what extent their portfolio of services could enable an asset freeze target to obtain funds, goods or services.
(3) 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. While it is not binding, it reflects the common understanding by the member states and the European Commission and aims to promote uniform implementation. The Opinion will therefore likely be followed by the member states’ authorities in charge of enforcing asset freeze measures.
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. Mayer Brown stands ready to assist in this regard.