due diligence towards owners and controllers is essential in assessing the risk of sanctions

The Commission has received two requests for an opinion from a regulatory authority within the EU on the application of sanctions regimes imposing restrictive measures on persons involved in actions compromising or threatening territorial integrity, sovereignty and the independence of Ukraine. The opinion focuses on the extent to which financial sanctions apply to transactions with unsanctioned entities that are controlled by sanction targets.

The first request concerned a sanctions target who was the chairman of the board of an unsanctioned entity based outside the EU, which had an unsanctioned EU subsidiary. The president was responsible for organizing and ensuring the accomplishment of the work of the council. The second request concerned an unsanctioned company outside the EU that was controlled by a target of sanctions. The company was the supplier of goods to companies outside the EU which in turn sold them to EU operators.

In reference to published guidance on EU sanctions in Syria, the Commission said that a national authority must decide whether an unsanctioned entity is controlled by a target of sanctions. If control over the non-sanctioned entity is established, then it is presumed that control extends to all of the assets of the subsidiary. Therefore, making funds or economic resources available to an unsanctioned entity that is controlled or owned by a target of the sanctions is to make them indirectly available to the latter – which is prohibited. This prohibition also extends to subsidiaries of the non-sanctioned entity.

This presumption can be rebutted if the subsidiary can demonstrate on a case-by-case basis that the funds or economic resources provided will not be used by or for the benefit of the target of the sanctions; or that the control of the target of sanctions on the non-sanctioned entity does not extend to its subsidiary.

Referring to the second request, the Commission stated that making payments to an intermediary for proceeds from a sanction target or from a business that it owns or controls can also be considered an indirect provision. funds to a sanction target.

Sanctions expert Stacy Keen of Pinsent Masons, the law firm behind Out-Law, said the opinion would have wider application to other sanction regimes that impose equivalent bans.

“These rebuttable presumptions in EU sanctions laws have not been fully replicated in UK sanctions regimes. If it is established that a target of sanctions owns or controls an entity, then the financial sanctions prohibitions extend to that entity, ”Keen said.

“It does not matter whether funds or goods provided to the concerned entity will be used by or for the benefit of the target of the sanctions, unless a defense or exception is available or a license has been obtained for the provision “said Keen. .

Keen said there are a number of factors to consider when purchasing goods. These include the intervention of many intermediaries in the chain going from the manufacturer to the end user; the mismatch between the country of origin of the goods and that in which an intermediary company is located; shipment of goods to the EU from such a third country; and the existence of restrictive EU measures targeting a significant number of natural or legal persons in either country.

“The notice is also relevant to financial institutions processing payments,” Keen said. “Although public opinion recognizes that the primary responsibility for carrying out these verifications rests with those who have a contractual relationship with the target of the sanctions or the entity owned or controlled by such a target, or its subsidiaries, this does not reassure institutions much. financial. The opinion is explicit that EU banks must apply due diligence mechanisms to ensure that they do not process a payment that results in funds being directly or indirectly a target of sanctions. “