EU: due diligence on owners and controllers critical to assessing sanctions risk

The Commission said that EU operators, including banks, must put in place the required due diligence procedures and conduct appropriate checks to avoid breaches of sanctions regimes. The due diligence procedures – including risk assessment, screening and ongoing monitoring – should look beyond the entity that is making or accepting a payment and assess the sanctions risk arising from its ownership structure and from those that have a decisive influence over the entity, the Commission said.

The opinion relates to the application of financial sanctions, specifically the prohibition on EU operators making funds or economic resources available, directly or indirectly, to or for the benefit of sanctions targets.

The Commission received two requests for an opinion from a regulatory authority within the EU on the application of the sanctions regimes imposing restrictive measures on those involved in actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. The opinion focuses on the extent to which financial sanctions apply to dealings with non-sanctioned entities that are controlled by sanctions targets.

The first request related to a sanctions target who was the chairman of the board of directors of a non-sanctioned entity based outside the EU, which owned a non-sanctioned EU subsidiary. The chairman was responsible for organising and ensuring the fulfillment of the board’s work. The second request related to a non-sanctioned company oustide of the EU that was controlled by a sanctions target. The company was the supplier of goods to businesses outside of the EU that in turn sold them to EU operators.

Referring to guidance published in relation to EU sanctions in Syria, the Commission said a national authority has to decide if a non-sanctioned entity is controlled by a sanctions target. If control over the non-sanctioned entity is established, it is then presumed that control extends to all of the subsidiary’s assets. Therefore, making funds or economic resources available to a non-sanctioned entity that is controlled or owned by a sanctions target amounts to making them indirectly available to the latter – which is prohibited. This prohibition also extends to the subsidiaries of the non-sanctioned entity.

It is possible to rebut this presumption if the subsidiary can demonstrate on a case-by-case basis that the funds or economic resources supplied will not be used by or for the benefit of the sanctions target; or that control by the sanctions target over the non-sanctioned entity does not extend to its subsidiary.

Referring to the second request, the Commission said that making payments to an intermediary for products originating from a sanctions target or a company that it owns or controls can also be considered as making funds indirectly available to a sanctions target.

Sanctions expert Stacy Keen of Pinsent Masons, the law firm behind Out-Law, said the opinion would have a wider application to other sanctions regimes that impose equivalent prohibitions.

“These rebuttable presumptions within EU sanctions laws have not been entirely replicated in the UK sanctions regimes. If it is established that a sanctions target owns or controls an entity, then the financial sanctions prohibitions extends to that entity,” Keen said.

“It does not matter whether or not any funds or goods provided to the relevant entity will be used by or for the benefit of the sanctions target, unless a defence or exception is available or a licence had been obtained for the supply,” Keen said.

Keen said a number of factors should be taken into account where goods are being purchased. These include 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 an intermediary company is located; the shipment of the goods into the EU from such a third country; and the existence of EU restrictive measures targeting a significant number of natural or legal persons in either country.

“The opinion is also relevant to financial institutions processing payments,” Keen said. “While the opinion acknowledges that primary responsibility to carry out these checks rests with those that have the contractual relationship with the sanctions target or the entity owned or controlled by such a target, or its subsidiaries, that is of little comfort to financial institutions. The opinion is explicit that EU banks must apply due diligence mechanisms to ensure that they are not processing a payment that results in funds being directly, or indirectly to a sanctions target.”