EU Sanctions Against Russia: The Banking Dimension

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Note for readers: the specific sanctions measures described here date from late February 2022 and have since been considerably expanded. The analysis of the sanctions regime and of the role of banks, below, remains of general application.

Following Russia’s recognition of the Donetsk and Luhansk areas and the entry of its armed forces, the Council of the European Union imposed restrictive measures prohibiting the financing of Russia, its government and its central bank. Prohibited operations include the purchase, sale, provision of investment services or assistance in the issuance of transferable securities and money-market instruments issued after 9 March 2022 by Russia, its government or the Central Bank of Russia, and the conclusion of arrangements for new loans or credit to those entities after 23 February 2022. On 26 February, certain Russian banks were cut off from SWIFT.

Why does the EU adopt sanctions and other restrictive measures?

Restrictive measures, including embargoes, are an essential instrument of the EU’s Common Foreign and Security Policy (CFSP). Sanctions aim to bring about a change of policy or conduct on the part of those targeted. They may target the governments of non-EU countries because of their policies, entities providing the means to pursue the targeted policies, groups or organisations such as terrorist groups, and individuals who support the targeted policies or take part in terrorist activities.

What sanctions does the EU adopt?

There are diplomatic sanctions and sanctions in the strict sense. The latter include arms embargoes; restrictions on the admission of listed persons (travel bans); economic sanctions, financial embargoes or sector-specific restrictions (including import or export bans, investment bans and prohibitions on providing certain services); and the freezing of assets belonging to listed persons or entities, whose assets in the EU are frozen and to whom no funds may be made available.

A “freezing of funds” is defined as any action to prevent any movement, transfer, alteration, use of, or dealing with funds that would result in a change in their volume, amount, location, ownership, possession, character or destination. The notion of “funds” is extremely broad, covering cash, cheques, claims, drafts, payment orders, deposits, account balances, ownership and debt instruments, shares, securities, interest, dividends, credit and set-off rights, among others.

What legal questions do sanctions raise?

The Council acts within the CFSP. It first adopts a CFSP decision under Article 29 of the Treaty on European Union. Measures such as arms embargoes or admission restrictions are implemented directly by the Member States; other measures interrupting or restricting economic relations with a third country, notably asset freezes, are implemented by a Council regulation adopted by qualified majority. Such regulations are binding and directly applicable throughout the EU and are subject to judicial review by the Court of Justice and the General Court in Luxembourg.

The introduction and implementation of restrictive measures must always comply with international law. They must respect human rights and fundamental freedoms, in particular the right to due process and to an effective remedy, and must be proportionate to their objective. They must also respect the EU’s and its Member States’ international obligations, including WTO agreements (GATT and GATS) where the measures affect trade in goods or services with third countries.

The impact of sanctions on the banking sector

Banks play an essential role in implementing sanctions: the measures require them to block the assets of targeted persons, and banks may themselves be targeted. Since the implementing regulations are binding and directly applicable, financial institutions must, save for expressly provided derogations, comply with all measures and transaction prohibitions as soon as they enter into force. They are subject to an obligation of result.

Monitoring system. Under Article 8 of the AML Act, banks must adopt effective policies, procedures and internal controls, proportionate to their nature and size, to comply with binding financial-embargo provisions. Under Article 23 of the NBB AML Regulation, they must operate a monitoring system that screens clients and incoming or outgoing operations to detect whether they are subject to an asset freeze, covering all client accounts, contracts and operations and enabling rapid detection of breaches.

Further prohibitions and obligations:

1. No entry into a relationship. Banks must refrain from entering into a relationship with a person or entity designated under a financial-embargo or asset-freeze regime, and must integrate embargo and asset-freeze aspects into their client-acceptance policy.

2. No making available of assets. A freeze means all the designated client’s assets must be frozen; an operation seeking to make assets available to a third party may not be executed. In the target country, banks must also stop providing financial services to sanctioned clients, on pain of being sanctioned themselves for circumventing the embargo.

3. Immediate reporting to the FPS Finance, Treasury Department. As soon as an institution carries out a concrete freezing measure, it must contact the Treasury Department.

4. Review of the risk profile and, where appropriate, report to the CTIF-CFI. Institutions must review the risk profile of the designated client and connected persons, apply adapted due diligence, and carry out an enhanced review of prior operations. A decision to end the relationship may not result in returning frozen assets to the client; where appropriate, a suspicious-transaction report to the CTIF-CFI is made in addition to notifying the Treasury.

Penalties

Breaches of embargo and asset-freeze measures are criminally punishable. The Act of 13 May 2003 on the implementation of restrictive measures adopted by the Council provides for administrative and criminal penalties for breaches of EU regulations and decisions, and the AML Act also provides administrative penalties for breaches of binding financial-embargo provisions.

This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.