EC clarifies Russia sanctions guidance does not apply to non-EU persons

However, EU persons are required to apply due-diligence to check that non-EU entities are not used by a UBO to mask its identity and evade the sanctions, the guidance says. Moreover, EU parent companies must not use their non-EU subsidiaries to circumvent the obligations that apply to the EU parent company.

The EU has tightened its Russia and Belarus sanctions regime in the past two weeks, notably in the financial sector. From 13 April 2022, Article 5f of amended Regulation 833/2014 and Article 1y of Regulation 765/2006 prohibit EU investment funds (which invest in transferable securities denominated in Euros or other EU Member State currencies) from accepting new investments from Russian or Belarusian persons unless they are EU nationals or have EU residency.

The prohibition applies to any Russian or Belarusian national or natural person residing in Russia or Belarus or any legal person, entity or body established in Russia or Belarus. However, it excludes EU Member State nationals or natural persons having a temporary or permanent residence permit in an EU Member State. Moreover, says law firm Maples, prohibited persons can remain invested in investment funds where the units or shares were issued by 12 April 2022, although they cannot make additional investments.

Under the existing EU anti-money laundering obligations relating to UBOs, the restriction may extend to investors investing in investment funds indirectly, through nominee and intermediate vehicles, says Maples.

'European Commission guidance indicates that EU sanctions rules should be interpreted broadly, particularly in light of widely framed anti-circumvention provisions', it notes. 'The rules prohibit any attempt by a party to knowingly and intentionally act as a substitute for a person referred to in the Fund Investor Restriction provision.'

The broad scope of the prohibition has caused uncertainty as to what is permitted for companies registered and incorporated outside of Russia. In particular, the question arises whether an entity is subject to the restrictions if its UBOs are Russian nationals or natural persons residing in Russia or legal persons, entities or bodies established in Russia.

The EC’s guidance clarifies this. Legal persons incorporated outside the EU are not expected to comply with the regulation, it says; however, it notes that EU operators should ensure through appropriate due-diligence that non-EU entities are not used by a UBO to evade the sanctions.

A related issue arises for foreign-invested enterprises with EU shareholders and EU nationals in non-EU Member States. The question arises whether they must comply with these regulations when doing business with Russian business partners from the non-EU state.

'In principle, EU sanctions do not apply extra-territorially', says law firm CMS. The firm says that Council Regulation (EU) No 833/2014 applies within EU territory, on board any aircraft or any vessel under the jurisdiction of a Member State and to any person inside or outside the territory of the EU who is a national of a Member State. It also applies to any legal person, entity or body, inside or outside the territory of the EU, incorporated or constituted under the law of a Member State, and to any legal person, entity or body in respect of any business done in whole or in part within the EU.

EU sanctions must therefore be complied with by all EU persons and by all EU-incorporated companies, including subsidiaries of non-EU companies in the EU.

STEP has also released a position paper clarifying the EU position on trusts with a ‘Russian connection’.

Sources

• Maples
• CMS Law
• EC (FAQs, PDF)
• STEP (position paper, PDF)