A UK company active in the food & beverage industry intends to approach a manufacturer based in the UAE to outsource the production of a new soft drink. The UK company performs due diligence on the manufacturer and identifies that the latter has two shareholders: (i) a local UAE company, which owns 65% of the manufacturer, and (ii) a person named DP, who owns the remaining 35%. DP is listed on the Consolidated List of Financial Sanctions Targets in the UK published by the UK Office for Financial Sanctions Implementation (OFSI).
- UK and EU financial sanctions can apply to an entity which is not designated under a sanctions regime, but is owned or controlled by a designated person.
- According to guidance issued by the Council of the European Union, as well as by OFSI, the criterion to be taken into account to establish whether an entity is owned by a designated person is the possession of more than 50% of the proprietary rights of the entity or having a majority interest in it.
- However, even when the designated person is a minority shareholder, an entity can still be subject to financial sanctions if it is controlled by the designated person.
- Consistent with the EU guidance, OFSI considers that an entity is controlled by a designated person if at least one of the following criteria is met:
- Having the right or de facto power to appoint or remove a majority of the members of the administrative, management or supervisory body.
- Controlling (either alone or pursuant to an agreement with other shareholders or members) a majority of the voting rights.
- Having the right or de facto power to exercise a dominant influence over an entity, pursuant to an agreement or the Memorandum or Articles of Association of that person or entity.
- Other factors may be relevant, e.g. the designated person’s right or power to control or use another person’s assets. This may also constitute circumvention of financial sanctions.
- OFSI has published draft guidance in respect of the UK sanctions regime which will be implemented after Brexit. Both the draft guidance and certain regulations which will enter into force post-Brexit, apply slightly different criteria to establish whether an entity is owned or controlled by a designated entity.