Opinion of the European Central Bank of 26 August 2024 on the modernisation of laws on international sanctions (CON/2024/27)

OPINION OF THE EUROPEAN CENTRAL BANK of 26 August 2024 on the modernisation of laws on international sanctions (CON/2024/27) Introduction and legal basis

On 5 July 2024 the European Central Bank (ECB) received a request from the Dutch Minister for Finance for an opinion on a draft legislative proposal for a Law on the implementation of international sanctions (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union (TFEU) and Article 2(1), third indent, of Council Decision 98/415/EC , as the draft law relates to De Nederlandsche Bank (DNB) and the tasks conferred upon the ECB concerning the prudential supervision of credit institutions pursuant to Article 127(6) TFEU. In accordance with Article 17.5, first sentence, of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law 1.1 As noted in the explanatory memorandum accompanying the draft law (hereinafter the ‘explanatory memorandum’), sanctions imposed by the United Nations (UN) and the Union are intended to maintain or restore peace; support the democratic rule of law, human rights and the principles of international law; prevent conflicts; strengthen international security; and fight terrorism. The Dutch sanctions regime consists of various national acts that implement in national law sanctions based on international law without ‘goldplating’ the latter. Over the past decade the Dutch sanctions regime has changed only to a limited extent, while the scope and complexity of international sanction measures have increased sharply. The draft law modernises the Dutch sanctions regime in response to the increased importance of sanctions . 1.2 The draft law safeguards the effective implementation of international sanction measures within the Dutch legal order but is not an implementation of Union or international law. The draft law modernises the Dutch sanctions regime by providing for, inter alia, an enforcement regime based on Dutch administrative law (instead of solely on criminal law), specific enforcement powers to be used in the event of serious non-compliance or evasion of sanction measures (e.g. replacement of the 1 Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42).

2 See, for example, the Law on sanctions (Sanctiewet 1977, Stb. 1980, 93).

3 Pages 1 and 2 of the explanatory memorandum. management of an undertaking), and measures to safeguard business continuity and resolution of undertakings impacted by international sanctions . 1.3 To mitigate or prevent adverse consequences for financial stability or serious social, economic or employment effects on Dutch society, the draft law contains provisions on business continuity and resolution for undertakings that are impacted by international sanctions. The draft law provides for the possibility for the responsible minister to take measures aimed at (1) ensuring that undertakings comply with international sanction measures, and (2) limiting the influence that can be exercised by a sanctioned owner or other affiliate. The purpose of these measures is to ensure the continuity or the orderly wind-down of the respective undertaking, as the case may be . According to the explanatory memorandum, the measures will always be aimed at minimising negative social effects, such as loss of employment and disruption of economic processes in the Netherlands and the Union . 1.4 A core competence of the responsible minister is to appoint a third-party administrator , either on his or her own initiative or at the request of an undertaking that is subject to an obligation pursuant to an international sanction. The appointment of a third-party administrator and any instructions issued by such administrator may only be intended to secure the cooperation of the undertaking in order to ensure its compliance with obligations under the imposed sanctions, while also safeguarding financial stability, the continuity of the undertaking or the careful winding-up of the undertaking’s activities. The draft law defines an instruction as the imposition of an obligation to perform or refrain from any factual act or legal act . Apart from the purpose of the instruction, the draft law does not expressly limit or specify the kinds of instructions the third-party administrator may give to an undertaking, but the explanatory memorandum refers to instructions that aim to restructure the undertaking in a way that safeguards compliance with international sanction measures (e.g. terminating contracts with sanctioned counterparties of the undertaking). The third-party administrator does not replace the undertaking’s board of directors. The undertaking does not need the consent of its shareholders when it implements the instructions of the third-party administrator, and neither the provisions of the articles of association nor any arrangements between the undertaking and its shareholders (e.g. on decision-making in shareholders’ meetings) apply . All officials (e.g. board members) who work for the undertaking are obliged to respond to information requests from the third-party administrator and to follow its instructions. Legal acts of an undertaking in breach of an instruction of the third-party administrator may be annulled by the third-party administrator or the responsible minister . The responsible minister may revoke the appointment of the third-party administrator if he or she deems the presence of the third-party administrator to be no longer necessary, but this may be done no later than the time at which the obligation to comply with

4 Page 6 of the explanatory memorandum.

5 Chapter 5 of the draft law.

7 Articles 5.2 and 5.4 of the draft law.

8 Article 5.1 of the draft law. the international sanction measure expires . The decision to appoint a third-party administrator and the revocation thereof must be published in the Government Gazette . 1.5 The draft law provides that if an undertaking is subject to supervision under the Law on financial 13 14 supervision or the Law on the supervision of trust offices 2018 , the responsible minister must exercise the abovementioned powers , including the power to appoint or provide instructions to the third-party administrator in agreement with DNB or the Dutch Authority for the Financial Markets, each to the extent responsible for carrying out tasks pursuant to those laws, or the ECB, if it is authorised to supervise that undertaking pursuant to Articles 4 and 6 of Council Regulation (EU) No 1024/2013 (hereinafter the ‘SSM Regulation’). The explanatory memorandum notes in this respect that the largest banks are supervised by the ECB . 1.6 The responsible minister will revoke the appointment of the third-party administrator for a financial institution in the event that (1) a resolution decision is taken, (2) a prudential supervisor appoints a 18 19 (silent) administrator , or (3) the continuous presence of DNB at the credit institution is established , unless the competent authority consents to keeping the third-party administrator in place . 1.7 Under the draft law DNB is responsible for the supervision and enforcement of administrative organisation and internal control in relation to the compliance of financial institutions with international 21, 22 sanction measures, which already falls under its supervision under Dutch supervisory law . 1.8 Under the draft law DNB may share information on international sanction measures with various foreign financial supervisors, including the ECB . This refers to information DNB receives in its capacity as supervisor in respect of compliance with sanction laws. The draft law contains various requirements for the sharing of information, including the following: adequate justification that provides a clear goal for the use of the shared information; sufficient guarantees regarding the confidential treatment of the information; and the requirement that the intended use of the information fits within the framework of the draft law, prudential regulations or the supervision of financial institutions .

13 Wet op het financieel toezicht, Stb. 2018, 443.

14 Wet toezicht trustkantoren 2018, Stb. 2006, 475.

16 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, p. 63).

17 Page 70 of the explanatory memorandum.

18 On the basis of Article 1:76 or Article 1:76a of the Law on financial supervision. These articles also cover the appointment of a temporary administrator under Article 29 of Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190).

19 On the basis of Article 3:111a(2)(o) of the Law on financial supervision.

21 Chapter 7 of the draft law.

23 Article 10i of the draft law.

24 See Article 10i(2) of the draft law.

2. Observations

2.1 The ECB’s role under the draft law 2.1.1 Article 127(6) TFEU and the provisions of the SSM Regulation referenced in the draft law confer various specific tasks concerning the prudential supervision of credit institutions upon the ECB. The ECB carries out the tasks, inter alia, of authorising and withdrawing authorisations and assessing notifications of the acquisition and disposal of qualifying holdings in respect of all credit institutions. For significant credit institutions the ECB also has the task, inter alia, of ensuring compliance with relevant Union law imposing prudential requirements on credit institutions, including the requirement to have in place robust governance arrangements, such as sound risk management processes and internal control mechanisms . To this end, the ECB is given all supervisory powers that are necessary for the exercise of its functions . The draft law envisages that the agreement of either DNB or the ECB, rather than both DNB and the ECB, is required in respect of the exercise of the responsible minister’s powers under the draft law. Consequently, and in view of the reference in the explanatory memorandum to the largest banks being supervised by the ECB, the ECB understands that the draft law requires the ECB’s agreement in respect of significant institutions only, while DNB’s agreement would be required in respect of less significant institutions. 2.1.2 The UN and the Union are the authorities responsible for the imposition of international sanctions. UN sanctions range from comprehensive economic and trade sanctions to more targeted measures such as arms embargoes, travel bans, and financial or commodity restrictions . The Union can impose sanctions as a means of, inter alia, promoting peace, international security, human rights, democracy, the rule of law, and compliance with international law. Union sanctions do not target a country or population, but are always targeted at specific policies or activities, the means to conduct them and those responsible for them . The ECB neither imposes these sanctions nor monitors compliance with them, even if they are imposed on significant institutions directly supervised by the ECB. It is for those entities to implement and monitor compliance with the different sanctions regimes. Meanwhile, individual Member States are responsible for identifying breaches of sanctions applicable within the Union and imposing penalties if necessary. 2.1.3 Against this backdrop, the purpose of the draft law’s envisaged appointment and revocation of the appointment of a third-party administrator is to ensure the effective implementation and monitoring of compliance with international sanctions; while also ensuring that the imposition of those international sanctions does not result in adverse consequences for an undertaking’s financial stability or continuity, insofar as ceasing the operations of an undertaking could have serious social, economic or employment effects for Dutch society. Consequently, the draft law does not concern the exercise of the ECB’s prudential supervisory tasks or underpin a prudential supervisory function

26 See paragraph 2.1 of Opinion CON/2020/15. All ECB opinions are published on EUR-Lex.

27 See, for the UN, Chapter VII, in particular Article 41, of the United Nations Charter, available on the website of the United Nations at www.un.org.

28 Union sanctions are based on Article 29 of the Treaty on the European Union (TEU) and Article 215 TFEU. The policy goals of the sanction measures are laid down in Article 21 TEU. under Union law . The competences and powers under the draft law are therefore distinct from, and without prejudice to, the ECB’s prudential supervisory tasks under the SSM Regulation. Therefore, the ECB should not have a formal role in approving the exercise of the responsible minister’s powers under the draft law, including the appointment of a third-party administrator, since this would exceed the scope of the ECB’s prudential supervisory mandate under Article 127(6) TFEU and the SSM Regulation. 2.1.4 Although the subject matter of the draft law falls outside the ECB’s fields of competence, certain competences under the draft law, such as the appointment of a third-party administrator on, inter alia, financial stability grounds, could indeed have prudential repercussions for the credit institution concerned. For example, a third-party administrator might be appointed by the responsible minister with the aim of terminating client relationships between the credit institutions and entities that are subject to international sanction measures. Terminating these client relationships could negatively influence the prudential soundness of a credit institution. Therefore, the ECB would welcome the introduction of a duty to inform the ECB of measures taken under the draft law insofar as such measures could impact the prudential requirements applicable to an institution that falls under the supervision of the ECB pursuant to the SSM Regulation. As the exercise of the responsible minister’s powers could have a prudential impact on credit institutions, the Dutch legislator should also consider clarifying that the relevant provisions of the draft law are without prejudice to the tasks and powers conferred on the ECB for prudential supervisory purposes under the TFEU and the SSM Regulation . 2.1.5 The ECB welcomes that the draft law expressly provides for the possibility for DNB to share information related to international sanction measures directly with the ECB . The ECB takes the view that, in order for it to be timely informed, the draft law would benefit from an express legal basis for the responsible minister to also share with the ECB information which is related to international sanction measures and relevant for the supervisory task of the ECB. 2.2 Relationship between the draft law and the resolution of credit institutions 2.2.1 The measures relating to financial institutions, including credit institutions, under the draft law, such as the appointment of a third-party administrator, may be taken in the event a sanction has adverse consequences for financial stability or the continuity of an enterprise, and is thus likely to cause serious social, economic or employment effects for Dutch society. Hence, the rationale for these measures seems to overlap with the aim of the various resolution regimes for financial institutions, such as credit institutions and investment firms, which also aim to safeguard the public interest, including the continuity of critical functions, financial stability and the imposition of minimal costs on taxpayers. Under Regulation (EU) No 806/2014 of the European Parliament and of the Council (hereinafter the ‘SRMR’) the Single Resolution Board (SRB) can take resolution measures provided

29 See paragraphs 2.4 and 2.5 of Opinion CON/2022/13.

30 See paragraph 2.6 of Opinion CON/2020/2.

31 Article 10i(1) of the draft law.

32 Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (OJ L 225, 30.7.2014, p. 1). that (1) the credit institution is failing or likely to fail, (2) there is no reasonable prospect that any alternative private sector measures would prevent the failure of the credit institution within a reasonable timeframe, and (3) a resolution action is necessary in the public interest . The public interest requirement refers to the resolution objectives laid down in the SRMR , two of which correspond with the objectives of the draft law: the avoidance of significant adverse effects on financial stability and ensuring the continuity of critical functions. Critical functions refer to activities, services or operations the discontinuance of which is likely to lead to the disruption of services that are essential to the real economy or to disrupt financial stability . 2.2.2 To safeguard the proper functioning of the various resolution regimes, good cooperation between the competent authorities under the draft law and the relevant resolution authorities is key. Although the draft law prevents the responsible minister from appointing a third-party administrator for a credit institution in respect of which a resolution decision is taken, and provides for the possibility for DNB to relieve such an administrator of its duties in the event it takes a resolution decision, the draft law does not clarify the cooperation between the two functions in the event that a resolution decision may be taken in the (near) future. Therefore, the ECB would welcome clarification of the cooperation between the responsible minister, the respective resolution authorities and the third-party administrator. For example, the draft law should take into account the role of the SRB, which is responsible for the effective and consistent functioning of the Single Resolution Mechanism within the Banking Union . A duty for the responsible minister to inform the SRB and DNB should be considered. In addition, the draft law should cater for the sharing of information by DNB on international sanction measures with the SRB and the resolution function within DNB, as the draft law currently lacks a legal basis for sharing such information. 2.3 Relationship between the draft law and DNB’s task to promote financial stability DNB is responsible within the Netherlands for the promotion of financial stability, which also encompasses DNB’s tasks as the Dutch macroprudential authority . There is an overlap between the task of the third-party administrator under the draft law and DNB’s financial stability mandate. DNB’s involvement in the appointment and instruction of the third-party administrator should therefore not be limited to DNB’s supervisory mandate and its role as resolution authority, but should also expressly take into account its financial stability task. 2.4 DNB’s enforcement and supervision powers under the draft law Under the draft law DNB will be responsible for the enforcement and supervision of the adequacy of the internal controls and the administrative organisation of financial institutions in order to comply

35 See Article 2, point (35), of Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190). 36 Article 7 of the SRMR. 37 See Article 4(1)(c) of the Law on De Nederlandsche Bank (Bankwet 1998, Stb. 1998, 200). with international sanctions. The ECB welcomes the strengthening of the legal basis and clarification of DNB’s supervisory powers in this respect. This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 26 August 2024. [signed] The President of the ECB Christine LAGARDE