International Law Advisory - Judicial Guidance on European Restrictions on Transactions Involving Sanctioned Terrorist Organizations and Entities

On October 11, the European Court of Justice issued a judgment, which answered two questions raised by the Higher Regional Court of Berlin concerning the interpretation of EU Regulation 881/2002 issued on  May 27, 2002, which imposes specific restrictive measures on transactions involving certain persons and entities associated with Usama bin Laden, the Al-Qaida network, and the Taliban (“the Regulation”). This decision provides some interesting insights into the interpretation and application of what are commonly referred to as “blocking” or “asset freezing” regulations, common in U.S. economic sanctions programs and becoming more prevalent in the EU.

This case involved the owners of buildings and land in Berlin who had agreed by notarial deed to sell their property to a group of three buyers. The deed provided that the sale price had to be paid to the sellers before final registration of the transfer of ownership in the Land Register. The final registration of the transfer of ownership was rejected by the local German authority on the ground that one of the three buyers was of the list of individuals subject to the freezing of their assets under the Regulation.

In this challenge to the application of the Regulation by German authorities, the Court addressed two principal questions.  First, the German national court questioned whether the Regulation prohibits property from being conveyed in performance of a sale and purchase to a person listed in Annex I of the Regulation.  Second, the national court questioned whether the Regulation prohibited the entry in the land register, a step necessary for effectuating final transfer of ownership in the property, even when the sale and purchase agreement had been concluded before the Regulation was published and the person listed in Annex I has already deposited the money in a trust or paid the seller.

The Court held that the final registration of the land transfer in the Land Register is an act that makes an economic resource available to one of the individuals listed in Annex I, and which enables them to obtain funds, goods or services in contravention of article 2(3) of the Regulation. Under German law, according to the Court, it is only after final registration that the buyer receives full ownership and consequently has the power to mortgage the property or transfer title. The Court held that Article 2(3) applies to any mode of making available an economic resource, and it did not matter that the contract of sale, the agreement on transfer of ownership, and the sale price all had been concluded prior to the date that the buyer had been included in the Annex I list. Rather, the Regulation precludes the completion of acts which implement contracts or transactions concluded before the entry into force of the Regulation, such as final registration of transfer of ownership in the Land Register.  In other words, there was no “grand-fathering” protection or exception to the application and effect of the Regulation.

The Court also held, however, that the Regulation does not preclude the repayment of the sale price. The Court left it to the German court to decide whether repayment of the sale price, and therefore an unwinding of the real estate transaction, would be a disproportionate infringement of the seller’s right to own the property. However, the Regulation does require that any payments due under contracts that arose prior to the date the buyer’s account became frozen would also need to be frozen.

The practical result of this decision is that the bona fide seller is prohibited from completing the sale to the restricted entity and the restricted entity is precluded from receiving the property.  It will be for the German Court to decide, under German law, whether the seller must return the funds (which would be placed in a frozen account).

Regulation 881/2002 has been amended over 70 times since its adoption and in particular in connection with the Annex 1 listing of persons, groups and entities. This judgment confirms that on-going transactions with potentially listed individuals or entities cannot be executed or finalized, regardless of the timing of when the transaction is initiated or when a person or entity is identified on the List.

The impact of this ruling goes beyond the specific regulation targeting the Al-Qaida network. It can apply more broadly to transactions with other listed individuals and entities as set forth in other EU regulations applying sanctions to Iran and Burma. Companies need to exercise close scrutiny with their current and new business partners even though the latter would not be listed under the regulations.      

Should you have any questions concerning the above, please contact David Lorello at +44 (0)20 7367 8007) in London; Guy Soussan at +32 (0)2 626 0535) or Laura Atlee at +32 (0)2 626 0516) in Brussels.