Prohibition of provision: The new EU guidelines for “indirect provision”
riskmethods welcomes a guest post from Thorsten Langer, Senior Consultant for Export Control Logistics and Foreign Trade at FORMAT Software Service GmbH. In this article, Mr. Langer writes about “Prohibition of provision: The new EU guidelines for ‘indirect provision’ “.
In its Annual Report 2012/2013, the Federal Office of Economics and Export Control published the following correct and important comment on German foreign trade and export control:
Products with the “made in Germany” brand are internationally recognized and sought after. German capital goods and services are helping to boost Germany’s profile and economic growth worldwide. These factors will help Germany remain an attractive base for business. What is needed therefore is an environment in which German businesses can maximize their potential, both nationally and internationally. Monitoring Germany’s exports in the form of export control is an indispensable element of German foreign trade policy. Exports must not be allowed to threaten our foreign or security policy interests. Export controls protect Germany’s essential security interests while safeguarding the country’s reputation and the German economy.
Slightly different sanction list screening – Prohibition of provision
The upper visualization shows on the left illustration that the provision of economic resources to listed natural and legal persons, entities and bodies is prohibited. The right illustration demonstrates that the provision of economic resources to non-listed natural and legal persons, entities and bodies is prohibited where this constitutes indirect provision to this listed company, person, entity or body.
Prohibition of indirect provision
Various country-based EU embargoes (e.g. Art. 23 Para. 3 of the EU Iran Embargo Regulation No. 267/2012) and other country-related sanctions measures enforced by the EU in the fight against terrorism contain so-called prohibition of provision. These sanctions specify that no funds or economic resources (i.e. assets of any kind and, in particular, goods and monetary services) may be made available to listed persons, entities and bodies, either directly or indirectly.
Direct provision refers to direct making available of economic value, that is, by way of direct delivery or payment to a listed person, for example.
Indirect provision applies where this economic value is made available indirectly, that is, to a listed person, entity or body via a non-listed person, entity or body.
Potential indirect provision of economic resources can take on different forms. Cases that are particularly practice-relevant concern goods deliveries to a non-listed company that is controlled by a listed parent company.
What does this mean for me in practice?
A good example here is the National Iranian Oil Company (NIOC). The NIOC was, like many of its subsidiaries, listed in October 2012. One of the 100% NIOC subsidiaries is Pars Oil & Gas Company (POGC), for example. To date, this company has not been listed by the EU, however.
Legal opinions in the various EU member states have so far also been mixed in terms of the question as to how these cases should be handled. Are all deliveries to the non-listed subsidiary (e.g. POGC) prohibited because this constitutes indirect provision of economic resources to the listed parent company (e.g. NIOC)?
With its Council document 9068/13 dated 04/30/2013, the EU has finally published guidelines that apply to all EU member states.
Council document: http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%209068%202013%20INIT
Provision of economic resources to non-listed companies that are
• owned by
• controlled by
a listed company shall, in principle, be considered to be a breach of the prohibition of indirect provision.
The criterion to be taken into account when assessing whether a legal person or entity is owned by another person or entity is the possession of more than 50% of the proprietary rights of an entity or having majority interest in it.
Different criteria are decisive, e.g. special voting rights of minority shareholders, direct control contracts.
Exemption from the prohibition of indirect provision*
Violation of the prohibition of indirect provision shall not apply if it can be reasonably determined
• on a case-by-case basis
• using a risk-based approach and
• taking into account all relevant circumstances,
• including the criteria below
that the goods will not be used by or be of benefit to the listed company.
The criteria to be taken into account include, inter alias:
• the date and nature of the contractual links between the entities concerned
• the relevance of the sector of activity of the non-listed entity for the listed entity
• the characteristics of the funds or economic resources made available, including their potential practical use by, and ease of transfer to, the listed entity.
Helpful: Monitoring of installation or commissioning
Implementation in companies
In spite of clarification by the EU of the prohibition of provision and its demands on the economy, implementing this in companies is a challenge that cannot be underestimated. How can the necessary processes be introduced and an understanding established in the company to ensure that no violation of the prohibition of provision whatsoever takes place? Imprisonment and heavy fines have been established in many countries to enforce compliance with the sanctions provisions. In the case of breaches or violations of the sanctions regulations, directors and board members as well the persons directly involved incur personal criminal liability.
This is an enormous task for the compliance experts in companies, who often do not have the right aids available. Because the objective is not only to avoid regulatory measures such as fines, market exclusion right up to imprisonment, but also to document the implementation of compliance requirements and to prevent damage to image.
Consequently, long-term implementation of the prohibition of provision through complete transparency in the supply chain and discipline by all employees involved must be ensured.
* BAFA – RD Runte, Head of Division 214 http://www.bafa.de/ausfuhrkontrolle/de/veranstaltungen/informationstage/2013/manuskripte/04_embargoentwicklungen.pdf