In response to the need for heightened oversight of financial transactions involving entities associated with Russia, a new regulation, Article 5r, has been enacted. Effective as of May 1, 2024, this regulation imposes reporting obligations on legal entities, organizations, and bodies within the European Union (EU) whose ownership structures have connections to Russia.
Reporting Obligations
Article 5r requires EU entities, which are more than 40 per cent owned by Russian interests, to report any transfers of funds out of the EU exceeding €100,000 to the competent authorities of their home member state. Article 5r of the Regulation mandates that entities meeting specific ownership criteria must report any transfer of funds exceeding €100,000 out of the EU within two weeks of the end of each quarter. These criteria include direct or indirect ownership by legal entities established in Russia, Russian nationals, or individuals residing in Russia. Importantly, the measure also applies to Russian nationals with a dual citizenship (including EU citizens). A semi-annual reporting obligation for credit and financial institutions initiating such transfers also applies.
The definition of "funds" under Article 1(zd) of the Regulation encompasses a broad array of financial assets and benefits. This includes tangible assets such as cash, cheques, and deposits, as well as intangible assets like securities, dividends, and various financial instruments. Essentially, any financial asset or benefit falls within this definition.
Scope
The scope of the reporting obligation outlined in Article 5r extends beyond traditional fund transfers within the banking system. Clarifications provided in the 'FAQs on Reporting on outgoing transfers related to Article 5r of Council Regulation 833/2014' affirm that the reporting obligation covers all types of funds specified in the Regulation's definition. This includes specific transactions outlined in Article 1(zd) that may not involve traditional banking channels. Therefore, entities subject to Article 5r must report not only actual fund transfers but also other financial transactions that fall within the definition of "funds."
Importance of Compliance and Deadlines
Entities falling within the scope of Article 5r must ensure compliance with the reporting requirements to avoid potential penalties or legal repercussions. Compliance entails timely and accurate reporting of qualifying fund transfers to the competent authority of the Member State where they are established. Failure to comply could result in regulatory scrutiny and sanctions. It is crucial for affected entities to establish robust mechanisms to identify qualifying fund transfers and report them accurately and promptly. Additionally, it's crucial to stay updated on any further guidance or amendments to the regulation to maintain compliance.
The first reporting deadline for outgoing transfers by Russian-owned entities is 1 May 2024 and should cover the period between 1 January and 31 March 2024. Entities should submit their reports within two weeks of the end of each quarter, starting from the first quarter of 2024. For credit and financial institutions initiating transfers, the reporting obligation starts on 1 July 2024, with reports due within two weeks of the end of each semester.
Resources
Useful information including announcements, FAQs, and reporting templates, can be found as follows:
• Announcement dated 16 April 2024 by the Cyprus Ministry of Finance: here.
• FAQs on the reporting on outgoing transfers here.
• Reporting template on outgoing transfers under Article 5r here.
Conclusion
The introduction of Article 5r represents a significant step towards enhancing transparency and oversight of financial transactions involving entities with ties to Russia. By imposing reporting obligations on such entities, regulators aim to mitigate the risks associated with potential illicit financial flows. It is crucial for affected entities to familiarize themselves with the requirements of Article 5r and implement robust compliance mechanisms to fulfil their reporting obligations effectively. Failure to comply could result in severe consequences, making adherence to these regulations paramount for all concerned entities.
For more information, feel free to contact any member of our AML Compliance and Sanctions team.
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