European Union and Switzerland: Guidance on Restrictions on Trusts Affiliated with Russian Persons – Major Impact on Wealth Management Industry and Clients

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As the Russian invasion of Ukraine continues, sanctions remain on our minds and as such we are providing an update on recent EU and Swiss guidance on restrictions taken into account when dealing with trusts linked to Russian individuals should be.

This article appears in the third edition of the Private Wealth Newsletter 2022.

The central theses

On June 24, 2022, the EU published updated guidance clarifying prohibitions related to the provision of trust services in previous EU regulations. In certain circumstances, EU-affiliated service providers would need to dissolve trusts with Russian-affiliated settlors or beneficiaries.

In particular, if the reorganization of a trust or similar legal arrangement was initiated after May 11, 2022 and the services of the EU service provider are necessary for the operation of the trust, that trust would need to be dissolved in order to comply with the regulations. A competent national authority may grant exceptions for operations strictly necessary for the termination of certain contracts until September 5, 2022.

On July 5, 2022, the Swiss State Secretariat for Economic Affairs (SECO) published similar guidance (see here) on the interpretation of trust bans in Article 28d of the Ordinance on Measures related to the situation in Ukraine.

Swiss and EU-affiliated service providers risk sanctions violations in relation to trusts previously modified to comply with the bans. Such service providers should also take care to make only the appropriate changes to the structure of their trust prior to the entry into force of the relevant legislation, e .g .

It remains unclear to what extent such service providers are obliged to comply with the guidelines retrospectively. For example, trusts that were reorganized between the time the rules and guidance were published may need to be wound up, and the assets of a trustor or beneficiary of a data subject may need to be subject to an asset freeze due to EU sanctions being frozen. Consequently, Swiss and EU-related service providers of fiduciary or other fiduciary and related services should consider these developments so that they know how to react.

The two jurisdictions, with few exceptions, have mostly converging interpretations of their restrictions. In the EU, for a trust with multiple beneficiaries and/or settlors (ie settlors) to be exempt from the prohibitions, all such beneficiaries and settlors would need to be exempt (e.g. be EU citizens or be temporary or permanent residents). approval in the EU) to exempt the order from the bans.

Under Swiss law, a trust or similar entity falls under the exception if only one beneficiary holds a temporary or permanent Swiss, EEA or Monaco resident permit or is a Swiss national. The Swiss directive expressly only refers to beneficiaries, not to settlors.

However, in both jurisdictions it may be possible to obtain approval from the relevant competent authority when assets are not accepted from or distributed to a person falling within the scope of the prohibition.

background

Since April 8th, 2022, the EU has published two regulations which amend Council Regulation (EU) No. 833/2014 (“regulation’) on restrictive measures in the face of Russia’s actions to destabilize the situation in Ukraine, as already amended by other EU regulations on sanctions recently.

On April 9, 2022, the EU adopted Council Regulation (EU) 2022/576 (“First Regulation”), which bans many transactions between Russian-affiliated trusts and EU-affiliated service providers. See our warning here. On June 3, 2022, the EU adopted Council Regulation (EU) 2022/879 (“Second Regulation”) as part of a sixth package of sanctions against Russia. This regulation extended certain time limits set out in the First Regulation and expanded certain prohibitions with respect to trusts associated with Russia, while providing additional exceptions. See our warning here.

On June 24, 2022, the EU published updated guidance on prohibitions on transactions between trusts linked to Russian persons and service providers linked to the EU.

On June 29, 2022, the Swiss Federal Council adopted the Sixth EU Sanctions Package under the Second Ordinance and the Swiss Ordinance on Measures in Connection with the Situation in Ukraine (“regulation“). As usual, the regulation reflects the EU restrictions, but provides for different efficacy dates and interpretations of similar or even identical terms.

On July 5, 2022, SECO published similar guidance (see here) on the prohibitions on trusts under Article 28d of the Ordinance.

Further information on the Swiss implementation of such measures can be found in our articles here and here.

EU and Swiss guidelines

1. Definition of “Trust or Similar Legal Arrangement”

The EU guideline now expressly states that foundations are the civil law equivalent of a common law trust and thus fall within the scope of a “similar legal arrangement”. On the other hand, SECO has not yet clarified whether foundations and trusts fall under “similar legal systems”.

In general, the EU guidelines state that there is no single definition of a trust and that the structure of any arrangement must be compared to that of a common law trust. The hallmarks of a common law trust include a fiduciary bond between the parties and a separation or separation of legal and beneficial ownership of assets.

In addition, the EU guidance encourages relying on a report from the European Commission to the EU Parliament and Council assessing whether EU member states have “all trusts and similar legal arrangements” for the purposes duly identified under a separate EU regulation Use of the financial system for money laundering or terrorist financing. Foundations are assimilated to a common law trust as they are a civil law vehicle that can be used for similar purposes. This rule is supported by Directive (EU) 2015/849, which imposes the same beneficial ownership requirements on foundations as trusts and similar legal arrangements. Accordingly, persons holding equivalent positions in foundations such as settlors and beneficiaries in trusts should be construed as subject to the same limitations under Article 5m.

Swiss guidance on the subject is minimal. In addition, Switzerland does not have its own trust laws. Therefore, it is currently unclear whether certain arrangements, such as foundations and trusts, can be understood as trust-like enough to fall within the scope of the Swiss prohibitions.

2. Prohibited Activities and Practice

The guidelines make it clear that no EU person should register a trust (or similar legal arrangement), even if required by national law.

The guidelines provide for the dissolution of existing trusts insofar as prohibited services are required for their operation.

In this context, any assets intended to be returned or distributed to a trustor or beneficiary subject to asset freeze due to EU sanctions would need to be frozen immediately.

In addition, the Directive clarifies that the service prohibitions apply to trusts created before and after the effective date of the relevant legislation.

3. Trusts to which both Russian and non-Russian nationals belong

The prohibition on registering a new trust or providing trustee services applies only where a settlor or beneficiary falls within the definition of a Russian person (defined herein). If these Russian person(s) are removed, the Services can be provided.

The EU guidance states that the prohibitions would not apply where the trust has only one settlor or beneficiary who is a national of a Member State or an individual with temporary or permanent residence in a Member State. This means that the trust is only exempt from the prohibitions if all beneficiaries and trustors of the trust are exempt from EU citizenship or an equivalent residence permit.

In addition, the EU guidelines state that trusts may continue to operate, with the approval of the relevant Member State, provided that the trustee does not accept assets from or distribute them to a trustor or beneficiary that is a member of the Russian person covered by the scope acts.

The guidance adds that exemptions for the provision of prohibited services to trusts should be requested on an individual basis.

Relevant Swiss interpretation

The Swiss interpretation of their regulation largely corresponds to the EU directives, but provides for different effective dates and some notable differences.

For trusts that include both Russian and non-Russian nationals, the Swiss interpretation states that the prohibitions would apply if a trust has only one Russian-affiliated beneficiary out of five.

However, the prohibitions would not apply if any of the eligible beneficiaries are citizens or hold permanent or temporary residency status of an exempt state. The exception under Swiss law is broader than under EU law as it includes not only EU Member States but also the EEA, Switzerland and Monaco. The exception would apply if, for example, out of five beneficiaries of a trust, four are Russian nationals and one is both a Russian and an EEA member state.

The Swiss Guidance does not explicitly address whether the exception applies in the case of a trustor who is a national or has a permanent or temporary residence permit in Switzerland, the EEA or Monaco.

Finally, Switzerland has not yet clarified whether foundations and trusts fall under “similar legal systems”.

The content is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This may qualify as “attorney solicitation” in some jurisdictions, requiring notification. Previous results do not guarantee similar results. For more information, visit: www.bakermckenzie.com/en/client-resource-disclaimer.

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