European Commission Clarifies Obligations of Financial Institutions as to Frozen Funds
On May 27, 2021, the European Commission (“Commission”) adopted an opinion on changes to the features of frozen funds (“Opinion”).1 The Opinion clarifies the extent to which financial institutions can change the character and location of frozen funds that they hold on behalf of individuals or entities subject to an asset freeze (“Designated Persons”) without requiring prior authorization from National Competent Authorities (“NCAs”). The Opinion also clarifies the circumstances in which frozen funds may be transferred between the European Union (“EU”) and the United Kingdom (“UK”) after Brexit.
The Opinion was issued following two requests from different NCAs with regard to the interpretation of the asset freezes imposed under the EU’s restrictive measures in view of the situations in Libya2 and Syria.3 It is, however, relevant for all asset freeze measures imposed by the EU.
The requirement to freeze funds is typically defined as “preventing any move, transfer, alteration, use of, access to, or dealing with funds in any way that would result in any change in their volume, amount, location, ownership, possession, character, destination or other change that would enable the funds to be used, including portfolio management.”4
The Commission, emphasizing the requirement to prevent a change that would enable the use of the funds, concludes that changes to certain features of the funds are not prohibited if these changes do not affect “the continuity of an asset freeze.” As a result, the Commission opines that frozen funds may be altered, transferred or moved provided that:
- They remain frozen and cannot be used by anyone as long as the EU restrictive measures are in force; and
- Such changes to the frozen funds’ features do not have the object or effect of circumventing the respective asset freeze.
This position marks a shift from previous guidance from the Council of the European Union, which reflected a more stringent approach to the freezing of funds.5
Turning to the specific facts submitted by the NCAs, the Commission takes the view that:
- A change of the character of frozen funds, resulting from the liquidation of shares held by an EU-based bank on behalf of Designated Persons in an EU investment fund, is not precluded by asset freeze measures provided that the operation does not enable the use of the funds by anyone. Notably, financial institutions must ensure that the proceeds resulting from the operation that led to a change of character are immediately frozen.
- Asset freeze measures do not prevent EU financial institutions from moving a frozen account (i.e., to re-book) between different entities or branches of the same financial institution within the EU, provided such re-booking does not enable the frozen funds to be used.
The re-booking issue raised by the second NCA, however, concerned a transfer of frozen accounts from the EU to the UK. Owing to Brexit, UK and EU sanctions may now diverge, with the result that Designated Persons in the EU may not be subject to similar asset freeze measures in the UK. In that scenario, any re-booking would eventually enable the frozen funds to be used. The Commission suggests that financial institutions considering moving frozen accounts from an EU Member State to the UK must have sufficient reasons to conclude that a transfer to the UK would not allow any eventual use of the frozen funds. Notably, they must:
- Ensure that the holder of the account to be re-booked is also subject to an asset freeze in the UK; and
- Assess and mitigate the risk that UK restrictive measures may further diverge from those adopted by the EU.
While the Commission does not exclude the possibility to re-book accounts from the EU to the UK, this should only “exceptionally occur for valid and legally sound reasons.” Thus, EU financial institutions should be extremely cautious when re-booking accounts to the UK and, preferably, seek to do so in accordance with their NCAs.
Of note, permitted changes in the character or location of frozen funds (i.e., those that do not enable the frozen funds to be used and are not attempts at circumvention) would—in principle—not require a prior authorization from the relevant NCAs. Nonetheless, the Commission underlines that such changes would be covered by the reporting obligations contained in the EU regulations imposing asset freeze measures. This means inter alia that EU financial institutions would have to inform their NCAs of any such change. When in doubt, it would therefore be prudent to seek guidance from the relevant NCA.
Although non-binding, this Opinion provides guidance for the uniform implementation of EU law and is thus likely to be followed by Member State NCAs. Therefore, the Opinion should facilitate the administration of frozen funds by financial institutions.
1 Commission Opinion of 27.5.2021 on changes to the features of frozen funds, C(2021) 3656 final, available at: https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/210527-frozen-funds-features-opinion_en.pdf.
2 Council Regulation (EU) 2016/44 of 18 January 2016 concerning restrictive measures in view of the situation in Libya and repealing Regulation (EU) No 204/2011 (OJ L 12, January 19, 2016, p. 1), as amended.
3 Council Regulation (EU) No 36/2012 of 18 January 2012 concerning restrictive measures in view of the situation in Syria and repealing Regulation (EU) No 442/2011 (OJ L 16, January 19, 2012, p. 1), as amended.
4 While the Commission refers to Council Regulation (EU) No 204/2011 Article 1(b) and Council Regulation (EU) No 36/2012 Article 1(i), a similar wording is used in all other EU regulations imposing asset freeze measures.
5 Council of the European Union, Best Practices for the effective implementation of restrictive measures, 4 May 2018, available at: https://data.consilium.europa.eu/doc/document/ST-8519-2018-INIT/en/pdf.
Paragraph 45 provides that “[a]ll uses of, and dealings with, funds, moving and alterations such as portfolio management, and whether by the designated person or another person holding or controlling such funds, require prior authorisation.”
