Sanctions designations should not affect enforcement of pre-existing third-party rights

In an opinion relating to the release of funds (6 page / 265KB PDF) frozen under the sanctions regime that targets individuals and entities in the Central African Republic (CAR), the Commission said the freezing of a person’s assets is not intended to be punitive. Instead, it is intended to prevent access to and use of assets for the improper conduct that led to their designation as a sanctions target.

A third party still has rights relating to pre-designation contracts and the commission said it was for this reason that exceptions and derogations are normally made when assets are frozen. One derogation – that features in most sanctions regimes imposing financial sanctions – allows the release of frozen funds where the obligation to make payment by the sanctions target arose before the relevant individual or entity was designated as a target. Provided that all the conditions in the derogation are met, the consent of the sanctions target is not required to release the funds consent is not a prequalification to the grant of that derogation.

The commission said the relevant national regulatory authority in the member state with responsibility for sanctions must be satisfied that all the payment is due before granting the derogation authorising payment. However, there is no need for a judicial decision on that assessment. The authority is able to decide whether or not the payment is due based on all the facts and legal elements.

The derogation also requires that a competent authority be satisfied that the payment is not to be made to a sanctions target. In the case of the CAR Regulations there is also a reporting requirement to the relevant United Nations Sanctions Committee.

The opinion relates to the release of frozen funds of a sanctions target to satisfy a guarantee in favour of an EU incorporated financial institution. The guarantee was granted before the sanctions were imposed.

The authority had asked whether the target’s consent was required to release the funds. It also asked whether a judicial, administrative or arbitral judgment, decision or award could be used to enforce the payment regardless of consent, and if in the absence of such a decision, if it could decide whether or not the guarantee should be enforced.

Sanctions expert Stacy Keen of Pinsent Masons, the law firm behind Out-Law, said: “This is a positive development for those that have contracted with sanctions targets prior to their designation given that the implementation of a lawfully due contractual payment should not be impacted by that designation.

“A narrower interpretation of the derogation requiring the consent of the sanctions target would leave the execution of pre-existing contractual obligations in the hands of the sanctions targets. Their designation as a sanctions target would allow them to withhold an otherwise lawfully due payment against a counterparty that contracted – at the time – with a non-sanctioned individual or entity,” Keen said.

Keen said the opinion was in keeping with the EU’s ‘Best Practices for the effective implementation of restrictive measures’ which says ‘interested parties’ can request the release of frozen funds. Requests are not limited to those made by sanctions targets.

Organisations and individuals impacted by CAR sanctions are typically designated as targets if they have, for example, engaged in or provided support for acts that undermine the peace, stability or security of the CAR; been involved in dealings relating to the violent activities of armed groups or criminal networks in the country; been involved in human rights abuses, recruited or used, children in armed conflict in the CAR; or attacked UN missions or international security presences in the CAR.