EU sanctions: application of trusts measures outside the private trusts sphere
As noted in our recent article, the 'fifth package' of EU sanctions against Russia adopted on 8 April 2022 introduced a notable addition to Regulation (EU) No 833/2014 in Article 5m, which prohibits the provision of management services1 and fiduciary services2 to trusts or similar legal arrangements with Russian connections3, unless the settlor4 or beneficiary is a national of an EU member state or a natural person having a temporary or permanent residence permit in an EU Member state. These prohibitions apply to all EU persons, including EU nationals and employees and entities incorporated or constituted under the law of an EU member state wherever they are doing business in the world. They also apply to all business done by non-EU persons in whole or in part within EU territory, including its airspace and on any aircraft or vessel under an EU member state's jurisdiction.
It is not yet clear if the UK will adopt similar prohibitions. While the UK and EU (and other like-minded jurisdictions) have generally closely cooperated and coordinated when imposing sanctions against Russia, there are notable differences. The UK's recent announcement (on 4 May 2022) of a ban on services exports to Russia made express reference to accountancy, management consultancy and PR services, and did not contain any reference to trusts. However, the precise scope of the new UK sanctions are not yet clear pending the laying of the relevant legislation before Parliament. We note that the US announced similar prohibitions for US persons on 8 May 2022, which expressly referred to accounting, trust and corporate formation, and management consulting services.
The prohibition under Article 5m(2) on the provision of fiduciary services came into effect today, 10 May 2022. This also marks the end of the winding-down period provided by Article 5m(3) for the termination of contracts which were not compliant with Article 5m concluded before 9 April 2022, or ancillary contracts necessary for the execution of such contracts.
The extent to which Article 5m will disrupt the use of trusts and similar arrangements by high net-worth Russians has not yet become clear. This has not been helped by a lack of guidance as to the scope of Article 5m. Since March 2022, the European Commission has published a number of guidance documents in the form of FAQs relating to EU sanctions against Russia.5 As at the date of writing, no such guidance has been issued by the Commission in relation to Article 5m.
However, it is important to note that Article 5m is not limited to trusts in the private wealth sphere and could have significant implications in commercial transactions that may not be immediately obvious. For example, it could extend to several types of security structures in a syndicated loan, employee benefit trusts, pension funds, unit trusts and the holding of client monies, where the relevant assets are held for the benefit of a Russian national or a Russian or Russian-owned company. It is not clear if the EU intended all or even some of these types of commercial transactions to be caught by the sanctions and each case is likely to turn on its facts. Pending further guidance or an amendment refining its scope, businesses should take into account that Article 5m is drafted broadly in considering its potential impact on their transactions.
If you would like to discuss the impact of the sanctions, then please contact one of our team.
1 The registration, provision of a registered office, business or administrative services as well as management services
2 Acting as, or arranging for another person to act as, a trustee, nominee shareholder, director, secretary or a similar position
3 Being those having as a settlor or a beneficiary:
(a) Russian nationals or natural persons residing in Russia;
(b) legal persons, entities or bodies established in Russia;
(c) legal persons, entities or bodies whose proprietary rights are directly or indirectly owned for more than 50 % by a natural or legal person, entity or body referred to in points (a) or (b);
(d) legal persons, entities or bodies controlled by a natural or legal person, entity or body referred to in points (a), (b) or (c);
(e) a natural or legal person, entity or body acting on behalf or at the direction of a natural or legal person, entity or body referred to in points (a), (b), (c) or (d).
4 As explained in our previous article, Article 5m uses the term "trustor" which we have interpreted as referring to the settlor
