Sanctions 2024
Denmark
Authors
Hafnia Law Firm LLP is a boutique firm based in Copenhagen, Denmark, specialising in a few core areas: shipping and trading, offshore and energy, dispute resolution, insurance, and sanctions and export controls. It advises on compliance with EU, UK and US sanctions and provides day-to-day screenings as well as strategic training of employees and assistance with building sanctions compliance programmes. It represents clients in disputes relating to sanctions, including commercial litigation and arbitration, criminal cases and investigations by authorities in matters where allegations of sanctions breaches are levied. Given the wide reach of current sanctions, as part of M&A processes, companies are advised to exercise careful due diligence with respect to compliance by any target company’s possible breach of sanctions. Hafnia Law Firm provides assistance with pre- and post-merger due diligence to clients engaged in M&A processes.
1. Trends and Overview
1.1 Sanctions Market
The sanctions landscape changed fundamentally after Russia’s second invasion of Ukraine on 24 February 2022. A flurry of new sanctions rules were adopted by the EU in a total of 12 sanctions packages in 2022 and 2023. These rules are directly applicable in Denmark and came into force immediately, with few exceptions. Businesses and the public authorities that were tasked with advising on and enforcing the sanctions were given very little guidance from the EU as to the proper application of the sanctions. Hafnia Law Firm therefore experienced clients seeking legal advice on how to understand and apply the sanctions. Given the lack of guidance and the very wide scope of the sanctions rules, the first two years after the war in Ukraine were characterised by considerable industry chaos when it came to sanctions. In 2024, the scene has settled a little with the enactment of new sanctions rules slowing down.
There are no effects from the COVID-19 pandemic, which was considered a closed chapter in Denmark shortly before the war in Ukraine broke out.
1.2 Key Trends
Businesses are beginning to grasp the extremely wide scope and the implications of the sanctions adopted against Russia following the outbreak of war in Ukraine. In 2024, it went from legislative chaos to businesses getting back on their feet by gaining a better understanding of sanctions. Many businesses have implemented sanctions compliance programmes that aid in managing sanctions risks. While there are many, many sanctions rules that have been adopted by the EU, enforcement is lacking. The competence within sanctions is spread out between different state authorities. The Danish Business Authority has launched investigations into potential sanctions breaches following news stories by Danish and international media and reporting of potential sanctions breaches by Danish banks, but we are yet to see any criminal cases for breaching the newly enacted Russia sanctions.
1.3 Key Industries
All sectors that have international business, such as banking and finance, insurance, shipping and trade, as well as any form of export or import of goods and technology, are particularly affected by sanctions.
1.4 Overview
1.4.1 Types of Sanctions
Denmark could in principle enact unilateral sanctions (like Canada or the USA does) but it does not. Sanctions and export control rules in Denmark emanate from the EU. UN sanctions are binding in Denmark by way of EU law.
1.4.2 Scope of Sanctions
EU sanctions apply (a) within the territory of Denmark and other EU member states, (b) on board ships and aircraft that are registered in an EU member state, (c) to any person who has a Danish passport or a passport of another EU member state whether they are inside or outside the EU, and (d) to any legal person, entity or body which is incorporated in Denmark or carries out business in Denmark. In practice, this means that all Danish nationals and Danish companies must comply. Foreign nationals and foreign companies must also comply assuming there is a nexus to Denmark as described above. Foreign subsidiaries of Danish companies need only comply with the sanctions that are applicable in the foreign subsidiary’s jurisdiction, unless the reality is that the transaction is orchestrated from Denmark or the transaction is being carried out in a foreign jurisdiction in order to circumvent EU sanctions.
1.4.3 Domestic and/or Supranational Measures
In practice, sanctions are imposed only by the EU and the UN.
2. Overview of Regulatory Field
2.1 Primary Regulators
The Danish Ministry of Foreign Affairs has listed all competent Danish authorities. As can be seen, competence is divided between many different public authorities. The main authorities (regulators) are the Danish Business Authority, the Danish Financial Supervisory Authority, the Danish Ministry of Foreign Affairs, the Danish Customs Authority and the Danish Maritime Authority.
2.2 Enforcement
2.2.1 Enforcement Responsibilities
The Danish Security and Intelligence Service (PET) and the Special Crime Unit (NSK) are responsible for criminal enforcement in case of sanctions violations. In practice, local police around the country may undertake investigations, and most cases involving a potential breach of sanctions start with the public authorities mentioned in 2.1 Primary Regulators.
2.2.2 Breaching Sanctions
Pursuant to section 110 c of the Danish Criminal Code, breaching sanctions is a serious criminal offence that may result in fines or imprisonment for up to four years. This presupposes that a prosecutor can prove beyond a reasonable doubt the intent to breach sanctions. Negligent sanctions breaches are a criminal offence that may lead to fines or imprisonment for up to two years.
2.2.3 Mitigation
Mitigating steps that can be taken to avoid or lessen penalties for a breach include turning oneself in voluntarily, disclosure and surrendering the fruits of the crime, and co-operation with police and prosecutors. Ensuring that compliance due diligence is implemented can help reduce the risk of sanctions being illegally breached.
2.2.4 “Strict Liability”
Unlike US sanctions, a breach of EU sanctions in Denmark will only become a matter of criminally liability if the sanctions rule was breached intentionally or negligently.
2.3 Licensing
2.3.1 Derogation
There is no scope to deviate or derogate from EU sanctions unless there is a legal basis to do so in the relevant EU Council Regulation.
There are many specific grounds for licensing across the applicable EU Council Regulation. It would exceed the scope of this article to list them all. For instance, a payment that has been frozen pursuant to Council Regulation (EU) No 269/2014, Article 2(1) on grounds that the payment belongs to or benefits a designated person or entity may be released pursuant to the exemptions in Article 4(1)(a) (to satisfy basic needs of designated persons or of dependent family members) or the exemption in Article 4(2)(b) (to pay for legal services). Other exemptions apply by virtue of Article 4(1)(c)-(e). These exemptions are duplicated across the relevant EU Council Regulations that set out sanctions rules against other hostile regimes than Russia.
Further, there are legal bases in the various EU Council Regulations (against Russia, Iran, Syria, etc) enabling the competent authorities to authorise the release of frozen funds or to authorise future transactions that are necessary for medical and pharmaceutical purposes, for humanitarian purposes or to prevent health crisis or any event that may have detrimental effects on the environment, or to exercise precautionary measures following a natural catastrophe.
There is scope for granting the release of frozen payments to satisfy arbitral awards issued prior to the date that a person or entity was designated. The conditions are strict and include, inter alia, that the payment cannot benefit the designated person or entity.
Licences are enacted for particular policy purposes; for instance, in relation to the Russia sanctions, there is now scope for allowing trade in fertilisers and agricultural products provided the competent authority in an EU member state has approved that sufficient ring-fencing (called “fire-walling” by the EU) measures are in place to ensure that a designated person or entity does not exercise ownership or control over the fertilisers and agricultural products or any payments made to purchase such products. This is addressed in an EU Guidance Note issued in May 2023. The underlying policy has been stated in Council Regulation (EU) No 833/2014 (see Recital 12 of Council Regulation (EU) 2022/1269: “The Union is committed to avoiding all measures which might lead to food insecurity around the globe. Consequently, none of the measures in this Regulation or any of those adopted earlier in view of Russia’s actions destabilising the situation in Ukraine target in any way the trade in agricultural and food products, including wheat and fertilisers, between third countries and Russia.”). There is also authority under Article 6e of Council Regulation (EU) No 269/2014 for the competent authority in Denmark to grant the release of frozen funds after having determined that such funds or economic resources are necessary for the purchase, import or transport of agricultural and food products, including wheat and fertilisers.
It is important to be aware of such policy-driven exemptions.
The description is not exhaustive. Legal advice should be obtained by any party seeking a general licence or a concrete release of frozen funds.
2.3.2 Provision of Legal Services
There is no general licence applicable across all EU sanctions for the provision of legal services to designated persons or entities. This obviously must be weighed against the European Charter of Human Rights and the European Convention on Human Rights, which have provisions on access to justice. For this reason, there are exemptions enabling lawyers to represent Russian clients in litigation and arbitration.
There is an important ban under Council Regulation (EU) No 833/2014 prohibiting legal representation of the Government of Russia and legal entities (businesses) in Russia. This does not apply to representation of natural persons in Russia, which has been confirmed by the Danish Bar and Law Society.
2.4 Reporting
In practice, the most important reporting obligation is with respect to asset freezing. This is important for banks that routinely freeze payments that benefit designated persons or entities. Such freezing must be reported to the Danish Business Authority. There are other reporting obligations across the more than 40 EU Council Regulations that contain the current EU sanctions (see, for instance, Article 8 of Council Regulation (EU) No 269/2014), and it would exceed the scope of this article to list them all.
3. Recent and Future Legal Developments
3.1 Significant Court Decisions or Legal Developments
1. There has only been one significant court decision on breach of sanctions in the last three years: the Dan-Bunkering case. On 14 December 2021, Dan-Bunkering, Bunker Holding and the CEO of Bunker Holding were convicted of the illegal sale of jet fuel for use in Syria. This was a breach of sanctions adopted by the EU in 2014 against Syria. A total of 172,000 tons of jet fuel was sold and used in Syria. The sale took place to two Russian companies that were procurement agents for the Russian military. The jet fuel was delivered in the Mediterranean Sea. The vessels that received the jet fuel sailed to ports in Syria. The Court found that there was a clear breach of the Syria sanctions and issued fines of DKK4 million and DKK30 million. The Court further confiscated DKK15.6 million equal to the profit earned by Dan-Bunkering. The circumstances of the sanctions breach were particularly egregious given that the sales had taken place over several years and that the jet fuel was found by the Court to have been used by Russian bombers in Syria. It was US authorities that had tipped off the Danish authorities, and the sale of jet fuel continued even after the Danish authorities had questioned the legality of the sales.
2. In terms of significant legal developments, the sanctions enacted by the EU against Russia and Belarus following the second invasion of Ukraine on 24 February 2024 need no mentioning. The scale of the Russia sanctions is unprecedented and imposes risks for all business that have any dealings with Russia. Even businesses that do not have any nexus to Russia need to understand and be aware of the risks involved in breaching the Russia sanctions if the business has cross-border activity, such as shipping companies, exporters, banks, insurance companies, etc.
3. It is important to note a Danish judgment which, though not related to sanctions, illustrates a legal principle of fundamental importance for future criminal cases involving sanctions violations. In November 2022, the Danish Western High Court acquitted a Danish national who had been convicted in the District Court for violating Danish law on fishing quotas. The rules on fishing quotes are rooted in EU law. The District Court had found that the fisherman owned too many fishing quotas and issued a fine of DKK54 million and confiscated amounts of more than DKK200 million from several companies that the fisherman owned or controlled. On appeal, the High Court acquitted the fisherman, his companies and advisers on grounds that it was not set out with sufficient clarity in the law that owning too many fishing quotas was subject to criminal liability. The court referred to Section 1 of the Danish Criminal Code, which expresses the overriding principle of criminal law that in order to prosecute it must be clearly stated in the law that an act or omission is not only illegal but is subject to criminal liability. This principle will be used to defend in future sanctions cases (and is being used as a shield at the moment in various pending cases involving investigations by Danish authorities into potential sanctions breaches). The issue is that EU sanctions are very often extremely wide in scope, and one cannot necessarily determine from the wording of the legislation what specific acts or omissions are illegal.
3.2 Future Developments
It remains to be seen whether the Danish authorities will ramp up their enforcement actions. This is first and foremost a matter of resources.
So far, in practical terms, enforcement has been seen when authorities in Denmark have been tipped off, eg, by media (such as DanWatch), by banks reporting on asset freezes or by foreign authorities (such as in the Dan-Bunkering case). Danish authorities have not been allocated the resources necessary to undertake independent investigations. One could compare this with the dawn raids that have been seen in cases involving suspected competition law breaches. Those are not (yet) reality in Denmark when it comes to sanctions violations. There are provisions which grant legal basis to authorities to make a dawn raid, but it remains to be seen whether and when such powers will be put to use. The Danish police obviously are very well equipped to ransack property and take on criminal cases. The NSK is known for being highly ambitious and efficient, and it remains to be seen to what extent the NSK will take on cases involving suspected breaches of EU sanctions.
Directive (EU) 2024/1226, adopted by the European Parliament and the Council on 24 April 2024, establishes comprehensive rules for defining criminal offences and penalties related to the violation of EU sanctions. This Directive is an important step towards more vigorous and efficient enforcement of EU sanctions in all EU member states; however, the Directive will not be binding for Denmark due to the Danish opt-outs. It remains to be seen whether the Directive will be implemented into Danish law by the Danish Parliament and, if not, whether Danish authorities in practice will apply the definitions of criminal offences, etc, set out in the Directive.
4. Delisting Challenges
4.1 Process
Denmark does not designate persons or entities independently of the EU. Designations under EU sanctions are made by the EU’s executive body, the European Council (EC or “Council”). Any requests for delisting therefore must be served within the EU.
There is a procedure for the Council to consider a request for delisting, in which the Council hears the member state(s) that proposed the listing, as well as hearing all other member states.
If a request for delisting is rejected, the designated person may bring proceedings before the General Court of the European Union. The judgment may be appealed to the Court of Justice of the European Union (CJEU).
The CJEU has decided that a third State can also qualify as a “legal person” directly affected by EU sanctions and can bring an action for annulment even though the EU has no reciprocal right before the courts of third States (Venezuela v Council, C-872/19 P).
4.2 Remedies
In the event of a successful delisting challenge, the relevant person or entity will be removed from the sanctions list. This means the person or entity’s assets will be unfrozen, ie, bank accounts can be used again. There is no legal basis for claiming damages, but the person or entity being delisted can have its costs related to the delisting challenge paid by the Council if the delisting challenge is successful.
4.3 Timing
How long it might take to obtain delisting depends on the time it takes for the EU litigation to complete, including any potential appeal to the CJEU. Previous cases show the delisting procedure has taken between four and 12 months from the application to the CJEU decision. It may take longer depending on the circumstances of the case.
5. Trade and Export Restrictions
5.1 Services
The EU has adopted import and export restrictions against Belarus, Iran, Iraq, Libya, North Korea, Russia, the Russian-controlled oblasts of Ukraine (Crimea and Sevastopol, Donetsk, Kherson, Luhansk and Zaporizjzja), Sudan, Syria and Venezuela. A non-exhaustive summary is set out below (this is written jointly for goods and services):
Russia
1. Dual-use goods and technology (export): Check Annex I of Regulation (EU) 2021/821 of 20 May 2021.
2. Military goods and technology (export): Check Annex VII of Council Regulation (EU) No 833/2014 of 31 July 2014.
3. Firearms and ammunition (export): Check Annex I of Regulation (EU) No 258/2012 of 14 March 2012 and Annex XXXV of Council Regulation (EU) No 833/2014 of 31 July 2014.
4. Item for use in the oil and gas industry (export): Check Annex II of Council Regulation (EU) No 833/2014 of 31 July 2014. See also Annex X of Council Regulation (EU) No 833/2014 of 31 July 2014.
5. Goods and technology suited for use in aviation or the space industry (export): Check Annex XI of Council Regulation (EU) No 833/2014 of 31 July 2014.
6. Maritime navigation goods and technology (export): Check Annex XVI of Council Regulation (EU) No 833/2014 of 31 July 2014.
7. Iron and steel products (import): Check Annex XVII of Council Regulation (EU) No 833/2014 of 31 July 2014.
8. Luxury goods (export): Check Annex XVIII of Council Regulation (EU) No 833/2014 of 31 July 2014.
9. Goods generating significant revenues for Russia (import): Check Annex XXI of Council Regulation (EU) No 833/2014 of 31 July 2014.
10. Goods which could contribute in particular to the enhancement of Russian industrial capacities (export): Check Annex XXIII of Council Regulation (EU) (EU) No 833/2014 of 31 July 2014.
11. Road transport within the territory of the EU: Check Article 3l of Council Regulation (EU) No 833/2014 of 31 July 2014.
12. Crude oil and petroleum products (import): Check Annex XXV of Council Regulation (EU) No 833/2014 of 31 July 2014.
13. Credit rating services to Russia and Russian persons: Check Article 5j of Council Regulation (EU) No 833/2014 of 31 July 2014.
14. Accounting, auditing, bookkeeping, business and management consulting or public relations services to the Government of Russia or companies in Russia: Check Article 5n of Council Regulation (EU) No 833/2014 of 31 July 2014.
15. Architectural and engineering services, legal advisory services and IT consultancy services to the Government of Russia or companies in Russia: Check Article 5n of Council Regulation (EU) No 833/2014 of 31 July 2014.
Belarus
1. Firearms and other arms, military goods and technology, etc (export): Check Annex XVI of Council Regulation (EC) No 765/2006 of 18 May 2006; see also Article 1b of Council Regulation (EC) No. 765/2006 of 18 May 2006 and Article 1 of Council Decision 2012/642/CFSP of 15 October 2012.
2. Dual-use goods (export): Check Annex I of Council Decision 2012/642/CFSP of 15 October 2012.
3. Equipment which might be used for internal repression (export): Check Annex III of Council Regulation (EC) No 765/2006 of 18 May 2006.
4. Tobacco products (export): Check Annex VI of Council Regulation (EC) No. 765/2006 of 18 May 2006.
5. Mineral products (oils, petcoke, etc) (import): Check Annex VII of Council Regulation (EC) No 765/2006 of 18 May 2006.
6. Potassium chloride products (potash) (import): Check Annex VIII of Council Regulation (EC) No 765/2006 of 18 May 2006.
7. Wood products (import): Check Annex X of Council Regulation (EC) No 765/2006 of 18 May 2006.
8. Cement products (import): Check Annex XI of Council Regulation (EC) No 765/2006 of 18 May 2006.
9. Iron and steel products (import): Check Annex XII of Council Regulation (EC) No 765/2006 of 18 May 2006.
10. Rubber products (import): Check Annex XIII of Council Regulation (EC) No 765/2006 of 18 May 2006.
11. Certain machinery products (export): Check Annex XIV of Council Regulation (EC) No 765/2006 of 18 May 2006.
12. Goods and technology suited for use in aviation or the space industry (export): Check Annex XVII of Council Regulation (EC) No 765/2006 of 18 May 2006.
Syria
1. Crude oil and petroleum products (import): Check Article 6 of Council Regulation (EU) No 36/2012 of 18 January 2012.
2. Military goods, technology, arms or related materiel (export): Check Annex IA of Council Regulation No 36/2012 of 18 January 2012.
3. Aviation or jet fuel (export): Check Annex Va of Council Regulation No 36/2012 of 18 January 2012.
4. Luxury goods (export): Check Annex X of Council Regulation No 36/2012 of 18 January 2012.
5. Syrian-denominated banknotes and coinage to the Central Bank of Syria (export): Check Article 11 of Council Regulation (EU) No 36/2012 of 18 January 2012.
Iran
1. Crude oil or natural gas (import): Check Article 3a of Council Decision 2010/413/CFSP of 26 July 2010.
2. Gold, diamonds, etc (import): Check Article 4c of Council Decision 2010/413/CFSP of 26 July 2010.
3. Military goods and technology (export): Check Annex II of Council Regulation (EU) 2023/1529 of 20 July 2023 and Annexes III and VIIA of Council Regulation (EU) No 267/2012 of 23 March 2012.
4. Raw materials (gold, diamonds, aluminium, steel, graphite) (export): Check Articles 4e and 26f of Council Decision 2010/413/CFSP of 26 July 2010 and Article 15 a of Council Regulation (EU) No 267/2012 of 23 March 2012.
5. Telecommunications equipment (export): Check Annex IV of Council Regulation (EU) No 359/2011 of 12 April 2011.
North Korea
1. Military goods, technology, arms and related technology (import and export): Check Annex II of Council Regulation (EU) 2017/1509 of 30 August 2017.
2. Aviation fuel (export): Check Annex III of Council Regulation (EU) 2017/1509 of 30 August 2017.
3. Gold, titanium ore, vanadium ore and rare-earth minerals (import): Check Annex IV of Council Regulation (EU) 2017/1509 of 30 August 2017.
4. Coal, iron and iron ore (import): Check Annex V of Council Regulation (EU) 2017/1509 of 30 August 2017.
5. Petroleum products (import): Check Annex VI of Council Regulation (EU) 2017/1509 of 30 August 2017.
6. Copper, nickel, silver and zinc (import): Check Annex VII of Council Regulation (EU) 2017/1509 of 30 August 2017.
Sudan
1. Military goods and technology (export): Check Article 1 of Council Decision 2014/450/CFSP of 10 July 2014.
Libya
1. Military goods, arms and related, equipment used for internal repression (export): Check Article 1 of Council Decision (CFSP) 2015/1333 of 31 July 2015.
2. Goods which could be used for smuggling of migrants and trafficking in human beings (export): Check Annex VII of Council Regulation No 36 of 18 January 2012.
3. Military goods, arms and related equipment used for internal repression (import): Check Article 3 of Council Decision (CFSP) 2015/1333 of 31 July 2015 and Annex IA of Council Regulation No 36 of 18 January 2012.
4. Crude oil and petroleum products (import): Check Article 6 of Council Regulation (EU) No 36 of 18 January 2012.
Venezuela
1. Military goods, arms, equipment used for internal repression or related goods (export): Check Articles 1 and 3 of Council Decision (CFSP) 2017/2074 of 13 November 2017.
Iraq
1. All proceeds from all export sales of petroleum, petroleum products and natural gas from Iraq, as listed in Annex I of Council Regulation (EC) No 1210/2003, as of 22 May 2003 shall be deposited into the Development Fund for Iraq under the conditions set out in UNSC Resolution 1483 (2003) and, in particular, paragraphs 20 and 21 thereof.
2. Any export from Iraq or other dealings in Iraqi cultural property and other items of archaeological, historical, cultural, rare scientific and religious importance shall be prohibited: Check Annex II of Council Regulation (EC) No 1210/2003 of 7 July 2003.
Specifically relating to the import of timber, EU companies also need to be aware of the EU Timber Regulation (Regulation (EU) No 995/2010 of 20 October 2010), which sets out due diligence procedures to be undertaken for companies involved in the trading of timber in the EU.
5.2 Goods
See 5.1 Services.
6. Civil Litigation and Arbitration
6.1 Force Majeure
There are no publicly available Danish court decisions which confirm that sanctions are a bar to performance of contractual obligations, but, in our opinion, sanctions may well constitute force majeure, subject to the circumstances of the case and the provisions of the contract.
Pursuant to Article 11 of Council Regulation (EU) No 269/2014 and Council Regulation (EU) No 833/2014, no claims in connection with any contract or transaction whose performance has been affected by the Russia sanctions shall be satisfied, if such claims are made by any Russian person, entity or body or by another person, entity or body acting on their behalf. Similar provisions apply across EU sanctions; see, for instance, the Belarus sanctions pursuant to Council Regulation (EC) No 765/2006, Article 8d.
These provisions mean that, if a contract or transaction is contrary to sanctions, a party in Russia or Belarus (or any party acting on their behalf) may not sue the non-Russian/non-Belarusian party for performance.
Even beyond the scope of these provisions, eg, if the transaction does not involve parties in countries subject to sanctions, issues of force majeure could arise if a contract or transaction is affected by the imposition of sanctions.
6.2 Enforcement
Enforcement issues have not been dealt with by the Danish courts.
7. Designation, Compliance and Circumvention
7.1 Executive Body
There are no competent bodies for making designation decisions in Denmark. Sanctions designation takes place within the EU.
The development of sanctions regimes within the EU is a complex process involving different actors. All decisions to adopt, amend, lift or renew sanctions are taken by the Council following examination in the relevant Council working groups. EU member states are responsible for the implementation of all sanctions within their respective jurisdictions.
The High Representative of the Union for Foreign Affairs and Security Policy contributes through his/her proposals to the development of the Common Foreign and Security Policy (CFSP). Together with the Council, the High Representative ensures the unity, consistency and effectiveness of action by the EU in the area of the CFSP.
The European External Action Service (EEAS) assists the High Representative/Vice President in fulfilling his/her mandate and has a key role in the preparation, maintenance and review of sanctions, as well as in the communication and outreach activities concerning these in close co-operation with member states, relevant EU delegations and the European Commission.
In the legislative process in the Council regarding sanctions, the EEAS has a particular role to play. This includes preparing, on behalf of the High Representative, proposals for a decision and, jointly with the Commission, proposals for regulations which are subsequently reviewed and adopted by the Council. Decisions are binding on the member states themselves. Regulations are directly applicable within the EU and are binding on individuals and entities, including economic operators.
For its part, the Commission presents proposals, jointly with the High Representative, for regulations. Once regulations are adopted, the Commission works to facilitate their implementation in the EU and addresses questions of interpretation by economic operators.
The Commission is responsible for ensuring the uniform application of sanctions.
7.2 Scope of Designation
There are no provisions in Danish law specifying the indirect designation of persons or entities as a result of their being “owned or controlled” by a directly designated person.
The sanctions regimes, eg, against Russia, Iran or Belarus, contain provisions requiring the freezing of assets that are owned or controlled by designated persons or entities.
Entities that are “owned or controlled” by designated persons or entities may themselves become designated. However, any such designation will only be made as matter of policy and to make clear to the market that the person or entity in question is sanctioned. The point is that, even without any express designation, any person or entity that is owned or controlled by a sanctioned person or entity will already be subject to sanctions.
The criterion for “ownership” to be taken into account when assessing whether a legal person or entity is owned by another person or entity, is whether (i) the “owning” person or entity possesses more than 50% of the proprietary rights of the other person or entity, or (ii) the “owning” person or entity has a majority interest in the other person or entity (see the definition provided for in Council (EC) Regulation 2580/2001, Article 1). If this criterion is satisfied, it is considered that the legal person or entity is owned by another person or entity.
The criteria to be taken into account when assessing whether a legal person or entity is controlled by another person or entity, alone or pursuant to an agreement with another shareholder or other third party, could include, inter alia:
(a) having the right or exercising the power to appoint or remove a majority of the members of the administrative, management or supervisory body of such legal person or entity;
(b) having appointed solely as a result of the exercise of one’s voting rights a majority of the members of the administrative, management or supervisory bodies of a legal person or entity who have held office during the present and previous financial year;
(c) controlling alone, pursuant to an agreement with other shareholders in or members of a legal person or entity, a majority of shareholders’ or members’ voting rights in that legal person or entity;
(d) having the right to exercise a dominant influence over a legal person or entity, pursuant to an agreement entered into with that legal person or entity, or to a provision in its Memorandum or Articles of Association, where the law governing that legal person or entity permits its being subject to such agreement or provision;
(e) having the power to exercise the right to exercise a dominant influence referred to in point (d), without being the holder of that right;
(f) having the right to use all or part of the assets of a legal person or entity;
(g) managing the business of a legal person or entity on a unified basis, while publishing consolidated accounts;
(h) sharing jointly and severally the financial liabilities of a legal person or entity, or guaranteeing them.
If any of these criteria are satisfied, it is considered that the legal person or entity is controlled by another person or entity, unless the contrary can be established on a case-by-case basis.
The fulfilment of the above criteria of ownership or control may be refuted on a case-by-case basis.
If ownership or control is established in accordance with the above criteria, the making available of funds or economic resources to non-listed legal persons or entities which are owned or controlled by a listed person or entity will in principle be considered as making them indirectly available to the latter, unless it can be reasonably determined, on a case-by-case basis using a risk-based approach, taking into account all of the relevant circumstances, including the criteria further outlined in the Council’s Best Practice Guidelines, that the funds or economic resources concerned will not be used by or be for the benefit of that listed person or entity.
Source: The Council’s Best Practice Guidelines issued in Brussels on 27 June 2022, paragraphs 61-66
7.3 Circumvention
7.3.1 Prohibiting Provisions
The EU Council Regulations that set out the EU’s sanctions contain the following provision: “It shall be prohibited to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent.”
This provision has been addressed in guidelines, such as the European Commission’s FAQs; see Chapter A.2 on “Circumvention and due diligence”.
Several other notes or guidelines have been issued, such as the European Commission’s “Guidance for EU operators: Implementing enhanced due diligence to shield against Russia sanctions circumvention”.
In practice, businesses will need to understand the rules in order to then be able to make a general risk assessment. Once this is done, businesses can implement due diligence procedures that take into consideration any signs of sanctions circumvention.
7.3.2 Criminal Penalties
Circumventing sanctions is a breach of sanctions, and any breach of EU sanctions is a criminal offence under Danish law that can lead to fines, imprisonment and confiscation.
Hafnia Law Firm LLP
Nyhavn 69,
1051 Copenhagen K
Denmark
+45 20 62 38 62
[email protected] www.hafnialaw.com
Trends and Developments
Authors
Hafnia Law Firm LLP is a boutique firm based in Copenhagen, Denmark, specialising in a few core areas: shipping and trading, offshore and energy, dispute resolution, insurance, and sanctions and export controls. It advises on compliance with EU, UK and US sanctions and provides day-to-day screenings as well as strategic training of employees and assistance with building sanctions compliance programmes. It represents clients in disputes relating to sanctions, including commercial litigation and arbitration, criminal cases and investigations by authorities in matters where allegations of sanctions breaches are levied. Given the wide reach of current sanctions, as part of M&A processes, companies are advised to exercise careful due diligence with respect to compliance by any target company’s possible breach of sanctions. Hafnia Law Firm provides assistance with pre- and post-merger due diligence to clients engaged in M&A processes.
Following Russia’s second invasion of Ukraine in February 2022, Hafnia Law Firm LLP was instructed on a high number of matters arising from the compliance work of banks. Many of these cases involved disputes that arose from questionable freezing of funds by banks. Clients often felt that banks and other financial institutions were enforcing sanctions more vigorously than required by law.
In 2023 and 2024, the world has seen adverse geopolitical developments in the Middle East, including hybrid wars involving Iran as instigator, the Houthis’ attacks on merchant ships in the Red Sea and the brutal terrorist attack by Hamas against Israel followed by a land invasion of the Gaza Strip. This has triggered a wave of new sanctions against Iran, with the EU, UK and USA being more focused than ever before on ensuring that banks implement efficient sanctions compliance procedures to avoid breaching, eg, US primary and secondary sanctions against Russia and Iran.
If a company’s transaction bank blocks a payment, the company will engage in a dialogue with the bank. Being a customer of the bank, the bank will listen attentively to the arguments raised by the company and will consider carefully whether there is a true obligation to block the funds.
If the issue cannot be resolved amicably and the bank is unwilling to release the funds, often the client company can engage with the competent national authorities by obtaining a licence granting the release of the funds, although the extent to which such licences are obtainable varies across the different sanctions regimes.
Ultimately, if no solution is found, the company suffering from freezing of funds will be forced to either live with the funds being blocked or resort to litigation against the bank.
What if the bank blocking the payment is not in a contractual relationship with the company that is sending or receiving the funds? In other words, imagine that the bank has no direct relation to the company whose funds have been blocked.
In the absence of a contractual relation, the bank exercising an asset freeze will have no commercial relation to the company whose funds have been blocked and thus the bank has little or no commercial reason to resolve the matter amicably.
Weigh in further that the bank in this day and age is under tremendous pressure from regulators and from society to show that it is at all times acting in full compliance with sanctions.
These dynamics have brought about a flurry of cases involving companies within the EU and the Middle East experiencing serious cash flow disruptions as a result of the actions of US intermediary (or correspondent) banks in relation to wire transfers in United States dollars (USD).
Intermediary banks play a critical role in the banking system. It is well known that banks in the Southern District of New York must clear payments for the funds to flow from sender to receiver in the case of USD remittances.
Historically, there have been many cases published by the Office of Foreign Assets Control (OFAC) involving huge fines directed at banks. For instance, Standard Chartered Bank admitted in 2019 to illegally processing transactions in violation of Iranian sanctions and agreed to pay more than USD1 billion.
Another example from our own jurisdiction (albeit mainly an anti-money laundering case) involves Denmark’s largest bank, Danske Bank, pleading guilty in December 2022 to fraud committed on US banks in a multibillion-dollar scheme to access the US financial system.
Such cases are obvious food for thought for banks within and outside the USA, and it should be noted that US authorities have said very clearly that they expect Standard Chartered Bank and Danske Bank to learn from their mistakes by implementing and maintaining a revamped compliance programme.
More than ever before, banks have become aware of their exposure and their sensitivity to sanctions risks. However, we see from our practice that US intermediary banks are taking compliance decisions that are not only wrong as a matter of US law but, quite simply, appear arbitrary.
We provide below two examples from our recent sanctions practice. Honouring our duty of confidentiality, we do not name our clients or the US banks involved.
Case No. 1 – Grain to Iran
A non-Russian client was engaged in a transaction for the delivery of marine fuel to a vessel that was transporting grain to Iran. The carriage of grain was permitted pursuant to an OFAC licence. The fuel was delivered in a jurisdiction at which the vessel called on her voyage to Iran. The client’s customer transferred the amount owed in USD, which was blocked by the intermediary bank in the USA. The intermediary bank requested more information to process the transaction, including detailed purpose of payment and copies of relevant contracts. The client, which had sold fuel to the ship, provided information suggesting that the client was delivering goods to Iran. That was not accurate. The payment was for the purchase of fuel for the vessel’s propulsion. Even though the client had nothing to do with Iran, the client’s customer’s carriage and delivery of grain in Iran were permitted under a general OFAC licence, and even though the client corrected this and thus provided accurate information to the intermediary bank, the intermediary bank began raising compliance enquiries for all transactions involving the client whenever the bank in question was acting as correspondent bank for USD payments.
Because of this, USD5-6 million became stuck, being delayed while awaiting responses to the compliance enquiries asked and/or being stopped entirely.
Case No. 2 – RG Solutions Limited
A non-Russian client engaged in a one-time transaction in September 2023 with a company named RG Solutions Limited, established in Hong Kong. The transaction involved payment of goods. The transaction was lawful and not subject to any sanctions, although the goods were delivered in Russia.
The purchase price for the goods was paid to RG Solutions Limited in September 2023. At the time, RG Solutions Limited was not subject to any sanctions.
In February 2024, in connection with the two-year anniversary of the outbreak of war in Ukraine, a high number of companies, such as in Russia, Iran, China, Hong Kong and India, were designated Specially Designated Nationals (SDNs). This included RG Solutions Limited. These designations were brought pursuant to Executive Order 14024, which provides for blocking sanctions on persons operating in the technology sector or the defence and related materiel sector of the Russian Federation economy, or any other sectors determined by the Secretary of the Treasury, in consultation with the Secretary of State.
The single transaction that our client had engaged in with RG Solutions Limited took place many months before the designation. A US intermediary bank had cleared the funds in September 2023. After the designation, the bank scrutinised its historic transactions and identified this transaction. Understandably, the bank raised questions on the nature of the transaction compelling our client to explain what business it had conducted with RG Solutions Limited.
This reaction from the bank was perfectly rational, but that was not all: the bank decided to implement a permanent blockage of funds with no prior warning. Because our client had engaged in one transaction eight months earlier with an entity that, at the time, was not an SDN, the bank simply decided that it no longer wanted to process payments to and from our client.
Because of this, wire transfers in the aggregate of USD5-8 million became blocked, disrupting our client’s cash flow. We immediately sought advice from two different law firms in the USA. It was difficult to see any justification for the blocking of funds.
Claims Against Intermediary Banks
Recent case law in the District Courts of the United States shows attempts by companies to claim against intermediary banks for their disruption of wire transfers. When an intermediary bank is involved, the first hurdle to overcome is the fact that many common law claims cannot be made by the company whose funds are blocked and/or frozen but would have to be made by the sending or receiving bank. The only contractual relationship is between the intermediary bank and the sending and/or receiving bank(s).
In a recent case from the District Court for the District of Columbia, decided on 9 February 2024, Ekopel D.O.O. v Citibank, N.A., 2024 US Dist. (D.D.C. Feb. 9, 2024), a company, Ekopel, filed suit against Citibank as intermediary bank and unnamed bank officers alleging that Citibank had mishandled wire transfers. Ekopel asserted various common law claims, specifically (1) fraudulent misrepresentation, (2) fraudulent concealment, (3) conversion, (4) intentional interference with a beneficial business relationship, and (5) unjust enrichment.
Ekopel is a Slovenian company which was the intended beneficiary of two payments made in March 2022 by Ukrainian companies for medical equipment. The funds were blocked by the intermediary bank, Citibank. Ekopel (the intended beneficiary) had an account with N Banka D.D. N Banka was acquired from the Slovenian subsidiary bank of Sberbank. Sberbank was designated as an SDN by OFAC after the Russian invasion of Ukraine. N Banka was never designated an SDN. However, N Banka continued to use the SWIFT code that had been used by Sberbank’s Slovenian subsidiary before the outbreak of war in Ukraine. As a result, Citibank stopped the payments from the Ukrainian companies to Ekopel as a result of sanctions screening, eventually returning the funds to the remittors six months later.
The case was first concerned with the ‘proper’ claimant. As Citibank is located in New York (like most other large US banks), the relevant law is New York law. New York law has adopted the Uniform Commercial Code, which includes Article 4-A that governs wire transfers. Article 4-A holds that the only party to have a claim arising from an incomplete wire transfer is the party immediately prior in the chain of transfers. That means it is the sender’s bank, not the sender itself, that holds the claim against an intermediary bank.
However, the Court found that Article 4-A applied only with respect to the claims for conversion and unjust enrichment. Importantly, Article 4-A appears not to apply with respect to (1) claims for fraudulent misrepresentation, (2) fraudulent concealment and (3) intentional (tortious) interference with a beneficial business relationship. The Court’s reasoning in Ekopel v Citibank is that these claims relate to alleged wrongdoing by the intermediary bank distinct from the mechanics of the funds transfer. That is to say, the latter claims can be made by the company whose funds have been blocked and/or frozen against the intermediary bank and not only by the sending or receiving banks.
Tortious interference with a business relationship
To make a claim for tortious interference against an intermediary bank, the claimant must prove: (1) that it had a business relationship with a third party; (2) that the intermediary bank knew of that relationship and intentionally interfered with it; (3) that the intermediary bank acted solely out of malice or used improper or illegal means that amounted to a crime or independent tort; and (4) that the intermediary bank’s interference caused injury to the relationship with the third party.
In Ekopel v Citibank, Ekopel’s claim for intentional (tortious) interference with a business relationship against Citibank failed. The Court relied on the facts that (i) Citibank was an intermediary bank in a six-bank funds transfer, ie, there were six banks involved in the transaction, of which four were intermediary banks, and (ii) Ekopel had not alleged any intention on the part of Citibank to interfere with the business relationship between Ekopel and the Ukrainian companies.
It may prove difficult for companies whose funds have been blocked and/or frozen to establish that the intermediary bank in question knew of the existence of a business relationship between the company and its customers. That may also be true for the third element, that the intermediary bank “acted solely out of malice or used improper or illegal means”.
Fraudulent misrepresentation and fraudulent concealment
Another potential claim against an intermediary bank is a claim for fraudulent misrepresentation. This claim also need not be made by the sending and/or receiving bank.
The claimant would have to show: (1) a misrepresentation or a material omission of fact, (2) which was false, (3) the falsity of which was known to the intermediary bank, (4) made for the purpose of inducing the company remitting and/or receiving payment to rely upon it, (5) justifiable reliance of the company remitting and/or receiving payment on the misrepresentation or omission, and (6) injury.
In Ekopel v Citibank this claim failed. The reason for this was that Ekopel had failed to state a claim as to fraudulent misrepresentation. Ekopel had to “state with particularity the circumstances constituting fraud”, which it had not done. Even if a claim can be stated with particularity, it may be difficult to establish fraudulent misrepresentation on the part of a bank stopping and/or freezing a payment due to the bank’s sanctions compliance procedures.
In order to prove fraudulent concealment, an additional seventh element would have to be proven, which is establishing that there is a fiduciary or confidential relationship between the company remitting and/or receiving payment and the intermediary bank, which would impose a duty on the intermediary bank to disclose material information to the company in question.
In Ekopel v Citibank, this claim failed as Ekopel had not identified any regulation which imposed a duty of disclosure on Citibank.
Conversion and unjust enrichment
Another potential claim against an intermediary bank would be conversion and/or unjust enrichment. This is only relevant in cases where the bank has frozen payments and not in situations where the payments have been returned to the sender.
However, such claims must be made by the sending and/or receiving bank. For this reason alone, it will, in practice, be difficult to make such claims.
Defamation
In other cases before the US District Courts, claims for defamation have been tried. In order to make a claim for defamation, a claimant would have to identify a false and defamatory statement and prove damages. Often, malice is also required. In the case Monarch Air Grp., LLC v JP Morgan Chase Bank, JP Morgan had informed the claimant’s customers that transactions were blocked due to “sanctions and/or internal JPMC policy”. The claimant’s defamation claim against JP Morgan failed.
Discrimination claims
Another potential claim against an intermediary bank would be discrimination, ie, claiming that the intermediary bank has discriminated against the company by blocking and/or stopping payments due to the intermediary bank’s internal policy. It would be difficult to make such a claim, particularly because case law shows that implementing sanctions screening procedures may be viewed as a legitimate, non-discriminatory reason that discharges the bank’s burden and defeats any discrimination claim.
Conclusion
In conclusion, it will be an uphill battle for companies whose funds have been blocked by an intermediary bank to make any claim against the intermediary bank. The entity entitled to make such claims is the sending and/or receiving bank. There are a variety of non-contractual claims (tort, defamation, etc) which can be made by the company whose funds have been blocked or frozen against the intermediary bank. However, these claims are very difficult to prove against an intermediary bank. Based on recent case law from the US District Courts, the most likely cause of action is a claim against an intermediary bank for tortious interference with a business relationship, but even that type of claim is not easy. Companies outside the USA that suffer from serious cash flow disruptions due to arbitrary blocking of funds have no obvious legal route to make any claim against the intermediary bank that is blocking the funds.
A company experiencing blocking of funds may apply to OFAC for the release of the blocked funds; however, those cases can take a long time.
Hafnia Law Firm LLP
Nyhavn 69,
1051 Copenhagen K
Denmark
+45 20 62 38 62
[email protected] www.hafnialaw.com
Law and Practice
Authors
Hafnia Law Firm LLP is a boutique firm based in Copenhagen, Denmark, specialising in a few core areas: shipping and trading, offshore and energy, dispute resolution, insurance, and sanctions and export controls. It advises on compliance with EU, UK and US sanctions and provides day-to-day screenings as well as strategic training of employees and assistance with building sanctions compliance programmes. It represents clients in disputes relating to sanctions, including commercial litigation and arbitration, criminal cases and investigations by authorities in matters where allegations of sanctions breaches are levied. Given the wide reach of current sanctions, as part of M&A processes, companies are advised to exercise careful due diligence with respect to compliance by any target company’s possible breach of sanctions. Hafnia Law Firm provides assistance with pre- and post-merger due diligence to clients engaged in M&A processes.
Trends and Developments
Authors
Hafnia Law Firm LLP is a boutique firm based in Copenhagen, Denmark, specialising in a few core areas: shipping and trading, offshore and energy, dispute resolution, insurance, and sanctions and export controls. It advises on compliance with EU, UK and US sanctions and provides day-to-day screenings as well as strategic training of employees and assistance with building sanctions compliance programmes. It represents clients in disputes relating to sanctions, including commercial litigation and arbitration, criminal cases and investigations by authorities in matters where allegations of sanctions breaches are levied. Given the wide reach of current sanctions, as part of M&A processes, companies are advised to exercise careful due diligence with respect to compliance by any target company’s possible breach of sanctions. Hafnia Law Firm provides assistance with pre- and post-merger due diligence to clients engaged in M&A processes.
