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Russia sanctions: new European Commission guidance

The updated guidance is set out in a Commission note (C(2015) 6477 final, dated 25 September 2015) that provides answers to questions that are understood to have been brought to the Commission's attention. The guidance may be further revised or extended in the future. The guidance is not legally binding, but will certainly be taken into consideration by the EU Member States when interpreting Regulation 833/2014.

Many of the questions and answers in the updated guidance repeat those in the prior Commission guidance note on Regulation 833/2014 that was published in December 2014. However, the updated guidance contains new questions and answers as well as certain refinements to some of the guidance given in the previous note.

Key new features of the updated guidance include the following:

• In relation to complying with the prohibition on financial assistance in relation to goods and technologies that are within the scope of Article 4 of Regulation 833/2014 (which essentially restricts EU persons from providing certain types of assistance such as technical, financing, and financial assistance relating to military and dual-use items, to persons, entities or bodies in Russia or for use in Russia), banks acting on behalf or to the benefit of their client are reminded that they should exercise due diligence on payments carried out by their customer and decline any payment made in breach of Regulation 833/2014. Also, banks acting as correspondent banks should decline a payment when information on such a breach is available. The guidance further states that primary responsibility for the classification of goods and technologies lies with those responsible for sending or receiving such items, and that where such a person (or the sender or recipient of the payment) has explicitly declared that the goods and technology concerned are not covered by restrictive measures, and where there is no reason for the bank to be otherwise suspicious, banks should feel confident in processing payments.

Participating in ISO standardisation activities is not prohibited under Article 2a of Regulation 833/2014 (which essentially prohibits EU persons from selling, supplying, transferring, or exporting dual-use goods and technology to persons, entities or bodies in Russia), given that the ISO standard development process pursues a legitimate goal and does not imply, per se, violation of EU restrictive measures. Nevertheless, relevant persons should be called upon to remain vigilant about the type of goods/technology shared in such a context (i.e. to ensure that the relevant ISO standardisation activities do not relate to prohibited goods/technologies); and that in case of doubt, the competent authority of the relevant Member State should be contacted for guidance.

The exemption for the financing of non-prohibited goods under Article 5(3)(a) should be interpreted narrowly, as an exception from the general rule which prohibits the providing of loans and credit under Article 5(3). The exemption only applies where the goods for which financing is being provided are: (a) consigned from the EU to a third country; or (b) received into the EU from a third country (i.e., the EU is the destination). The mere transit of goods through the EU would be insufficient; there must be a meaningful nexus with the EU in order for the exemption to apply.

EU persons can process payments, provide insurance, issue letters of credit, or extend loans to targeted entities for non-prohibited exports or imports of goods or non-financial services to or from the Union after 12 September 2014. This exemption does apply where such operations relate to prohibited exports/imports.

• Where an EU person had extended a loan or credit with a maturity exceeding 30 days to a targeted entity before or on 12 September 2014 for the export or import of non-prohibited goods or non-financial services to or from the Union, the EU person is allowed by Regulation 833/2014 to modify the payment schedule or drawdown or disbursement terms, or to sell account receivables to another targeted entity or allow debt from that loan or credit to be taken over by another targeted entity. The reason such operations are allowed is because they relate to non-prohibited goods or non-financial services within the meaning of the Regulation. Again, the position would be different where such operations relate to prohibited exports/imports.

Determining what constitutes "emergency funding" for the purposes of the exemption on such funding that may be available (depending on the facts) under Article 5(3), necessarily requires a careful case-by-case assessment of the circumstances. Regulation 833/2014 requires specific and documented evidence that the provision of such funding is in order to meet solvency and liquidity criteria for legal persons established in the EU.

An EU person who had extended a loan or credit with a maturity exceeding 30 days on or before 12 September 2014, is not allowed to agree to a takeover of the debt arising from such loan whereby a targeted entity assumes the role of the borrower in relation to the debt after 12 September 2014. This is because agreeing to such a takeover of debt would effectively correspond to making a new loan or credit to a targeted entity after 12 September 2014 and would therefore be prohibited by Article 5(3).

• Also, an EU person who had extended a loan or credit with a maturity exceeding 30 days before or on 12 September 2014, is not allowed to cancel out (i.e., 'forgive') the debt arising from such a loan after 12 September 2014. This is because cancelling of the debt would a fortiori provide access to capital to the sectorally targeted entity.

The prohibitions in Article 5(3) extend to the rollover of existing debt. Any rollovers must comply with the 30-day maturity limit imposed for new transactions made after 12 September 2014. It is possible that a succession of rollover agreements each with a maturity of 30 days or less could amount to circumvention. This would need to be assessed in the light of the concrete circumstances of a specific case.

The obligation not to provide credit, beyond a 30-day maturity threshold, extends only in relation to targeted entities, their non-EU subsidiaries, and persons acting on their behalf, under Article 5(3). It should be borne in mind that the EU subsidiary of a targeted entity is itself directly subject to compliance with the Regulation and should not be passing funds on to a targeted entity within a Group of which it forms part. Abuse of this exception to enable a targeted entity to obtain funding would constitute circumvention under Article 12. A potential lender is obliged to refuse to grant credit/loans when it knows or becomes aware that the funds in question would end up with a targeted entity.

Receiving information and undertaking risk management and monitoring is not prohibited by Regulation 833/2014. However, such risk management would not be permitted if it amounted to activity prohibited under Article 5, such as participating in the making available of loans or assisting in the issuance of transferable securities with respect to targeted entities.

Derivatives which give the right to acquire or sell a transferable security or money market instrument within the scope of Article 5(1) and 5(2) (which essentially prohibit dealings in transferable securities and money market instruments issued by or on behalf of sectorally sanctioned entities after the effective date(s) - i.e., 1 August or 12 September 2014, as the case may be), such as options, futures, forwards or warrants, irrespective of how they are traded (on-exchange or over-the-counter (OTC)), are covered by the prohibition set out in Article 5. Certain other derivatives, such as interest rate swaps and cross currency swaps, are not covered by the prohibitions set out in Article 5(1) and 5(2), nor are credit default swaps (except where these give the right to acquire or sell a transferable security). The guidance clarifies that derivatives used for hedging purposes in the energy market are also not covered.

When considering whether making a modification to a transferable security entered into prior to 1 August 2014 or 12 September 2014, respectively, would make such a contract qualify as a 'new' (and thus prohibited) transferable security for the purposes of applying Article 5(1) and (2), it is necessary to take account of the level of materiality of any changes made by the modification. It is prohibited to adjust a transferable security entered into prior to 1 August 2014 or 12 September 2014 respectively where the modification would actually or potentially result in additional capital being made available to a targeted entity. Other changes are permitted.

The prohibitions of Article 5(1) and 5(2) extend to all "transferable securities" (as defined in Article 1(f) of Regulation 833/2014). Limb (iii) of Article 1(f) refers to any other securities "giving the right" to acquire or sell transferable securities, as defined. The guidance points out that, in such cases, the prohibitions of Article 5(1) and 5(2) apply regardless of whether or not that right is actually exercised (by purchasing, selling, or holding the underlying securities).

• Whether promissory notes fall within the scope of Article 5(1) and 5(2) will depend on the facts. The guidance points out that promissory notes may have a wide variety of functions. As a form of debt instrument and according to the case, they may be transferable via the money markets or be construed as a bond, which would bring them into the scope of Article 5(1) and 5(2). However, if promissory notes are used as a form of payment - e.g., if a targeted entity was to issue a non-negotiable promissory note as a means to pay for non-prohibited goods with EU persons - this would not be prohibited, as it would be consistent with the objectives of Regulation 833/2014 to prohibit certain money-flows and money creation between EU persons and targeted entities under Article 5, while leaving legitimate trade unaffected.

• Bills of lading which document the carriage of goods and the receipt of the goods by the transporter, do not fall under Article 5(1) and 5(2). However, in negotiable form, bills of lading can be traded for financing purposes. As with any other activity, such trading would be subject to Article 12 of Regulation 833/2014, which prohibits circumvention.

• Depositary receipts fall within the definition of transferable securities in Article 1(f) of Regulation 833/2014. Therefore, depositary receipts issued by a targeted entity fall within the prohibitions set out in Article 5. EU persons, including a European central securities depositary (CSD), are subject to Articles 5(1) and 5(2) of Regulation 833/2014 in relation to the depositary receipts issued by a targeted entity. However, the legitimate safekeeping, custody, and settlement of the underlying shares - where these shares are representing capital of a non-targeted entity - is not covered by Article 5.

Providing financial research in relation to prohibited transferable securities is not allowed under Regulation 833/2014. This is because Article 5 states that it is prohibited to directly or "indirectly" provide investment services in relation to transferable securities. Among other things, the definition of investment services in Article 1 of Regulation 833/2014 includes "investment advice" - and, according to the guidance, financial research constitutes by its nature a form of indirect advice, as the analysis contained in the research document assists potential investors in taking their decisions. Thus, the provision of financial research should be seen as a form of investment service and is prohibited under Regulation 833/2014.