EU sanctions extended to non-targeted persons and aligned with US ‘ownership’ test

The Council of Ministers (the Council) recently published a significant update to its best practices for the effective implementation of restrictive measures (42 pages / 473 KB). The update provides recommendations aimed at enhancing the implementation of EU sanctions and assisting with compliance.

The guidelines are important for EU operators in the complex landscape of sanctions compliance.

In the context of EU sanctions,  a ‘designated person’ refers to an individual, entity, or ship that has been specifically listed under EU legislation as being subject to sanctions. EU operators are prohibited from dealing with the funds and economic resources owned, held or controlled by EU designated persons, and from making them available – directly or indirectly – to, or for the benefit of, such persons.  These prohibitions are referred to as ‘financial sanctions’ restrictions.

The EU maintains a consolidated list of EU designated persons, However, financial sanctions can also apply to dealings with individuals and entities that are not featured on the consolidated list. They extend to entities or bodies owned or controlled by EU designated persons and to those acting on behalf of or at the direction of designated persons.

The update emphasises that the concept of “acting on behalf of or at the direction of” should be considered equally as important as the ownership and control tests.

A notable change in the update of the EU’s best practices is the adjustment of the ownership threshold. Previously, the threshold for determining ownership was set at “more than 50%”. However, the update has lowered this threshold to “50% or more” of the proprietary right of a company. This aligns the EU’s approach with the of the US Office of Foreign Assets Control (OFAC) ownership test.

“The ‘new’ ownership test is referred to in the EU’s 14^th Russian sanctions package in relation to the best efforts-obligation. The update of the best practices confirms that it applies to all EU sanctions regimes,” said Barbara Thiemann, EU and trade law expert at Pinsent Masons.

This change is a further divergence from the UK, which maintains the ‘more than 50%’ ownership test. Another area of divergence is that of ‘aggregation’ of ownership. The US and EU aggregate the interests of designated persons in determining whether the ownership test is met, while the UK does not automatically aggregate unless, for example, the shares or rights are subject to a joint arrangement between designated parties or one party controls the rights of another.

Stacy Keen, sanctions expert at Pinsent Masons, said: “UK persons assessing exposure to the risk of non-compliance with sanctions should not take comfort, without enhanced due diligence, if they identify that a company is 50% owned by a designated person.  A shareholding just below ‘50% or more’ is a red flag for sanctions evasion, with designated persons divesting themselves of part of their shareholding via enablers including proxies and family members to bring themselves below this relevant threshold. Historic shareholdings and the timing of divestments should be assessed, as should the degree of ‘control’ that the designated person has over the relevant entity before any view on risk is taken.”

Some of the circumstances indicating ‘control’ according to the updated EU’s best practices have been previously identified as red flags for evasion in the ‘Red Alert on Financial Sanctions Evasion Typologies: Russian Elites and Enablers’. These include share transfers at a time close to the designation and the use of front companies as proxies,

Karien Scribante of Pinsent Masons said: “When a divestment has occurred, checks should be conducted on the entity or individual who acquired the ownership from the designated person. These checks include assessing the profile of the new shareholder or shareholders for any overt connections to the designated person as well as assessing whether available information suggests that the new shareholder or shareholders could not reasonably have afforded to acquire the investment.”