Germany: Sanctions On Russia – Restrictions On Access To Capital Markets

The EU has - as announced for several weeks in political debates - intensified the economic sanctions against Russia as from 1 August 2014. In this context, several EU Council regulations have recently been issued.

Through these regulations, the sanctions will take on a new dimension against Russia and will affect a great number of established business relationships between enterprises in the EU and Germany, respectively, and Russian business partners.

Whereas the measures of the EU were initially aimed at freezing funds and economic resources of certain natural and legal persons, entities and bodies and restricting certain investments (Council Regulation (EU) No 269/2014 of 17 March 2014 and implementing Council Regulation (EU) No 810/2014 of 25 July 2014), another set of far-reaching restrictive measures is now being implemented. The aim of the following Regulation is, among others, to restrict the access to capital markets for certain financial institutions:

Taking into account the format of a newsletter, the following is designed to provide a brief overview of the key provisions of the Regulation.

Among the "Sanctions Regulations" which have recently been adopted, Regulation 833/2014 is presumably one of the economically most relevant ones to German and European enterprises. 

1. Council Regulation (EU) No 833/2014

This Regulation relates to measures taken as from 1 August 2014 and does not, within the scope of Article 5 relevant for capital markets, cover transactions entered into before this date.

1.1 Article 5 prohibits "to directly or indirectly purchase, sell, provide brokering or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments with a maturity exceeding 90 days, issued after 1 August 2014" if these securities or instruments have been issued by certain persons or bodies.

1.1.1 The prohibition primarily relates to securities and money-market instruments issued by the banks listed in Annex III of the Regulation, namely Sberbank, VTB Bank, Gazprombank, Vnesheconombank (Veb) und Rosselkhozbank.

1.1.2 In addition, securities and money-market instruments issued by legal persons, entities or bodies established outside the European Union and whose proprietary rights are owned for more than 50 % by a bank mentioned above shall also be subject to the prohibition.

1.1.3 Finally, the prohibition also relates to such issuers acting on behalf, or at the direction of, banks as referred to in 1.1.1 above or persons, entities or bodies referred to in in 1.1.2 above.

1.2 The prohibition relates to securities and money-market instruments.

1.2.1 "Transferable securities" within the meaning of the Regulation are those classes of securities which are negotiable on the capital market, such as

  1. shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares,
  2. bonds or other forms of securitized debt, including depositary receipts in respect of such securities, as well as any
  3. any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement.

1.2.2 "Money-market instruments" shall mean those classes of instruments which are normally dealt in on the money market, such as treasury bills, certificates of deposit and commercial papers.

1.2.3 Instruments of payment shall not qualify as "transferable securities" and "money-market instruments" and are, thus, explicitly excluded from the restrictions.

1.3 In addition to the purchase and sale of certain securities and money-market instruments, Article 5 of the Regulation also prohibits to provide brokering or assistance in the issuance of, or otherwise deal with such securities or instruments. In this context, please note that the German version of the Council Regulation deviates from other language versions (e.g. the English, French and of Spanish version) as it does not refer to "brokering" but to "brokering services" (which has a different meaning according to its definition). However, in light of various other language versions of the Council Regulation (e.g. the English, French and Spanish versions which clearly refer to "brokering", "courtage", "intermediaciòn"), there are good arguments to interpret the German language accordingly and to see this point a mere drafting or translation error.

"Brokering" shall mean the following services and activities:

  1. reception and transmission of orders in relation to one or more financial instruments,
  2. execution of orders on behalf of clients,
  3. dealing on own account,
  4. portfolio management,
  5. investment advice,
  6. underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis or without a firm commitment basis,
  7. any other service in relation to the admission to trading on a regulated market or trading on a multilateral trading facility.

The above clearly shows the aim to avoid or restrict to the farthest possible extent the access to the capital market for the relevant financial institutions.

1.4 From now on, prior to exercising any activity in connection with securities and money-market instruments it will be essential to check whether

  1. the issuer is a bank expressly listed in Annex III of the Regulation, and
  2. the contemplated activity or transaction is prohibited due to the shareholding structure or the capacity in which the issuer acts or appears. 

2. Financial services of bodies not stated in Article 5 Annex III

Financial services with or of institutes not stated in Article 5 in connection with Annex III do not fall in the scope of application of the Council Regulation and are therefore generally still permitted.

2.1 However, it should be ensured that the relevant (generally permitted) financial service is not provided in connection with other services or transactions which are subject to other provisions of Regulation 833/2014 (or other EU sanctions regulations).

2.1.1 For example, according to Article 4 (1) b) of the Regulation 833/2014 it is prohibited to provide, directly or indirectly, financing or financial assistance related to the goods and technology listed in the Common Military List, including in particular grants, loans and export credit insurance, for any sale, supply, transfer or export of such items, or for any provision of related technical assistance to any natural or legal person, entity or body in Russia or for use in Russia. Even if not expressly stated, the prohibition could also include all types of avals to be granted for advance payments, fulfillment, "Good Performance" or warranty claims for the benefit of clients or suppliers.

2.1.2 The same applies to the direct or indirect financing of dual-use goods and technology, i.e. such items which are or may be intended, in their entirety or in part, for military us or a military end-user. The inclusion of such goods and technologies may have a substantial impact, since a wide range of goods could be affected (from machine-tools through chemicals to electronic semiconductors etc.).

2.2 Any contemplated financing transaction or activity having a direct or indirect connection to Russia, including such financing transaction or activity which is generally not prohibited under Article 5, needs to be examined with the greatest possible care.

2.3 According to Section 18 (1) Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG), violations of these prohibitions constitute a criminal offence which may be punished with a prison sentence from three months to five years. According to Section 73 et seq. of the German Criminal Code (Strafgesetzbuch, StGB), the court may order the confiscation of what was obtained (e.g. proceeds) in connection with the crime. 

2.4 Pursuant to Article 10 of the Regulation 833/2014, actions by natural or legal persons, entities or bodies shall not give rise to liability of any kind on their part, if they did not know, and had no reasonable cause to suspect, that their actions would infringe the measures set out in the Regulation. It remains to be seen to what extent an investigation duty exists in order to eliminate the existence of such reasonable cause and to exclude any such liability. However, in light of the reinforced measures recently taken by the EU, it can be expected that an increased examination standard is to be applied. To ensure that the criterion "no reasonable cause to suspect" is fulfilled, each relevant transaction and activity must be checked in respect of the existence of such "reasonable" causes. The examination and its result should be properly documented.

2.5 In addition, Sections 30, 130 of the Administrative Offences Act (Ordnungswidrigkeitengesetz - OWiG) remain to be mentioned. If, for example, a corporate body of a legal person, a partner of authorized to represent the relevant partnership having legal capacity, an authorized representative with full power of attorney (Generalbevollmächtigter), a holder of a registered power of attorney (Prokurist) or certain other persons authorized to manage the operations of a company have breached the prohibitions under the Regulation, an administrative fine may also be imposed on the company (see Section 30 OWiG). In case an employee not listed in Section 30 OWiG has committed any such crime or administrative offence, Section 130 OWiG applies. This means that, in addition to the acting person, an administrative fine may also be imposed on the holder of the undertaking or enterprise. Also in such case, the company may (in application of Section 30 OWiG) be subject to an administrative fine. In both cases (Section 30, 130 OWiG), the level of fines set forth (depending on the case, up to EUR 500.000,- or up to EUR 10 million) must be considered. Though, according to Section 17 para (4) OWiG the administrative fine shall exceed the economic benefit the offender has obtained by committing the administrative offence. Therefore, in such cases, the maximum amounts as defined by law are not relevant and may considerably be exceeded.

3. Amended Council Regulation (EU) No 269/2014

In this context we would like to point out that Council Regulation (EU) No 269/2014 concerning restrictive measures in view of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine has been again amended and extended by Council Regulation (EU) No 811/2014 of 25 July 2014 as well as by implementing Council Regulation (EU) No 810/2014 of 25 July 2014 and (EU) No 826/2014 of 30 July 2014. The Regulation provides for the freezing of funds of certain persons and entities and restrictions on certain investments as a response to the illegal annexation of Crimea and Sevastopol. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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