Following the escalation of the conflict in Ukraine, the EU has established a number of sanctions on transactions with Russian companies and individuals. As one of the top investors in the Russian economy and an important logistical hub in exports to Russia, the Netherlands play an important role in the day-to-day relations between the EU and Russia. It is therefore relevant to take a closer look at the practical implementation and impact of the sanctions in a Dutch context.
Forbidden persons and entities
In the first waves of sanctions following the events in Crimea (EU Council Regulation of 17 March 2014 No. 269/2014), mostly irrelevant people were been placed on the EU “freeze list”. Following the escalation of the conflict, some influential business people and also some companies were added. Existing assets or claims belonging to these persons must be frozen. In addition, article 2 paragraph 2 of the regulation states that “no funds or economic resources shall be made available, directly or indirectly, to or for the benefit of natural persons or natural or legal persons, entities or bodies associated with [sanctioned persons]”.
How do you find out?
Information about the ownership of Russian companies is not publicly available in all cases and will very often be in Russian only. The site of the Russian tax service (www.nalog.ru) contains a link to the Russian State Unified Register for Legal Entities (EGRYuL). For limited liability companies, the extract shows the shareholders. For joint stock companies, this information is not visible from the public register.
Russian open joint stock companies (OAO) have extensive obligations to report on their shareholder structure and also on their affiliates. Such information can usually be found on the company’s website.
One of the more common corporate research programs, SPARK, combines information from the company register, courts and statistical and other authorities and may contain information about equity structures and affiliates.
Weapons, dual use goods and specific oil exploration technology
On 31 July 2014, the second level of sanctions was enacted with Council Regulation 833/2014 with three additional measures:
- A total weapons embargo, as well as prohibition to supply dual use goods to Russia;
- Prior export license for specific technology related to deep sea, Arctic and shale oil exploration;
- No more long term (>90 days) funding for 5 large state owned Russian banks;
Weapons and dual use goods are reasonably well defined terms in a EU legal context and we can simply refer to the existing lists. Regulation 833/2014 contains a list of the oil exploration technology concerned, but the scope of the listed items is very wide and should be applied to “deep sea, Arctic and shale oil projects”. During an information session of the Dutch government on 21 August 2014 in the Hague, an official of the Ministry of Finance orally proposed to, for the time being, define “deep sea” as deeper than 150 m and “Arctic” as above the polar circle. There is no written confirmation of this position.
The financing of such transactions is restricted in the same way.
If in doubt, an export license should be applied for. It should not be expected that a decision is taken quickly: the authorities are entitled to study the application for eight weeks and will likely need a lot of time to coordinate their decision with other EU states.
Due diligence and “contamination risk”
The question obviously occurs to what extent companies should investigate intended transactions and counterparts to ensure that sanctions do not apply (due diligence). Regulation 269/2014 tries to answer that question. First, if a company or person would go too far in implementing the regulation, there is only liability if “funds and economic resources were frozen or withheld as a result of negligence”.
On the other hand, if you were not vigilant enough in enforcing the either of regulations, then you escape liability only if you “did not know, and had no reasonable cause to suspect” that your actions would not violate the regulation.
In addition, transactions which are by themselves authorised may therefore be “contaminated” because they may be construed to facilitate prohibited transactions further down the supply chain.
Who should apply the sanctions?
The Regulations apply to all entities which have been incorporated in the EU and to all EU citizens, as well as to transactions which are fully or partly carried out on EU territory. A Russian branch or representative office of a European legal entity falls clearly under that definition, as well as a director of a Russian company with a EU nationality. The sanctions therefore do formally not apply to Russian subsidiaries of European holding companies, as long as the directors are not EU nationals. This was confirmed by a representative of RVO, the Dutch government umbrella organisation. A representative of the Dutch central bank expressed the different view that it will consider the failure to stop a sanctioned transaction in a Russian subsidiary as “indirect” support.
Penalties
In the Netherlands, persons or entities violating economic sanctions can be penalised depending on the category of the violation. The Russian sanctions have not been categorised yet, but the maximum amounts are 10,000, 1 million and 4 million Euro for categories 1, 2 and 3 respectively. If the size of the advantage obtained is greater than 2 million Euro, a penalty of twice the size of that advantage can be imposed. For companies with a license such as banks and trust offices, violation of the sanctions can have much more far reaching consequences: suspension or loss of the license.
Controlling authorities
To make matters more complicated, not every company or person reports to the same government authority for the implementation of these sanctions. “Regular” companies can be controlled by the Dutch tax and customs authorities and the ECD (Economic Control Unit). These authorities are generally understaffed and unaware of the intricacies of the Russian business of their “clients” Banks, trust offices and other financial service institutions report directly to DNB (the Dutch central bank) whilst investment institutions report to the AFM (Financial Markets Supervisor). These authorities supervise a far smaller number of institutions in a substantially more thorough manner.
Banks have already been seen to drag on compliance discussions relating transactions with Russia for weeks, or even freeze incoming payments until it is fully clear that there is no relation with a person or company on the freeze list. Companies which are recipients of general credit facilities will have to demonstrate that their whole business is “sanctions proof”. Although the intention was to limit the impact of the sanctions, it is difficult to see how this will succeed in practice: the level of interconnectedness of the economies is enormous and the scope of the current sanctions has some grey areas, as demonstrated above.
This means that any transaction involving Russia or with Russian entities must now be carefully planned in advance. All export contracts should be checked on their content as well as on the equity structure of the (ultimate) recipient.
Additional guidelines and clarifying letters are being prepared and we will inform you accordingly.
Should you have questions in the meantime with regard to the implementation of the sanctions, please do not hesitate to contact our Amsterdam or Moscow office.
Amsterdam/ Moscow, 27 August 2014
*the information in this newsletter is of a general nature only and should not be relied upon as advise. If you need additional information or our assistance regarding any of the issues discussed please contact Bauke van der Meer via the email below: