On 3 July 2024 the Council of the European Union published an update to the EU Best Practices for the effective implementation of restrictive measures (Best Practices), which introduced several changes. The Best Practices are to be considered non-exhaustive recommendations of a general nature for the effective implementation of EU restrictive measures (sanctions). They play a significant role in the application and interpretation of EU sanctions regulations.

In this article, the authors Senior Associate Edvīns Draba and Associate Kristers Pētersons  provide a short description of the main changes to the EU Best Practices.

Ownership test

The EU has revised its approach to determining ownership and control for the purposes of applying sanctions, bringing it more into line with the United States.

Previously, the EU required a legal person, entity or body to be “more than 50%” owned by a designated person (DP) for EU asset freezing measures to apply. This standard differed from the “50% or more” threshold adopted by the United States Office of Foreign Assets Control.

The new EU approach, outlined in the Best Practices guidance, aligns with the US “50% rule.” This means that if an individual or entity owns 50% or more of a company’s shares, for sanctions purposes that company is considered to be owned by that individual or entity. Additionally, the EU Council has reiterated the interpretation already established by the European Commission in its “Frequently Asked Questions”, under which ownership should be calculated on an aggregated basis, considering the combined total ownership of multiple DPs. Therefore, if e.g. two DPs each own 25% of the shares in a company, the company will also be considered a sanctioned entity, due to being owned by DPs.

Control test

When assessing whether a legal person or entity is subject to EU restrictive measures, operators must consider not only direct ownership, but also the concept of “control.” This means that even if a DP does not own 50% or more of shares in an entity, they may still be considered to have control over it.

The previous version of the Best Practices contained criteria for establishing control. Now the explanation has been expanded by including more specific examples of circumstances that indicate that a DP exercises control over a non-designated entity.

To identify potential control, operators should consider factors such as:

  • Majority shareholding: While not definitive, holding the largest share in a company compared to other shareholders can indicate control. Clear thresholds for determining “majority shareholding” are still lacking, but it is worth noting that the example the EU Council provided was 40%.
  • Buyback options: The ability of a former owner (a DP) to repurchase a company (e.g. after a management buyout) under favourable terms suggests potential retained control.
  • Share transfers: A share transfer to a new owner shortly before or after (if allowed for by the relevant Council Regulations) a person has been designated may also suggest retained control by the DP.
  • Use of front persons (any of the following):
    • A new owner is closely connected to the designated previous owner – e.g. is a family member or former employee/business partner – and it’s possible that the sale price was too low or otherwise abnormal.
    • The entity has an advisor (or a board of advisors) with ultimate decision-making power over the activity of the entity, even though from the title or function, this does not seem self-evident.
    • There is a written agreement from which it is clear that a non-shareholder or a shareholder with minor shareholdings is given the authority to solely decide on the business of the entity, or that the persons who are supposed to be in charge of an entity have their decisions made by designated persons.
  • Complex corporate structures: Entities involved in complex structures, such as shell companies or trusts, should be scrutinised for potential control by a DP. Some of these entities were set up or changed their identity shortly before or after (if allowed by the relevant Council Regulations) the adoption of the sanctions regime or the person’s designation, and/or have no credible business activity. Or, e.g. one or several trusts are used as receiver(s) of assets from an entity owned or controlled by a designated person.

Acting on behalf of a DP

The EU has introduced new criteria to determine whether a person or entity is acting on behalf of or at the direction of a DP. This concept is distinct from ownership or control, although it can be influenced by these factors.

The EU has provided a non-exhaustive list of indicators to assess this relationship:

  • the precise ownership/control structure, including links between natural or legal persons, entities or bodies
  • the nature and purpose of the transaction, coupled with the stated business duties of the legal person, entity or body
  • previous instances of acting on behalf or at the direction of the listed natural or legal person, entity or body
  • disclosure made by third parties obtained from credible, reliable and independent sources and/or factual evidence indicating that directions were given by the natural or legal person, entity or body

It’s important to note that this expanded definition of responsibility can impact a wider range of entities, including those without direct ownership or control links to a DP.