Meet The Members Europe – Headwinds and tailwinds in EU’s banking & finance sectors

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Sanctions 2022 (Ukraine)

In 2022, the European Union (following closely with the United States and the United Kingdom) imposed new sanctions against Russia in response to its ongoing war against Ukraine. These sanctions have brought about a number of novelties in terms of their scope and impact and have presented significant challenges for the banking and insurance sectors.

The sanctions imposed have targeted a wide range of individuals and entities, including Russian oligarchs, government officials, and companies that are believed to have been supportive of the Russian aggression against Ukraine. In addition, the sanctions have also targeted key sectors of the Russian economy, such as energy, finance, and defence.

One of the key novelties of these sanctions is the way in which they have been designed to maximise their impact while minimising their potential negative consequences. For example, the sanctions imposed by the United States have been targeted specifically at Russian state-owned banks and energy companies, rather than at the Russian people as a whole. This approach is intended to avoid causing unnecessary harm to ordinary citizens, while still putting pressure on the Russian government to change its behaviour.

Similarly, the European Union’s sanctions have been designed to target specific individuals and companies, rather than the Russian people as a whole. This approach has been achieved by imposing travel bans and asset freezes on key individuals and companies, rather than imposing broad economic sanctions on the Russian economy as a whole.

However, despite these efforts to minimise the negative consequences of the sanctions, they have still presented significant challenges for the banking and insurance sectors. For example, many banks and insurers have been forced to re-evaluate their exposure to Russia, as the sanctions have made it much more difficult to do business with Russian companies and individuals.

“Many banks and insurers have been forced to re-evaluate their exposure to Russia.”

One of the greatest challenges involving the banking sector and, in many instances, their legal counsels, is related to the interpretation of the (in)famous criteria for the determination of the “control” and of the coverage area of the freezing of funds, when it comes to groups of controlled by a sanctioned person or entity. Recent practice has shown that, the criteria are quite wide and thus present a twofold problem. On one hand, they put the banks/other EU market players in a difficult position when striving to identify which are the clients/transactional parties in scope for freezing of funds/payments (EU banks and other players being “forced” to over-freeze for fear of regulatory sanctions). On the other hand, they void the effort of the legal counsel when trying to provide valuable legal advice to the EU market players, since the understanding of such criteria exceeds the rules of legal and grammatical interpretation and, rather, such understanding lies in an obscure interpretation which is purely economically or even politically driven. In fact, such wide and ambiguous interpretation of the “control” gives rise to the question of whether the sanctions applied by the EU work against the Russian economy or, rather against the EU economy (given that there are many reputable EU companies with stakes are owned by Russian oligarchs, through EU stock exchanges).

Another relevant example is the sinuous evolution of article 5b under the EU Regulation 833/2014 regarding the prohibition (for EU banks) to hold Russian persons/entities’ “deposits” greater than €100,000. It started by imposing this prohibition to citizens and residents of Russia, while, based on a much debated and contested answer of the European Commission in its FAQs section around the 25th of March 2022, the EC issued an interpretation whereunder the restrictions applied to EU based companies owned by Russian beneficial owners, too (!). This lasted for a couple of weeks (despite the apparent paradoxical and illogical situation) and has been eventually solved by publishing updates to the FAQs section and amending of the EU Regulation. To summarise, the issue might lie in the fact that the EU regulations in the sanctions area often seem to fail in legal drive and clarity. Going through the documents, one might assert that they are written exclusively by economic experts in concert with political factors.

“One of the key novelties of these sanctions is the way in which they have been designed to maximise their impact while minimising their potential negative consequences.”

EU AML Package On December 7th ‘22 the European Council agreed its position on the new AML Regulation and new AML directive (AMLD 6), Together with the recast of the transfer of funds Regulation, these will form the new EU AML rulebook.

The AML Regulation might be enforced by 2024 while the entire package might be adopted by the end of 2025.

Some of the new rules embraced under the new package bring about new and/or stricter standards in terms of: coverage of rules to crypto-assets service providers; beneficial ownership identification (e.g. mandatory consultation of UBO Register plus the use of another reliable source for the verification of the identity; reporting duties to the Central; new rules on multilayered ownership and control structure; no exception from UBO identification/verification for listed companies or government bodies/companies; need to document the nature and extent of the UBO interest in the legal entity), or CDD rules.

As a matter of detail, when implementing the 4th AML Directive, Romania’s legislative body and local regulators in the banking and insurance sectors have chosen the harsher path and introduced CDD rules which are, in fact, identical or similar to the ones predicted to be laid down in the foreseen EU AML Package. Hence, due to the harsh vision of the local authorities, at least in theory, the local regulation/legislation is more or less aligned with the foreseen new rules.