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In the aftermath of Russia’s recognition of the non-governmental controlled areas of Donetsk and Luhansk, followed a few days later by the invasion of Russian military forces in Ukraine, the international community has responded with the imposition of an unprecedented package of sanctions and restrictions against Russia, that appear not to have been yet exhausted. On Friday 8th April 2022, the European Council imposed the 5th package of economic and individual sanctions against Russia, with the aim being, as per the EU Council’s press release of the same date, “to reinforce pressure on the Russian government and economy, and to limit the Kremlin’s resources for the aggression”.
At the time of writing this publication, further restrictive measures and designations are expected to be announced soon by the European Union. On 4th May 2022, the President of the European Commission, Mrs Ursula von der Leyen, in her speech at the EP Plenary, gave an overview of the further sanctions the EU is oriented to impose against Russia, in response to its invasion in Ukraine. Such measures include addition of further individuals in the sanctions list, removing Sberbank and 2 other major banks from SWIFT, banning three big Russian state-owned broadcasters from EU airwaves and complete import ban on Russian oil. In addition, Mrs von der Leyen, stated that “the Kremlin relies on accountants, consultants and spin doctors from Europe. And this will now stop.” It is therefore expected that further measures prohibiting the provision of services to Russian nationals and entities will be imposed. It is worth noting that the US has already announced on 8th May 2022 further sanctions against Russia, that mirror to a large extent the above announcements on EU level.
Cyprus, being a member of the European Union, as well as nationals of Cyprus and legal entities registered under the laws of Cyprus, are bound by the provisions of the relevant EU Regulations imposing restrictive measures against Russian individuals, entities and assets. Also, as member of the United Nations, Cyprus has an obligation to enforce international sanctions by a relevant decision/resolution adopted by the United Nations Security Council. Finally, it is noted that although not bound by the restrictions imposed by the US and UK, Cyprus professionals closely monitor any sanctions imposed and honour such restrictions.
Overview of currently applicable EU sanctions on Russia
Following the adoption of the fifth package of sanctions on 8 April 2022, the current applicable sanctions, by virtue of Council Regulation (EU) No. 833/2014 (as amended), Council Regulation (EU) No. 269/2014 (as amended), Council Regulation (EU) No. 692/2014 (as amended) and Council Regulation (EU) No. 2022/263, are as follows.
It is evident from the above overview that the scope of the current EU sanctions on Russia is far reaching and professionals have a taunting task to stay ahead and have a good understanding of the sanctions so as to be able to comply during the provision of relevant services.
We will consider some of these challenges in the present publication, that are of particular importance to professionals in Cyprus, providing legal, corporate or other services to Russian nationals and entities of Russian interests, whether listed in the relevant annexes of the above EU Regulations or not.
Presumption of Ownership and Control
With regards to the provisions of the relevant EU Regulations, one particular challenge that EU market operators are facing is in relation to their scope of application. As a general rule, EU sanctions target only the individuals and entities listed in the annexes of the relevant Regulations. However, a presumption is being applied by the EU that if the listed person is deemed to own or control a legal person or entity, it can be presumed that the control also extents to the assets of that legal person or entity (and to its subsidiaries) and that any funds or economic resources made available to that legal person or entity (or to its subsidiaries) would reach the listed person. Thus, the assets of the legal person or entity (and of its subsidiaries) are also frozen within the EU and the prohibitions of the relevant Regulations apply to it.
As per the European Council’s Best Practices , the criterion to be taken into account when assessing whether a legal person or entity is owned by another person or entity is the possession of more than 50% of the proprietary rights of an entity or having majority interest in it (the “50% Rule”). Also, the 50% Rule must be considered in the aggregate, i.e., in case a legal person or entity is owned by more than one listed person that in the aggregate hold more 50% of the said legal person or entity then the 50% Rule above applies in relation to that legal person or entity.
The said rule therefore poses a particularly unique compliance challenge, since entities might be owned by sanctioned persons through complex, indirect ownership structures across different jurisdictions.
Adding to the above, the reach of the sanctions is not limited to the element of ownership but extents to the control exercised by a sanctioned person on other entities. The provisions of the EU sanctions therefore apply in relation to entities that are controlled by sanctioned persons. As per the European Commission’s guidance and the European Council’s Best Practices in order to determine whether a legal person or entity is controlled by another, i.e., whether the latter “is able to and effectively asserts a decisive influence over the conduct of the other entity in question” a number of criteria should be taken into account as identified by the European Commission and European Council.
This presumption however, can be rebutted on a case-by-case basis by the legal person or entity (or its subsidiaries), and the freezing of its assets and other prohibitions to be lifted, if it can be demonstrated that some or all of the assets are outside the control of the listed person, and/or that funds or economic resources made available would not reach the listed person, because for example, appropriate safeguards are in place by the legal person or entity (or its subsidiaries). As per the Commission’s guidance, such safeguards could include, the freezing of voting rights, as well as governance mechanisms ensuring that no funds or economic resources (e.g., dividends or loans) are made available to the listed person .
Further restrictions that are of particular importance to professionals in Cyprus providing corporate, legal or other services to Russian nationals and entities of Russian interests, have been imposed by virtue of Regulations 5f and 5m of the Regulation 833/2014 (as amended).
Article 5f provides that:
“1. It shall be prohibited to sell transferable securities denominated in any official currency of a Member State issued after 12 April 2022 or units in collective investment undertakings providing exposure to such securities, to any Russian national or natural person residing in Russia or any legal person, entity or body established in Russia;
2. Paragraph 1 shall not apply to nationals of a Member State or natural persons having a temporary or permanent residence permit in a Member State.”
As per relevant clarifications given by the European Commission, the above prohibition relates to shares of both public and private companies, that are issued after 12 April 2022. It can be concluded therefore that, the prohibition of Article 5f does not capture transactions in relation to shares and other transferable securities, that were issued prior to 12 April 2022.
In addition, the prohibitions laid down by the sanctions must always be considered and interpreted in light of the general prohibition contained in the EU Regulations not to participate knowingly and intentionally in activities the object or effect of which is to circumvent prohibitions in the Regulations. Therefore, although not strictly prohibited by the provisions of Article 5f, the EU Commission has further clarified that enhanced due diligence must be exercised in relevant circumstances so as to avoid the selling of transferable securities denominated in an official EU currency that are issued after 12 April 2022, to non-Russian entities owned by Russian nationals or natural persons residing in Russia.
The above article provides the following:
“1. It shall be prohibited to register, provide a registered office, business or administrative address as well as management services to, a trust or any similar legal arrangement having as a trustor or a beneficiary:
(a) Russian nationals or natural persons residing in Russia;
(b) legal persons, entities or bodies established in Russia;
(c) legal persons, entities or bodies whose proprietary rights are directly or indirectly owned for more than 50 % by a natural or legal person, entity or body referred to in points (a) or (b);
(d) legal persons, entities or bodies controlled by a natural or legal person, entity or body referred to in points (a), (b) or (c);
(e) a natural or legal person, entity or body acting on behalf or at the direction of a natural or legal person, entity or body referred to in points (a), (b), (c) or (d).
2. It shall be prohibited as of 10 May 2022 to act as, or arrange for another person to act as, a trustee, nominee shareholder, director, secretary or a similar position, for a trust or similar legal arrangement as referred to in paragraph 1.
3. Paragraphs 1 and 2 shall not apply to the operations that are strictly necessary for the termination by 10 May 2022 of contracts which are not compliant with this Article concluded before 9 April 2022 or ancillary contracts necessary for the execution of such contracts.
4. Paragraphs 1 and 2 shall not apply when the trustor or beneficiary is a national of a Member State or a natural person having a temporary or permanent residence permit in a Member State.
5. By way of derogation from paragraphs 1 and 2, the competent authorities may authorise the services referred to therein, under such conditions as they deem appropriate, after having determined that this is necessary for:
(a) humanitarian purposes, such as delivering or facilitating the delivery of assistance, including medical supplies, food, or the transfer of humanitarian workers and related assistance or for evacuations; or
(b) civil society activities that directly promote democracy, human rights or the rule of law in Russia.”
The strict interpretation of this provision is that:
1. No new trusts can be established for:
2. No trustee of related services as identified in the article can be offered to the above identified persons after 10th May 2022.
The above provisions, although appearing straightforward, are the subject of heated debate between professionals as to the effect they have in pre-existing trust arrangements whereby EU professionals provide services of trustees. Relevant clarifications are expected to be given by the European Commission in order to clarify the interpretation and applicability of the provision.
Regardless of the above debate, one thing is certain, that the creation of trusts or any similar legal arrangements in favour of Russian nationals or legal persons registered in Russia, is a thing of the past, at least as long as the sanctions remain in place.
It is evident of the above, scraping just the surface of the challenges imposed by the EU sanctions against Russia, that the work of EU professionals in a variety of sectors has undoubtedly become even more burdensome and demanding and the regulatory aspect has been significantly enhanced. It feels that it has become a slogan of the recent years, but we once again bear witness to new realities for the business world at large.
This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the author or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.
EU Best Practices for the effective implementation of restrictive measures (doc. 8519/18), paragraph 63
EU Best Practices for the effective implementation of restrictive measures (doc. 8519/18), paragraph 66-67
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