A Sanctioned person transfers their assets into trust – are they now out of scope for sanction freezes?

Would transferring a sanctioned entity’s shares to a trust be effective enough to ensure an EU company’s shares are no longer under the control of, or related to, a sanctioned shareholder?

• Given the depth of the Russian sanctions, some EU companies directly or indirectly owned by sanctioned entities have considered transferring the company’s shares to a trust.
• This divestment mechanism allows for a temporary transfer of ownership, with the trust assets isolated in an autonomous entity, separate from the settlor’s assets.
• The overall objective is that the company’s shares are no longer under the control of, or related to, a sanctioned shareholder.

An Italian court has just requested a preliminary ruling from the Court of Justice of the European Union (CJEU) on the ownership/control of assets in discretionary trusts.

• This is the second time an Italian court has referred the interpretation of Article 2(1) of Regulation (EU) No 269/2014 to the ECJ.
• On April 2023, the Tribunale Amministrativo Regionale per il Lazio (Case No. C-483/23, not yet decided by the Court) referred to the CJEU a case concerning a fixed trust, the settlor of which was a designated person under this Regulation.

Without anticipating the ruling, but based on previous Italian case law:

• The ownership/control may exist.
• Not only in cases of “formal or direct” ownership/control of the asset by designated persons,
• But also in cases of “substantial or indirect” ownership/control.
• Thus, vesting the assets in the trust would not break the substantial ownership link.

Detailed Analysis

1. The Tribunale Amministrativo Regionale per il Lazio (Italy) has referred two important legal questions to the Court of Justice of the European Union (CJEU) in a case involving FZ AR SpA and various Italian government bodies (the “Defendants” or the “Government Bodies”).
2. The case, known as C-428/24, concerns the interpretation of Article 2(1) of Regulation (EU) No 269/2014, which deals with restrictive measures against certain persons, entities, and bodies in respect of actions that undermine or threaten Ukraine's territorial integrity, sovereignty, and independence.
3. The central issue revolves around the legal status of assets held in discretionary trusts, where the beneficiary of such a trust is listed in Annex I to Regulation (EU) No 269/2014.

The Italian court asks two questions to the CJUE:

• The first question asks whether the assets or funds held in a discretionary trust are to be regarded as ‘belonging’ to the beneficiary even if national law or a contractual clause in the trust instrument expressly prohibits the beneficiary from using or disposing of the assets as long as they are listed in Annex I to the Regulation. This question raises concerns as to whether the EU Regulation precludes an interpretation allowing assets to be considered belonging to the beneficial owner despite legal barriers preventing their use or disposal.
• The second question seeks clarification as to whether these assets or resources can be considered under the beneficiary's " control " despite legal prohibitions on their use or disposal, due to the beneficiary’s inclusion in Annex I. The Italian Tribunal asks whether the Regulation allows assets to be under the beneficiary's control even when such power is expressly limited by national law or contractual terms.

Concerning the possible answers to both questions:

• The plaintiff (i.e., the trust) claimed that there is no ownership/control upon the discretionary beneficiary of the trust, as, according to the deeds of institution, the beneficiary does not have the right to demand and obtain distributions or payments, nor can the beneficiary give instructions to the trustee for the management of the assets or limit or condition in any way his managerial discretion, nor – again – can the beneficiary terminate the trust before its expiration or, until that time, appropriate the trust assets.
• The Government Bodies claimed that the current lack of powers upon the beneficiary does not rule out the possibility of the beneficiary's future use of the frozen assets. This is because, according to them, the trust is still a legal transaction based on the will of the parties and, as a consequence, it may be subject to changes (including a waiver to the above-mentioned contractual bans posed on the beneficiary by the deed of the institution, early dissolution of the trust, or refusal or impossibility of devolution to the beneficiaries).
• The Italian court conclusively submitted for confirmation to the CJEU the following interpretation, based on previous Italian case law: ownership/control may exist not only in cases of “formal or direct” ownership/control of the asset by designated persons but also in cases of “substantial or indirect” ownership/control. In such cases, a person (the beneficiary) – although not directly owning/controlling the assets and not having their availability – can objectively exercise “substantial influence” over them since they are the ultimate beneficiary. According to the Tribunal, the beneficiary’s will is decisive in arranging the conferred assets. The vesting of the assets in the trust would not, therefore, sever the link of substantial ownership.

This is the second time an administrative Court in Italy has deferred to the CJEU the interpretation of Article 2(1) of Regulation (EU) No 269/2014.

• On April 2023, the Tribunale Amministrativo Regionale per il Lazio (case No. C-483/23, not decided by the Court yet) deferred to the CJEU a case concerning a fixed trust, the settlor of which was a designated person under Regulation (EU) No 269/2014.
• The settlor was also one of the potential beneficiaries of the trust. Still, he ceased to be so in February 2022, before the Government Bodies' enforcement of the asset freeze.
• In that case, the issue was whether the settlor (listed in Annex I) could be deemed to own/control a trust whose remaining beneficiaries were only potential (namely, his descendants – non-existent yet at the time of the asset freeze – and, as an alternative, specific charities).

The Italian court referred to the CJEU the following three questions:

• Whether the assets or funds held in a trust are to be regarded as ‘belonging’ to the settlor.
• (If not) Whether the trustee, as long as they can be deemed equivalent to an owner, can also be considered as a “person associated” with the designated settlor under Article 2(1) of Regulation (EU) No 269/2014.
• Whether the settlor can be deemed as the person who controls the assets or funds due to the settlor’s inclusion in Annex I.

Concerning the possible answers to these questions:

• The plaintiffs (i.e., the trust) claimed that there is no ownership/control over the trust's settlor, as he was no longer one of the potential beneficiaries. Indeed, by the deed of the institution and the governing law, there was no power (direct or indirect) of management and control upon the settlor.
• The Government Bodies claimed, among other things, that Directive (EU) No. 849/2015 on the prevention of money laundering states that the settlor of a trust falls within the category of “beneficial owners” of the trust itself. Indeed, although the settlor is no longer the beneficiary of the assets, such assets could still “return” to the settlor’s ownership/availability, assuming a failure in the final transfer of the assets to beneficiaries (e.g., due to their waiver, or early dissolution of the trust).
• The Italian court conclusively submitted for confirmation to the CJEU the following interpretation based on previous Italian case law:
• The asset placed in a trust does not permanently leave the settlor's assets. Thus, the asset continues to “belong” to the settlor until the final transfer to the beneficiaries.
• Indeed, the trustee is not the asset owner, as there is no confusion about the assets placed in trust with the trustee’s assets.
• If this is true, freezing measures are possible if the asset has not been transferred to the beneficiary.
• Ownership/control may exist in cases of “formal or direct” ownership/control of the asset by a designated person and in “substantial or indirect” ownership/control cases.
• This is when the settlor can objectively exercise “substantial influence” over the assets.
• This may happen because the settlor can also regain formal ownership (through early dissolution of the trust or by refusal or impossibility of devolution to the beneficiaries, as claimed by the Defendants).
• It may also happen because, by establishing trust and entrusting the management and control to trusted persons chosen by the settlor himself, the settlor can control its use (primarily, its final destination).
• The vesting of the assets in the trust would not, therefore, sever the link of substantial ownership.

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https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:C_202405219

https://eur-lex.europa.eu/legal-content/IT/TXT/PDF/?uri=OJ:C_202300502

source

https://regandtrade.com/2024/09/would-the-transfer-of-a-sanctioned-entitysshares-to-a-trust-be-effective-enough-to-ensure-an-eu-companys-shares-are-no-longer-under-the-control-of-or-related-to-a-sanctioned-shareholder/