International financial sanctions and the associated obligations to enforce these sanctions are of significant economic importance, but are only tangentially studied. Therefore, in many situations, important events in the matter go unnoticed.
The Costaș, Negru & Asociații team has significant theoretical and practical experience in the field of international financial sanctions, which is why they constantly address the issues that arise in the field. The partnership’s practice in this area is coordinated by Dr. Cosmin Flavius Costaș and Radu Buda.
We aim today to deal with one of the recent reporting obligations, of interest to economic operators, active since 1 May 2024.
I. Introduction
In the last decade, armed conflicts seem to be becoming more frequent and the economic consequences are becoming more acute and more difficult to manage. In this context, international organisations opt for imposing international financial sanctions in order to minimise the effects of the aggresion, to safeguard the interests of states more or less involved in the armed conflict, in order to ultimately to restore the international law order.
Regulation (EU) no. 833/2014 was adopted in the context of Russia’s aggression against Ukraine with the annexation of Crimea in 2014. This Regulation has been brought up to date especially after the spread of the armed conflict in 2022.
A new measure entered into force on 1 May 2024 to ensure financial security at EU level and to reduce the risks of transfers of funds by legal entities covered by Regulation 833/2014. This is a new reporting obligation for transfers reaching the threshold of the new Article 5R imposed on legal persons and entities with significant links to Russia.
More specifically, Article 5R requires entities to notify the competent authority of the Member State in which it is established, as from 1 May 2024 , within two weeks of the end of each quarter, of any transfer of funds outside the Union in excess of EUR 100 000 made during that quarter, directly or indirectly, in one or more transactions.
Article 5R is intended to help competent authorities at national level to improve visibility in tracking the flow of funds to entities of Russian nationality outside the EU, without affecting the activities of entities which are owned, even partly, by Russian nationals and which operate legally in the European Union. As a result, the competent authorities will be able to analyse more effectively which types of transfers may pose a risk of sanctions violations for collusive relations with Russia and help to map Russia’s main sources of income by identifying the flows of funds.
II. Article 5R entities
The new obligation applies to legal persons, entities and bodies established in the European Union, more than 40% of whose ownership is held, directly or indirectly, by:
more than 40 % of whose ownership rights are held, directly or indirectly, by:
(a) a legal person, entity or body established in Russia;
(b) a Russian national (including dual nationality);
(c) a natural person residing in Russia; or
(d) credit and financial institutions.
However, Article 5R also applies if the legal entity is owned by more than one of the above persons.
Indirect ownership involves the exercise of ownership rights through a series of intermediaries. However, it is distinct from the exercise of control over these entities, as its existence is established following a factual analysis. Moreover, the condition of exercising control over the entity is irrelevant for Article 5R.
As far as associations and foundations are concerned, they are covered by the Regulation and implicitly by Article 5R, as long as this is clear from the interpretation of the competent national authorities.
III. Scope of application
Article 5R provides that any transfer of funds outside the European Union in excess of EUR 100,000 made during a quarter, directly or indirectly, in one or more transactions must be reported. While direct transfer does not need explanations, the indirect transfer involves the involvement of intermediaries, usually from the EU, to facilitate the transfer to the final recipient, an entity outside the EU.
The notion of reportable transfer includes any kind of transfers initiated in the EU or from the jurisdiction of a Member State to another State by legal persons owned by relevant Russian legal or natural persons, including those for the purpose of repatriating profits. The transfer may concern any type of funds, regardless of the currency used. The notion of funds is detailed in Article 1 (d) of the Regulation, covering financial assets and benefits of any kind, providing an illustrative list of types of financial assets (e.g. cash, cheques, cash claims, bills of exchange and money orders, deposits with financial institutions, receivables and debt securities, interest, dividends).
In terms of territorial scope, Article 5R covers transfers of funds held by a non-EU subsidiary belonging to a credit or financial institution or economic operator in the EU, as long as they are among the entities covered by Article 13 of Regulation 833/2014. The rationale behind this rule is that these subsidiaries do not possess legal personality distinct from the parent company, so civil liability for their actions is upon the main entity.
However, Article 5R does not apply to transfers of funds from a subsidiary located outside the territory of the EU, belonging to an EU credit or financial institution or entity, unless the subsidiary was involved in such a transfer knowingly to avoid the application of Article 5R.
From a time perspective, the first reporting round should cover transactions completed between 1 January and 31 March 2024. However, the notification obligation will only enter into force from 1 May 2024. From the second quarter (Q2) of 2024 onwards, reporting would be due two weeks after the end of each quarter, e.g. for Q2 by 15 July; for Q3 by 15 October; for Q4 by 15 January 2025, and for Q1 2025 by 15 April 2025.
For credit and financial institutions, the reporting obligation takes effect on 1 July, i.e. the day after the end of the first half-year. Therefore, the first notification will have to be filed by 15 July 2024 at the latest, and for the second half of the year by 15 January 2025.
Even if the entity referred to in paragraph 1 has already executed its reporting obligation, credit and financial institutions must report transfers in accordance with paragraph 2 of Article 5R.
IV. Conclusion
In this article we have analysed the conditions of the new reporting obligation for transfer of funds procedures in the light of Regulation 833/2014. Its scope of application mainly concerns transfers made by entities with a significant connection to Russia.
This article was prepared, for the blog of the civil society of lawyers Costaș, Negru & Asociații, by Ms. Miruna Mihuță (Arad Bar Association).
Costaș, Negru & Asociații is a civil society of lawyers with offices in Cluj-Napoca, Bucharest and Arad, which offers assistance, legal representation and consultancy in several practice areas through a team composed of 19 lawyers and consultants. Details regarding legal services and team composition can be found on the website https://www.costas-negru.ro. All rights for the materials published on the company’s website and through social networks belong to Costaș, Negru & Asociații, their reproduction being permitted only for informational purposes and with correct and complete citation of the source.
