On July 3, 2024, the Council of the European Union (“EU Council”) officially promulgated a new set of best practices (“best practices” or “guidance”) for organizations seeking to comply with the latest sanctions regulations (also known as “restrictive measures”) adopted by the EU to advance critical foreign policy objectives—including, but not limited to, the EU’s ongoing support for Ukraine against Russian Federation aggression. The issuance of the guidance is the latest in a series of efforts taken by the EU to underscore the importance of financial sanctions compliance to organizations operating within its jurisdiction. Originally issued in June 2022, the guidance provides a general framework by which EU “economic operators” can more effectively discharge the legal obligations imposed on them by law and regulation with respect to asset freezes and economic resource proscriptions. Among other things, the revised guidance clarifies the circumstances under which funds and other economic resources belonging to, owned, held or controlled by, a designated natural or legal person must be frozen by institutions in actual possession of those resources.

While much of the guidance remains unaltered from 2022, the revised document substantially modifies both the “ownership” and “control” dimensions of the EU Council’s best practices. With respect to ownership, the new document now completely replaces the previous test for determining whether sanctions applied to undesignated entities owned by sanctioned parties under a new standard that closely mirrors the so-called “Fifty Percent Rule” adopted by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). Thus, while the previous standard emphasized that asset freezing measures applied solely to entities owned “more than 50%” by a designated party, the new standard lowers the ownership threshold to “50% or more of the proprietary rights of an entity.” Additionally, the EU Council’s new guidance further emphasizes that, when assessing ownership information, economic operators must also remain cognizant of “aggregated ownership” interests in an effort to determine sanctions applicability. Under this element of the new ownership test, where one or more designated persons retains proprietary interests in an entity that, when combined meet or exceed the 50% threshold, that entity too, is considered blocked.

The new guidance also makes a number of important changes with respect to the “control” standard utilized by economic operators to assess restrictive measure applicability in the absence of ownership interest information. Specifically, where such operators are unable to ascertain whether an entity is subject to sanctions regulations by virtue of ownership, the guidance requires that they consider whether a designated party exercises any degree of control over that entity. This includes, but is not limited to, weighing whether the designated party “de facto exercise[s] a dominant influence” over an entity while not necessarily “being the holder of that right.” By emphasizing “de facto” arrangements, the new guidance thus expands the obligations of economic operators to include consideration of control arrangements that may be maintained outside of normal legal conventions. Finally, the best practices provide a number of useful examples for organizations to consider when approaching the issue of control under the EU’s various restrictive measure programs by describing circumstances that may serve as “indications” that a designated person has control over a non-designated entity. These circumstances include: (1) “majority shareholding” (where a designated person may be the largest shareholder of a company in comparison to others); (2) “buyback options” (where a designated person may have disposed of his or her interests in a non-designated entity with an option to reacquire control over that entity under favorable conditions); (3) “transfer of shares at a time close to the designation” (where a designated person disposes of a relevant number of shares that enable an entity to fall below required ownership thresholds); (4) use of front persons to avoid triggering restrictive measure prohibitions; and (5) reliance on trusts, shell companies, and limited liability companies to evade sanctions regulations applicability.  

The guidance explicitly provides that, should either ownership or control be established in line with the frameworks described above, economic operators are categorically prohibited from “making available [any] funds or economic resources” to non-listed legal persons or entities that may be related to such designated parties. As a result of this new guidance, all organizations with significant operations in the EU should consider updating their sanctions compliance program practices to account for the aforementioned changes. In particular, sanctions compliance programs should place an increased emphasis on obtaining all relevant information—including material ownership and control information—from potential customers or contractual counterparties situated in certain high-risk jurisdictions before consummating any transactions with those parties. Should a prospective customer or counterparty refuse to provide such information, then the organization should evaluate whether the often marginal economic benefit afforded by the transaction outweighs the very real risk posed to the business from a potential violation of EU restrictive measures.