Analysis of the Impact of EU Sanctions on Companies with Russian Owners in Slovakia in Connection with the War in Ukraine. The article explains how EU sanctions work, the obligations under the AML Act, and the practical implications for beneficial owners on sanctions lists.
A topic currently under frequent discussion in connection with the ongoing unjustified and unprovoked Russian military aggression against Ukraine and its political consequences is the expansion of the list of individuals on the European Union’s sanctions lists (hereinafter also referred to as the “EU”) and the (non-)implementation of EU sanctions in certain countries or on other sanctions lists. The consequences for Russian owners (not only) of Slovak commercial companies or their ultimate beneficial owners include, among other things, the denial of access to funds from banking institutions and the public budget. However, sanctioning the owners of these companies presents significant complications in practice. Currently, the ownership structures of legal entities are relatively complex and are not always necessarily transparent. Identifying them requires expert and repeated investigation, as ownership structures are not fixed and can evolve quite dynamically. The situation is evolving daily, the number of individuals on sanctions lists is growing, and state institutions have often not yet taken the first step against those subject to sanctions. If they were to freeze such entities’ “assets” despite the unclear ownership structure, they could subsequently face legal consequences. Individuals on the sanctions list have the right to judicial protection, so they may turn to the courts after sanctions are imposed against them. A person included on the so-called sanctions list who objects to their inclusion on this list may request removal from the list of sanctioned persons from the committees of the United Nations Security Council (“UNSC”), the Office of the Ombudsman and Mediation Services of the United Nations, or the relevant working group of the European Union.
To better understand this issue, it is necessary to explain the very nature of the sanctions list. The European Union sanctions list is a consolidated list of countries, entities, and individuals involved in or suspected of money laundering or terrorist financing, subject to economic sanctions by the EU. Lists of sanctioned persons are included in the annexes to UN Security Council resolutions and in the annexes to individual EU regulations, which require all financial institutions in member states to immediately freeze the financial and economic resources of sanctioned persons.
In the Slovak Republic, a national mechanism has been established in the area of the administrative enforcement of international sanctions in accordance with UN Security Council resolutions, ensuring an immediate process for the adoption of UN Security Council sanctions – the immediate freezing of assets of sanctioned persons, namely through legislation on the implementation of international sanctions, Act No. 289/2016 Coll. on the Implementation of International Sanctions and Amending Act No. 566/2001 Coll. on Securities and Investment Services and Amending Certain Acts (the Securities Act), as amended (hereinafter referred to as “ZOVMS”).
EU sanctions are adopted by transposing UN Security Council (UNSC) sanctions resolutions, whereby, following the adoption of a UNSC resolution, it is necessary to implement the resolution in question into an EU regulation as soon as possible. However, the EU also applies its own autonomous sanctions in accordance with foreign policy objectives toward certain countries, as well as toward individuals who are citizens of EU member states. Economic sanctions are a fundamental component of the EU’s Common Foreign and Security Policy and are used as part of international efforts to combat money laundering, terrorist financing, and other financial crimes. To this end, an EU sanctions list is compiled, which must be incorporated into financial institutions’ AML/CFT programs.
EU sanctions may include:
- the freezing of financial assets or economic resources, a ban on financial transactions
- restrictions on market access, trade, investment, or technical assistance
- an arms embargo
- restrictions on land, air, or sea connections
- a ban on athletes competing in events in the sanctioned country
- restrictions on entry into the country
- suspension of cooperation with a third country
EU sanctions are issued by the European Council. Every member of the Council must unanimously agree on the sanctions before legislation is drafted and enters into force. Some sanctions, such as the freezing of financial assets, are implemented directly by the EU administration. Other types of EU sanctions, such as an arms embargo, are implemented by the member states themselves through national legislation, which means that the sanctions must be transposed into national law. Sanctions imposed by the EU apply to financial institutions and individuals within the territory subject to the jurisdiction of the European Union. The sanctions also apply to EU citizens operating outside the EU.
According to an analysis by Dun & Bradstreet, Russian and Ukrainian businesspeople own 3,284 companies in Slovakia, of which 66% are Ukrainian firms with a registered capital exceeding 40 million euros, and the remaining 34% are controlled by Russian businesspeople, with cumulative assets exceeding 70 million euros.These companies employ several staff members and are also linked to additional suppliers with further employees. Foreign companies owned by Russian owners report more significant cash flow problems and lower optimal capital. At the same time, government institutions are discussing a ban on companies with Russian owners participating in public tenders, as well as denying them investment services or subsidies. Companies registered in Slovakia that have Russian owners can send their profits to Russia via third countries, and a portion of those profits may subsequently end up directly in the Russian budget—which is currently financing the war—in the form of taxes or various other fees.
In connection with the events in Ukraine and the adoption of sanctions against Russia, we would like to draw your attention to the restriction on doing business with persons on the sanctions list, i.e., the obligation under Section 10(1)(d) of Act No. 297/2008 Coll. on the Prevention of Money Laundering and the Financing of Terrorism and on Amendments to Certain Acts (hereinafter the “AML Act”): “The
basic due diligence of the obligated entity in relation to the client includes
d) determining whether the client or the ultimate beneficial owner of the client is a politically exposed person or a sanctioned person, ”
It is also necessary to mention Section 4(1) and (2)(l) m) of the AML Act, pursuant to which:
“An unusual business transaction is a legal act or other act that indicates that its execution may lead to money laundering or the financing of terrorism.
An unusual business transaction is, in particular, a transaction:
...l) where there is a reasonable suspicion that the client or the ultimate beneficiary is a person subject to international sanctions under a special regulation, or a person who may be related to such a person, or
m) where there is a reasonable suspicion that its subject matter is or is intended to be a good or service that may be related to a good or service subject to an international sanction under a special regulation.
” You can check whether a person or company is on the sanctions list on this website , where you will find a list of EU and UN sanctions that is not legally binding but is up to date, categorized by topic, country, type, and entity.
Additional lists of sanctioned individuals can be found at the links below:
- https://sanctionssearch.ofac.treas.gov/
- https://www.gov.uk/government/publications/financial-sanctions-consolidated-list-of-targets/consolidated-list-of-targets
Transposing European lists into reality is complicated, as experts say Russian elites have most of their assets hidden in offshore accounts, companies, and real estate in Europe and the U.S. Offshoring is a business practice in which a company is established outside the country where it operates. In such cases, the entity is registered abroad. In reality, therefore, the list of sanctioned individuals would be much longer than it currently is.
The consequences of the war in Ukraine are currently being felt even by companies whose owners are not listed on the so-called sanctions list but are Russian citizens. Given the above, it is clear that any company whose ultimate beneficial owner is listed on the sanctions list will face consequences in the near future, whether in the form of frozen financial assets, restricted market access, or the denial of subsidies. However, it is certainly not feasible to consider the collapse of all businesses. Global industry would thereby risk triggering an economic crisis, and it would also have negative consequences for employment.
