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New EU Commission Guidance on “control” by a designated entity

  • United Kingdom
  • Financial services disputes and investigations
  • Fraud and financial crime
  • Litigation and dispute management

24-06-2020

Background

On Friday 19 June 2020, the EU Commission published guidance on the application of the financial measures laid down in Article 2 of Council Regulation (EU) No 269/2014 (the “Regulation”) following a joint request from a number of national competent authorities (“NCAs”). The guidance specifically deals with the concept of ‘control’ by a designated entity and ‘indirectly’ making funds and resources available to designated persons and entities (the “Guidance”). A copy of the Guidance can be found here.

Article 2(1) of the Regulation imposes an asset freeze on all funds and economic resources belonging to, owned, held or controlled by any person that is listed in Annex 1 of the Regulation. Article 2(2) further prohibits EU operators from making funds or economic resources available, directly or indirectly, to these designated persons.

The EU Commission has previously provided guidance on the criteria to be taken into account when determining control in the FAQs on EU restrictive measures in Syria and the EU Best Practices Guidance.

The request for the Guidance was made in light of the fact that a designated person listed in Annex 1 to the Regulation has a management role in a non-designated, non-EU entity (“the Entity”). The NCAs wanted to understand what the obligations were with respect to the Entity, in particular whether all financial transactions to and from the bank accounts of the Entity must be blocked. According to an NCA and based on the statute of the Entity, the designated person has powers including: “designing the Entity’s corporate structure and the single policy of the Entity’s activities, directing its financial and economic activities, deciding on the opening of current accounts, on currencies and on other accounts, as well as performing all operations on the accounts”.

The request from the NCAs

The NCAs asked for guidance on the following points:

1.    How would paragraph 63 (“Control”) of the EU Best Practices apply to the designated person, based on the statute of the Entity? How should it be read in conjunction with paragraphs 66-68 (“Making indirectly available funds or economic resources to designated persons and entities”)?

2.    In this specific context: (i) do the assets of the Entity have to be frozen; (ii) must EU economic operators separately assess whether the designated person has control over each asset of the Entity before freezing them; (iii) do EU economic operators have to assess all financial transactions to make sure they do not make economic resources available to the designated person; (iv) can providing services by EU economic operators to or working for the Entity be considered as making economic resources available to the designated person; and (v) does the scope of Article 4(1)(c) of the Regulation include fees for the holding of funds on the current account of a client with whom a bank has terminated cooperation after clearing the account balance and closing the account?

What does the Guidance say?

The EU Commission states that it is for NCAs to take into account all the elements at their disposal and the specific circumstances of the case to determine whether the designated person has control over the Entity. If it is established that the designated person does have control over the Entity then the assets of the Entity must be frozen, although the freeze may be lifted if the Entity can show that such assets are not ‘controlled’ by the designated person. The details of the administrative procedure by which the Entity may do so are to be decided in accordance with national rules.

The Guidance states that it is prohibited to make funds available to the Entity unless this is authorised by the NCA pursuant to one of the derogations available under the Regulations or unless it is reasonably determined that the funds will not be made available to the designated person. Payments from the Entity’s frozen account(s) should not be made unless this is authorised by the NCAs pursuant to one the of derogations. The Guidance adds that the applicability of the derogation in Article 4(1)(c) is limited to fees or services charges that would ensure the routine holding of existing frozen funds.

Additionally, the Guidance states that the information-sharing obligations provided for in Articles 8 and 12 of the Regulation are applicable here. NCAs should make the conclusions regarding the existence of such control public. In order to avoid over-compliance, the NCAs could also publicly indicate the assets of these entities that they have determined are not controlled by the designated persons and therefore do not need to be frozen, if any. It remains to be seen whether there will be any appetite to do this given the litigation risk that this may create for the NCAs.

Finally, providing services to or working for the Entity can be considered as making economic resources indirectly available to the designated person if it enables the latter to obtain funds, goods, or services. The NCAs must make an assessment on this.