Russia and Belarus Targeted in New EU Foreign Investment Risk Guidance

The EU has issued new guidance on the risks associated with foreign direct investments (FDI), targeting Russia and Belarus in light of military aggression against Ukraine.

With five packages of sanctions already imposed on Russia, the EU emphasizes that FDI is a separate channel of risk that needs to be addressed. “In the current circumstances, there is a heightened risk that any investment directly or indirectly related to a person or entity associated with, controlled by, or subject to, influence by the Russian or Belarusian government into critical assets in the EU, may give reasonable grounds to conclude that the investment may pose a threat to security or public order in Member States,” the guidance says.

The EU also notes that there is a convergence between sanctions and foreign investment: “For example, business transactions with designated persons and entities cannot legally be carried out unless the legislation exceptionally allows them, and EU banks shall freeze payments received from any designated Russian bank subject to an asset freeze.”

The guidance states that an FDI is likely to affect security or public order:

• If the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces of a third country, including through ownership structure or significant funding 
• If the foreign investor has already been involved in activities affecting security or public order in a Member State
• If there is a serious risk that the foreign investor engages in illegal or criminal activities

Russian and Belarusian Business Interests in the EU

Between 2015 and 2021, Russia was the 11th largest foreign investor in the EU and 2020 data shows Russian individuals or entities control about 17,000 EU companies, potentially controlling stakes in an additional 7,000 and minority stakes in 4,000. The sectors with the largest presence of Russian control are wholesale, real estate, professional scientific and technical activities, and finance and insurance.

Meanwhile, Belarusian individuals and entities control about 1,550 EU companies and have potentially controlling stakes in another 600 and minority stakes in 400. They have the largest presence in similar sectors to Russia, apart from finance and insurance.

5 Key Actions for EU Member States

The EU guidance includes five actionable takeaways: 

1. Systematically use screening mechanisms to assess and prevent threats related to Russian and Belarusian investments, on grounds of security and public order
2. Ensure close cooperation between national authorities (NCAs) and those screening investments in the context of implementing EU sanctions, as well as identifying breaches and imposing penalties
3. Fully implement the FDI Screening Regulation to address risks related to security or public order from Russia and Belarus
4. Ensure full compliance with the requirements of the Anti-Money Laundering Directive, to prevent the misuse of the EU financial system
5. Ensure close cooperation between Member States’ screening authorities, NCAs, banks and institutions, and international financial institutions of which Member States are shareholders. This can help identify investments, in particular from Russia and Belarus, that could affect security or public order in the EU. Ensure full compliance with sanctions in activities supported by the aforementioned public investment entities

National screening mechanisms are already in force in 18 (out of 27) EU countries, and the EU has urged them to ensure these cover all relevant FDI transactions. It also calls on those without mechanisms to urgently set them up, and for accelerated adoption by those countries already preparing to implement additional measures.  

The EU has already supported the removal of Russian and Belarusian banks from the SWIFT financial messaging service and has prohibited the acceptance of new deposits exceeding certain values from Russian and Belarusian persons and entities.

For compliance teams, this new guidance from the EU is a reminder to assess their firms’ wider risk exposure to Russian and Belarusian entities alongside compliance with sanctions. 

Find out more about the EU’s planned AML/CFT framework in our new guide.