14 Apr 2022

EU sanctions: impact on the trust industry

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The EU has expanded its sanctions against Russia by introducing restrictive measures, prohibiting EU trust and company service providers ("TCSPs") from (1) providing administration services to trusts and similar structures connected with Russian nationals1; and (2) with effect from 10 May providing trustee or other fiduciary services to trusts and similar structures connected with Russian nationals. This means that all EU TCSPs are required to comply with the new sanctions by divesting themselves of any and all affected Russian related business by 10 May 2022.

EU restrictive measures are generally introduced by Regulations which are directly effective in all member states. But their effect can be considerably wider as they apply to all EU persons, including EU nationals 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 EU and 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. For EU sanctions to apply, it is therefore sufficient that an EU person is involved or that the parties partially act within the EU.

Article 5m(1) of Regulation (EU) No 833/2014 (the "Regulation") prohibits the registration, provision of a registered office, business or administrative services as well as management services to a trust or any similar legal arrangement having as a settlor2 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 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) ("Russian trust or any similar legal arrangement")

(the "prohibition on the provision of management services").

Article 5m(2) prohibits as of 10 May 2022 EU persons from acting as, or arranging for another person to act as, a trustee, nominee shareholder, director, secretary or a similar position, for a Russian trust or any similar legal arrangement (the "prohibition on the provision of fiduciary services").

It must be noted that the prohibitions on the provision of management services and on the provision of fiduciary services will not apply in relation to operations that are strictly necessary for the termination by 10 May 2022 of contracts which are not compliant with Article 5m concluded before 9 April 2022, or ancillary contracts necessary for the execution of such contracts.

The prohibitions on the provision of management services and on the provision of fiduciary services also do not apply where the settlor or beneficiary is a national of a member state, or a natural person having a temporary or permanent residence permit in a member state.

Analysis

These sanctions are widely drawn and have the potential to affect all TCSPs worldwide, not just those who are located within the EU. This is because the sanctions apply to any EU person, including an EU national working for a non-EU TCSP or a non-EU TCSP conducting business wholly or in part within the EU.

If you have the required EU nexus, then you must comply with the sanctions, meaning that you cannot administer any structure or entity or provide fiduciary services to it, if it is caught by the rules. Like all sanctions, the Regulation is broadly drafted and the recent amendments to it were made in a short time period, therefore interpreting its scope is complex.

To avoid breaching these sanctions, it is important that all TCSPs check their client bases to identify any potential connections to Russia among existing and new clients. We recommend performing enhanced due diligence to ensure you are not acting for Russian nationals, or their companies in the EU, to avoiding breaching the Regulation. This may also involve carrying out wider background checks.

If you have Russian client(s) caught by the Regulation then you have until 10 May 2022 to stop acting for them. Trustees will recognise that this will not be an easy task. It is unclear whether there will be a ready pool of replacement TCSPs who, leaving to one side the potential tax issues, will be willing to take on this work.

If you would like to discuss the impact of the sanctions, then please contact one of our team.

 

 
 


1 Which prohibition came into effect on 9 April although there is a wind down period until 10 May 2022
2 The Regulation uses the term "trustor" which we have interpreted as referring to the settlor

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