New Commission opinion on EU sanctions and “making available”: the impact of a non-sanctioned company and its subsidiaries of having a Designated Person director

On 8 June 2021, the European Commission published an opinion on Article 2(2) of Council Regulation (EU) No 269/2014 of 17 March 2014 (the “Regulation”). The Regulation imposes an asset freeze on certain Russian individuals and entities in response to the situation in Ukraine. Article 2(2) contains the standard EU asset freeze wording providing that “no funds or economic resources shall be made available, directly or indirectly, to or for the benefit of” the designated persons listed in Annex I to the Regulation.

The Commission was asked to issue its opinion in relation to one designated individual listed in Annex I to the Regulation. This person is the Chairman of the Board of Directors of a non-designated, non-EU entity (“Entity A”). In turn, Entity A owns a subsidiary company based in an EU Member State (the “EU Subsidiary”). The Commission was asked to confirm whether the designated person should be regarded as controlling Entity A and whether EU persons were prohibited from making payments to the EU Subsidiary.

In answering this question, the Commission referred to the criteria identified in its 2017 FAQs on the Syrian sanctions regime, and the Council of the European Union’s 2018 Best Practices for the effective implementation of restrictive measures, which are to be taken into account to determine whether a legal entity is controlled by another person. These include (among others):

• the power to appoint or remove a majority of the members of the administrative, management or supervisory body of the legal entity;
• using all or part of the legal entity’s assets; and
• having influence as regards corporate strategy, operational policy, business plans, investment, capacity, provision of finance, human resources and legal matters.

The Commission noted that if the designated individual is determined to have control over Entity A, it can be presumed that the control extends to all assets nominally owned by Entity A.  In other words, where a designated individual is a director of Entity A, an assessment of his control will be essential in determining whether Entity A must also be (rebuttably) presumed to be subject to an asset freeze.

The Commission took the view that the national competent authority (“NCA”) that had raised the question was competent to apply those criteria and determine the factual question of whether the designated person controlled Entity A.

Moving on to the position of the EU Subsidiary, the Commission determined that, once control by a designated person over a non-designated entity is determined, it can be presumed that the control also extends to the subsidiaries and assets of the non-designated entity (although that presumption can be rebutted on a case by case basis).

Applying this to the EU Subsidiary, the Commission found that, if the NCA was satisfied that Entity A was controlled by the designated person, that control would also be presumed to extend to the EU Subsidiary, such that EU persons would be prohibited from making funds or economic resources available to the EU Subsidiary on the basis that this would amount to making funds indirectly available to Entity A, and therefore the designated person (subject to the EU Subsidiary being able to rebut this presumption by demonstrating that it was not in fact controlled by the designated person).

The Commission also considered a second scenario, involving a non-designated, non-EU entity controlled by a designated person (“Entity B”). Where goods produced by Entity B are sold by companies based in third countries (the “Third Country Intermediaries”) to EU operators, the Commission found that it is to be assumed that the Third Country Intermediary has paid or will pay Entity B, or has provided or will provide some other form of consideration to Entity B. Consequently, any EU person acquiring goods from, and making payments (or providing other consideration) to Entity B indirectly allows funds and or economic resources to be channelled to Entity B, and therefore, to the extent that Entity B is controlled by a designated person, the transaction ultimately amounts to making funds and/or economic resources indirectly available to the designated person.

The Commission found that, in this scenario, EU operators should “assess all factual elements at their disposal”, including:

• the intervention of numerous intermediaries in the chain leading from the manufacturer to the end-user;
• the mismatch between the country of origin of the goods and the one where the Third Country Intermediary is located;
• the shipment of goods into the EU from a relevant third country; and
• the existence of EU sanctions targeting a significant number of natural or legal persons in either country.

This opinion clearly demonstrates the importance of due diligence for companies wishing to comply with EU sanctions, and the importance of identifying designated persons within the supply chain or otherwise connected with contractual counterparties. The involvement of designated individuals in the management of a counterparty (or the parent company of a counterparty) should be carefully considered in order to assess what, if any, control that designated person may exercise over the prospective counterparty. Although the opinion has been issued in relation to sanctions imposed in relation to the situation in Ukraine, it interprets a prohibition which is common to many EU sanctions regimes and so should be regarded as having read-across value to all equivalent EU asset freeze regimes.

Companies with an EU sanctions nexus may also wish to review a second Commission opinion (issued on 2 June 2021) relating to the possibility of releasing frozen funds to enforce a guarantee. In summary, the Commission concluded that a member state competent authority may authorise the release of frozen funds to satisfy a guarantee given by a designated person prior to their designation. This opinion related specifically to Council Regulation (EU) No 224/2014 of 10 March 2014, which relates to the Central African Republic. However, as above, it is likely that this opinion will have read-across value to other sanctions regimes which contain equivalent licensing grounds. Those licensing grounds may include (as is the case with the Central African Republic sanctions) a requirement for member states to notify the relevant UN Sanctions Committee of their intention to grant such an authorisation.

For advice on sanctions due diligence or the application of EU sanctions to your business, please reach out to your usual HSF sanctions contact or one of the authors of this post.