Russia sanctions: EU banks’ reporting obligations clarified

As part of the Russia sanctions, banks and financial institutions are increasingly subject to auditing and reporting obligations (e.g. in Article 5a(4a) and Article 5g of Regulation (EU) No 833/2014).

A new reporting obligation will come into force on 1 July 2024. This concerns outgoing payments from the EU by undertakings and other entities and bodies held by Russian owners. On 12 April 2024, the Commission published guidance on these latest reporting obligations. This addresses 16 frequently asked questions.[1] Additionally, a template for reporting to the national competent authorities – in Germany, the Bundesbank – was published.[2]

A. Extensive reporting obligations for companies and banks

In December 2023, Article 5r was added to Regulation (EU) No 833/2014.[3]

Paragraph 1 of Article 5r Regulation (EU) No 833/2014 requires legal persons, entities and bodies established in the EU to report transfers of funds of more than €100,000 to a destination country outside the European Union in cases where more than 40% of the ownership rights in the paying entity are held directly or indirectly by (a) legal persons, entities or bodies established in Russia or (b) Russian nationals or (c) a natural person residing in Russia.

In addition, Article 5r(2) of Regulation (EU) No 833/2014 requires credit and financial institutions to report such transfers of funds if they are initiated on behalf of an institution held from within Russia within the meaning of paragraph 1.

B. Comprehensive scope and demarcation problems

The Commission’s questions and answers mainly concern the scope of application of the provision, namely the question of whether a report is required at all. The modalities of the reporting procedure are also examined.

With regard to the scope of application of the reporting obligation for credit and financial institutions, it is first clarified that branches outside the European Union are also covered if the branch does not have its own (foreign) legal personality (Questions 4 and 5).

Moreover, it is also clarified that the term “funds” as referenced in Article 5r of Regulation (EU) No 833/2014 encompasses financial assets and benefits of any kind (see also Art. 1 lit. zd)) (Question 3). It is not necessary for the reporting threshold of €100,000 to be exceeded by an individual transfer; rather, individual payments within the reporting period are added up (Question 7).

The identification of EU companies and entities (indirectly) held from within Russia within the scope of the reporting obligation is likely to cause considerable practical difficulties. In this respect, the Commission clarifies that the 40% threshold is calculated on an aggregate basis. Accordingly, the reporting obligation applies if the sum of all property rights held by relevant Russian groups of persons exceeds the threshold (Question 9).

“Indirect” ownership status on the part of the relevant Russian groups of persons within the meaning of Article 5r of Regulation (EU) No 833/2014 means ultimate ownership status that is legally mediated by intermediary entities and legal persons (“intermediaries”). De facto control for exerting influence is not relevant (Question 10).

Credit and financial institutions must initially identify the EU undertakings, entities or bodies concerned that are held from within Russia on the basis of know-your-customer information. If not all relevant information is available, the missing information must be gathered in the next regular customer screening (Question 12).

Furthermore, the identification of “indirect transfers” within the meaning of Article 5r(2) of Regulation (EU) No 833/2014 is likely to present complex practical issues. In this regard, the Commission provides an example according to which a transfer via one or more intermediaries in the EU with an ultimate destination outside the European Union is deemed to be an indirect transfer (Question 6).

Moreover, the reporting modalities have been specified in detail, in particular by providing the reporting template. The reports from credit and financial institutions for the first half of 2024 are due by 15 July 2024 and for the second half of 2024 by 15 January 2025 (Question 8).

Concerning corporate groups, the individual legal entities within the group are obliged to report to the relevant authorities in the according Member State. It is not possible to submit a collective report for a corporate group covering the entire EU (Question 15).

C. Uncertainties remain despite clarifications

The new guidance provides some welcome clarifications in view of the approaching reporting deadlines. However, considerable uncertainties are likely to remain in practice when assessing whether certain transfers are reportable. In view of the first reporting deadline of 15 July 2024, the credit and financial institutions concerned should drive forward the implementation of the new reporting obligations as soon as possible.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[1] EU Commission, Frequently Asked Questions on the Reporting on Outgoing Transfers Concerning Sanctions Adopted Following Russia’s Military Aggression Against Ukraine, 12/4/2024, https://finance.ec.europa.eu/document/download/5e05f301-c39e-4cd0-bdcb-f1d13e9b9dcd_en?filename=faqs-sanctions-russia-outgoing-transfer-reporting_en.pdf (retrieved on 16/4/2024).

[2] EU Commission, Reporting Template on Outgoing Transfers under Article 5r of Council Regulation (EU) No 833/2014, 12/4/2024, https://finance.ec.europa.eu/document/download/c36b6910-a3e4-4a5b-a342-3f34aab4568b_en?filename=faqs-sanctions-russia-outgoing-transfer-article-5r-reporting-template_en.xlsx (retrieved on 16/4/2024).

[3] See Sachs and Rösch, 12th EU sanctions package: Companies need to take action, Noerr Insights, 20/12/2023, 12th EU sanctions package: Companies need to take action (noerr.com) (retrieved on 16/4/2024).