Significant changes to EU sanctions impact compliance programs

Over the summer, the EU Commission has issued several significant clarifications and amendments to the EU sanctions regimes related to Russia and Belarus and the underlying guidelines and interpretations. 

The latest package of sanctions related to Russia was adopted by the EU on 24 June 2024 and entered into force on 24 and 25 June 2024, respectively.

Since the 14^th package of sanctions against Russia, a number of important changes and guidelines have been issued, some of which will have a significant impact on compliance programs and procedures.

In addition, the restrictions related to Belarus have been tightened and now also include requirements for “no-Belarus” clauses for certain exports.

New control and ownership criteria

Whereas the restrictive measures themselves are set out in the Regulations adopted, the guidelines and FAQs issued by the EU Commission, serve to inform the interpretations of the Regulations.

One of the key documents is the “EU Best Practices for the effective implementation of restrictive measures” (“Best Practices”), of which a revised version was issued on 3 July 2024. The new version of the Best Practices includes significant changes that are in particular relevant for compliance with Regulation (EU) 269/2014 with later amendments (the “Asset Freeze Regulation”). The Asset Freeze Regulation lists a significant amount of individuals and entities with close ties to the Russian government and economy and with whom EU operators are generally prohibited from dealing.

In particular the following clarifications are important to take note of:

1. Ownership:
   1. Percentages – In determining whether a legal person or entity is owned by another person or entity, the possesion of 50% or more of the proprietary rights of an entity or having majority interest in will cause that the legal person or entity is considered to be owned by another person or entity. Previously, the criterion was more than 50%.
   2. Aggregation of ownership – When assessing ownership, the aggregated ownership of the entity should also be taken into account. For example, if one designated person owns 30% of the entity and another designated persons owns 25% of the entity, the entity should, in principle, be considered as owned by designated persons. This was already the position in other EU guidelines, but has now also been clarified in the Best Practices.

2. Control:
   1. De facto control – It has been clarified that the criteria to be taken into account when assessing whether a legal person or entity is controlled by another person or entity, alone or pursuant to an agreement with another shareholder or other third party, could also include having the power to, de facto, exercise the right to exercise a dominant influence.
   2. Majority shareholder – Where a designated person is the largest shareholder of a company compared to other shareholders, this may indicate that the designated person fulfils the control criteria.
   3. Buy-back options – Control by a designated person may be deemed to exist, if a management buyout takes place, whereby the designated previous owner can buy back the company under favourable conditions. Especially where these conditions could easily be invoked, this may warrant further analysis whether the designated previous owner has control.
   4. Transfer of shares close to the time of the designation – A transfer of shares (whether all, a majority or a minor part) in the non-designated entity to a new owner shortly before or after (if allowed for by the relevant Council Regulations) the designatation of the current owner may also suggest retained control by the designated person.
   5. Use of Front-persons – Control by a designated person may exist, if a new owner is closely connected to the designated previous owner, e.g. a family member or former employee/business partner, and, possibly, the sale price was too low or otherwise abnormal.
   6. Use of trusts, shell companies etc. – It may also indicate continued control by a designated person, if an entity is part of a needlessly complex corporate structure, potentially involving entities such as shell companies, limited liability companies and/or trusts linked to a designated person. This includes if some of these entities were set up or changed their identity shortly before or after (if allowed by the relevant Council Regulations) the adoption of the sanctions regime or the person’s designation, and/or have no credible business activity.

Since the war in Ukraine started and the EU sanctions regimes intensified, we have seen several cases of sanctioned individuals and entities attempting to circumvent the EU sanctions and their designations pursuant to Regulation (EU) 269/2014 (as amended). With the recent changes to the definitions of ownership and control the EU-Commission is seeking to target in particular these circumvention attempts and to close those gaps that have been causing headaches for EU companies and legislators.

From a practical perspective, the changes have a material impact on compliance programs, and we recommend that EU companies revisit their sanctions policies and procedures related to third party screenings to ensure that they match the new interpretations. Re-screenings of third parties will also be relevant.

New Belarus related restrictions

On 29 June 2024, additional restrictions related to Belarus were adopted by the EU pursuant to Council Regulation (EU) 2024/1865 of 29 June 2024 amending Regulation (EC) No 765/2006 concerning restrictive measures in view of the situation in Belarus and the involvement of Belarus in the Russian aggression against Ukraine.

As one of the new elements, the Belarus restrictions (Council Regulation (EU) 765/2006 (the “Belarus Regulation”)) now require that EU exporters insert in their future contracts a so-called ‘no-Belarus clause’, through which they contractually prohibit the re-exportation to Belarus or re-exportation for use in Belarus of goods or technology as listed in Annexes XVI, XVII and XXVIII to the Belarus Regulation, common high priority items as listed in Annex XXX to the Belarus Regulation, or firearms and ammunition as listed in Annex I to Regulation (EU) No 258/2012.

In application of a no-Belarus clause, exporters shall ensure that the agreement with the third-country counterpart contains adequate remedies in the event of a breach of the contractual obligation concluded.

The no-Belarus clause requirement resembles the no-Russia clause requirement set out in article 12g of Regulation (EU) 833/2014 (as amended). Based on the existing guidance issued by the EU Commission in this respect, the remedies should be reasonably strong and aim to deter non-EU operators from any breaches of the prohibition to re-export. Remedies can include, for instance, termination of the contract and the payment of a penalty and the EU Commission has shared a suggested no-Russia clause in its Russia FAQ, which would likely also serve as a relevant guidance tool for the no-Belarus clause requirement.

Impact on Danish companies

The scope of applicable sanctions targeting Russia and Belarus are extensive and Danish companies should ensure that their sanctions compliance programmes, policies, screening processes, and payment processes are updated to ensure that the new guidelines from the EU Commission are appropriately addressed.

Gorrissen Federspiel closely follows the developments of sanctions against Russia and Belarus, and we can assist with interpretation of and compliance with applicable sanctions as well as the implementation of measures to ensure that sanctions are observed. If you have any questions, please feel free to contact a member of our Compliance & Sustainability team.

For more information on the previous EU sanctions packages relating to Russia and Belarus, please see Gorrissen Federspiel’s newsletters of 25 June 2024, 27 February 2024, 19 December 2023, 26 June 2023, 27 February 2023, 19 December 2022, 7 October 2022, 8 June 2022, 11 April 2022, 16 March 2022, 10 March 2022, 2 March 2022, 28 February 2022, and 24 February 2022.