What standard of due diligence do EU operators have to observe to comply with the obligation to freeze assets and the prohibition to make resources available to listed persons and entities? Due diligence may consist in screening of beneficiaries of funds or economic resources against sanctions lists and adverse media investigations (1). Assessing the beneficial ownership of a business counterpart is a due diligence duty.
The applicable EU Regulations lay down on EU operators (and operators conducting business in the EU) an obligation of result regarding the obligation to freeze assets and the prohibition to make funds and economic resources directly or indirectly available (pursuant to Article 12 of Council Regulation No. 833/2014). The underlying means (due diligence) used by the operators to ensure compliance with the above-mentioned obligations and prohibitions are not further specified in EU legislation. EU operators must perform appropriate due diligence calibrated according to the specificities of their business and the related risk exposure. Each operator should therefore develop, implement, and routinely update an EU sanctions compliance programme that reflects their individual business models, geographic areas of operations and specificities and related risk-assessment regarding customers and staff. Such sanctions compliance programmes can assist in detecting red flag transactions that can be indicative of a circumvention pattern.
When conducting due diligence, what EU operators must assess is whether the assets in question belong to, or are owned, held, or controlled by the listed person (one should even take into account the aggregated ownership of the entity), and whether any funds or economic resources would be made available, directly or indirectly, to that person.
EU operators should also exert enhanced due diligence (EDD) when a deposit is made to an account of an entity owned by a Russian/Belarussian national or a natural person residing in Russia and to make sure that they are not selling securities denominated in the official currency of a Member State to the abovementioned entity or natural person. Compliance with trade-related sanctions (e.g., dual-use exports, oil exploration equipment, high tech goods and technology) is not limited to banks processing the related payments but is also the responsibility of operators initiating such trade (e.g., exporters, brokers). In all situations, EU exporters should perform adequate due diligence on their business partners and the final destination of funds or economic resources. In any case of doubt, EU operators can reach out to their national competent authority.
In particular, EU operators should have in place adequate due diligence procedures to ensure that their exports of covered items are not diverted to Russia. In all cases economic operators must conduct appropriate due diligence and prove to the national competent authorities that the goods are not ‘originating’ or ‘exported from Russia’ and are only transiting through Russia EU. EU operators should exercise appropriate due diligence in assessing the origin of the oil, too. In cases where an EU operator without direct access to price information (e.g., tier 2 or 3) reasonably relies on an attestation showing the Russian good was transported at or below the price cap, after performing appropriate due diligence, and such an attestation was falsified or provided by illegitimate actors, the EU operator would not be considered in breach of this provision provided they acted in good faith.
Moreover, as of 4 June 2022, it is prohibited to provide, directly or indirectly, accounting, auditing, including statutory audit, bookkeeping and tax consulting services, as well as business and management consulting or public relations services to the Russian government, as well as to legal persons such as companies and other entities or bodies established in Russia. But which activities in particular are covered by the prohibition of ‘legal advisory services’ according to Art. 5n (2) of Council Regulation (EU) No. 833/2014? The sanctions on ‘legal advisory services’ have been designed to preserve access to justice and the right of defence. “Legal advisory services” include:
- the provision of legal advice to customers in non-contentious matters, including commercial transactions, involving the application or interpretation of law;
- participation with or on behalf of clients in commercial transactions, negotiations, and other dealings with third parties; and
- preparation, execution, and verification of legal documents.
Article 5n of Council Regulation (EU) No. 833/2014 explicitly excludes from the ban the provision of services that are strictly necessary:
- for the termination by 8 January 2023 of contracts which are not compliant with this Article concluded before 7 October 2022, or of ancillary contracts necessary for the execution of such contracts;
- for the exercise of the right of defence in judicial proceedings and the right to an effective legal remedy; or
- to ensure access to judicial, administrative, or arbitral proceedings in a Member State, or for the recognition or enforcement of a judgment or an arbitration award rendered in a Member State, provided that such provision of services is consistent with the objectives of this Regulation and of Council Regulation (EU) No. 269/2014.
It should be taken into account that the prohibitions under Article 5n (1), (2) and (2a) of Council Regulation No. 833/2014 only cover services provided to the Russian government and to legal persons, entities or bodies established in Russia and not to natural persons. It is also in general prohibited to provide pro bono legal services to the Government of Russia and to any legal person, entity or body established in Russia unless these services fall within the scope of application of the general exemptions provided under Article 5n.
In conclusion, the prohibition to provide legal advisory services applies regardless of the type of law (EU law, Russian law or other) to which it refers. The representative offices of EU legal entities are bound to comply with EU restrictive measures, and it is therefore prohibited for them to provide the restricted services to the Government of Russia or to companies in Russia (unless any of the exemptions or derogations in Article 5n apply) (2).
(1) Adverse media investigations refer to searches on the internet and news (media investigations) to find evidence that a contractual counterpart, even if not designated, is actually controlled by a designated person.
(2) For more information regarding frequently asked questions concerning sanctions adopted following Russia’s military aggression against Ukraine and Belarus’ involvement in it please consult the latest consolidated version (07.02.2023) by European Commission here