Reed Smith In-depth

Russia’s prolonged invasion of Ukraine has resulted in the imposition of an unprecedented range of sanctions on Russia by governments around the world. Businesses operating in the EU have been at maximum capacity, reviewing, receiving advice on and modifying their practices as each new package of sanctions is released by the EU. Similarly, U.S. businesses have spent significant time and efforts on tracking and complying with the sanctions imposed by the U.S. government.

EU prohibition in relation to public procurement

An updated FAQ on the EU’s public procurement directives was issued on 2 June 2022 to provide businesses with greater clarity on the EU restrictions on public procurement, the essence of which is to prevent European public funds going to Russian contractors.

Under article 5k(1) of Council Regulation No. 833/2014 (the Sanctions Regulations), it is prohibited to award or continue to execute any public or concession contract falling within the scope of the public procurement directives and other specified regulations to or with:

a) A Russian national, or a natural or legal person, entity or body established in Russia;

b) A legal person, entity or body whose proprietary rights are directly or indirectly owned for more than 50 per cent by an entity referred to in point (a) of this paragraph; or

c) A natural or legal person, entity or body acting on behalf or at the direction of an entity referred to in points (a) or (b) of this paragraph,

including, where they account for more than 10 per cent of the contract value, subcontractors, suppliers or entities whose capacities are being relied on within the meaning of the public procurement directives (the Prohibition).

It is clear from the above that the Prohibition is intended to be wide-reaching and it is now incumbent upon businesses that are engaged in EU public procurement activities to understand the impact of these sanctions and the additional duties and responsibilities the Prohibition places upon them and their public contracts.

Commencement of the Prohibition

The Prohibition applies to all ongoing and future public procurement procedures as well as awarded public contracts and concessions.

It took effect on 9 April 2022; i.e., from this day, new contracts falling under the Prohibition should not be signed where this also starts the period of termination for ongoing contracts falling under the Prohibition.

Interpretation of the Prohibition

Subcontractors and suppliers

While points (a)-(c) of article 5k(1) are relatively clear, we have received numerous questions about the interpretation of the subcontractor/supplier requirements under the Prohibition.

It is prohibited to contract with any person, regardless of their place of establishment or nationality, who implements or intends to implement a contract using Russian or Russian-owned subcontractors, suppliers or capacity providers where their participation is above 10 per cent of the contract value.

Total Russian ownership of the contractor must be above 50 per cent; i.e., regardless of whether ownership is split between multiple persons or entities, if the cumulative Russian ownership (across all owners) is over 50 per cent, the contractor, subcontractor or supplier is caught (a covered entity).

The Prohibition and application of the 10 per cent of contract value, applies individually to each subcontractor, supplier or capacity provider and not on a cumulative basis. Where more than one covered entity is involved, the value of their participation has to reach 10 per cent of the contract value in at least one case for the Prohibition to apply.

Application when the business is not a public buyer, but a subcontractor

As detailed above, the Prohibition not only prohibits the direct bidder or contractual partner, but also covers subcontractors, suppliers or entities whose capacities are being relied on – in each case provided they account for more than 10 per cent of the contract value.

Consequently, the obligation to comply with the Prohibition (and subsequent due diligence) is not limited to direct bidders or main contractors, but passes down through the entire supply chain and all parties have a duty to comply.

Additional duties of businesses

Where the Prohibition applies, businesses are obliged to reject the tender or terminate the contract (if already ongoing). Moreover, when a Russian contractor/subcontractor may be involved, businesses are now obliged to request the tenderer to replace the Russian subcontractor in its supply chain and offer them an opportunity to submit a revised tender.

Businesses must now check the shareholding of their suppliers/subcontractors whose individual contribution on a covered project is 10 per cent or more of the contract value to ensure that they are not Russian-owned.

The EU has advised that the terms ‘suppliers’ and ‘subcontractors’ include the whole supply chain and not only direct suppliers. Thus, contracts are covered even if the 10 per cent of Russian subcontracting is provided through intermediary entities, third parties or entities further down the supply chain.

GDPR implications

When checking the shareholding of the supply chain, businesses are obliged to use advanced KYC checks to ensure that they have full information on the ultimate beneficial owners of each of the entities.

Any company involved in a public procurement procedure or contract, whether listed on a stock exchange or not, is obliged to provide detailed information on its owners, to the extent necessary to establish that it is not Russian-owned over the sanctioned limit. Information on ownership is necessary to implement the Sanctions Regulations, and public buyers are authorised to request this information under article 6 of the GDPR.

Nevertheless, all the rules on protection of personal data still apply. Thus, the information obtained must be protected, not shared beyond the purpose for which it was obtained, and destroyed when it is not needed.