The Challenge
In May, Italian authorities faced a critical question: can a well-drafted trust deed protect assets from EU sanctions if those assets are still linked to designated individuals? This was tested in cases involving Bermuda-law trusts, where the instruments were designed to prevent transfer to or control by sanctioned individuals under Council Regulation (EU) No 269/2014, following Russia's aggression against Ukraine.
Despite these precautions, Italian regulators froze the assets. Trustees argued that their trust deeds legally separated the assets from the sanctioned individuals. If the documents stated that these individuals couldn't control the funds, why were the assets frozen?
The Court of Justice of the European Union (CJEU) provided a clear answer in Case C-483/23 and Joined Cases C-428/24 and C-476/24: the facts matter more than the documents.
Regulatory Framework and Constraints
Article 2 of Council Regulation (EU) No 269/2014 mandates freezing funds and resources "belonging to" or "under the control of" designated persons. But what does "control" mean when a trust deed explicitly prohibits it?
Trustees assumed that a well-documented legal structure would determine regulatory treatment. If you drafted the trust correctly and followed its terms, you believed you were compliant. This wasn't creative compliance; it was standard fiduciary practice.
However, Italian authorities looked beyond the documents to actual relationships, benefit flows, and decision-making patterns. They identified settlors who retained influence and beneficiaries who continued to benefit, suggesting structures designed to circumvent sanctions.
The CJEU had to choose between a formalist interpretation that prioritized legal documents and a substance-focused approach that examined practical reality.
The Court's Approach
The CJEU chose substance over form. It ruled that "belonging to" and "control" in Article 2 should be interpreted broadly, covering all forms of influence over funds and resources, even without a formal legal link to the designated person.
The court provided specific indicators for regulators to assess:
- Relationships between beneficiaries or settlors and trustees
- Resource allocation benefiting the designated person
- Complex legal structures without clear purpose
- Majority shareholding in the trustee by the beneficiary or settlor
- Entity reorganization before sanctions
- Personal ties between directors and the designated person
This framework offers a concrete method for assessing control, beyond what the trust deed states.
In related decisions, Joined Cases C-684/24 and C-685/24, the court applied similar reasoning to Italian trust mandates under the 4th Anti-Money Laundering Directive. It held that Italy could treat these arrangements as similar to trusts, requiring beneficial ownership disclosure even without formal ownership transfer.
Results and Implications
Italian authorities can now freeze assets held through trusts where sanctioned individuals retain influence, regardless of trust deed provisions. Fiduciary companies must disclose beneficial ownership information for trust mandates to those with legitimate interest, even if these arrangements don't transfer legal title.
The CJEU's reasoning aligns with the English Court of Appeal's Eurochem judgment, forming a cross-jurisdictional consensus on effects-based enforcement.
For compliance teams, these rulings eliminate strategies relying solely on documentation. You can't rely on drafting alone if the facts show continued influence or benefit.
What Could Be Done Differently
The CJEU didn't explicitly address this, but the message is clear: structures based only on formal separation without addressing practical control won't pass regulatory scrutiny.
If trustees had monitored the factual indicators identified by the court, they might have detected control issues earlier. Documenting decision-making independence, tracking benefit flows, and maintaining evidence of arm's-length relationships would have provided stronger defenses.
The trust deeds weren't necessarily wrong; the mistake was treating them as sufficient evidence of compliance without verifying that reality matched the documented structure.
Takeaways for Your Team
Reassess Trust Arrangements: Examine any trust or fiduciary setup linked to designated persons. Don't just check if documents prohibit control; assess if the individual retains practical power over the assets.
Map Factual Indicators: Use the CJEU's indicators to evaluate existing structures. Look for overlapping relationships, resource flows benefiting designated persons, unnecessary complexity, ownership stakes, recent reorganizations, and personal ties.
Enhance Due Diligence: Go beyond document review. Understand decision-making patterns, economic benefit flows, and relationship networks. Regular reassessment is crucial.
Verify AML Compliance: Ensure your beneficial ownership processes work for arrangements without formal title transfer. The CJEU confirmed that member states can classify such arrangements as similar to trusts.
Ensure Procedural Safeguards: Your compliance framework should provide legal protection for beneficial owners when exemption requests are denied, even if administrative bodies make the initial decision.
These cases clarify that compliance obligations apply to practical reality, not just formal structure. Your compliance infrastructure must reflect this distinction.
