A European payments firm processes a standing instruction. Overnight screening flags the account holder against the EU Consolidated List. The funds are now frozen. The operational question is immediate: can those funds ever be released, and if so, how?
Under EU sanctions law, the release of blocked funds is prohibited as a default rule. A designated person's assets must remain frozen. Release is lawful only through a specific derogation authorised by the relevant Council Regulation and approved by the competent national authority. No bank, payment firm, or asset-holder may release funds on its own commercial judgment.
This briefing sets out the governing regime, the authorised derogation routes, the obligations on asset-holders, the cross-regime divergence with OFAC and OFSI, and the risk flags that practitioners encounter most frequently.
Who governs the release of blocked funds under EU rules?
Responsibility sits with the Member State competent authority – the national body designated under each Council Regulation to administer licensing and derogations. The Council of the EU sets the sanctions programme through a Regulation and a parallel Council Decision. The Regulation has direct effect across all Member States, but derogation decisions are taken at national level. This means a French bank, a German asset manager, and a Dutch payment firm holding the same frozen account must each apply to their own national authority, under procedures that the Member State determines.
At EU level, the European Commission coordinates interpretation and publishes consolidated guidance. The EU General Court hears annulment actions brought by designated persons against the Council Decision that placed them on the list. These are distinct processes: a listing challenge addresses the designation itself, whereas a derogation application addresses a specific transaction or release while the listing remains in force.
In our cross-border practice, clients regularly conflate these two routes. A derogation application does not suspend or challenge the designation. A successful annulment removes the designation entirely. Understanding which route is appropriate – and whether to pursue both simultaneously – is one of the first questions any asset-holder or designated person must answer.
The position above covers the standard governance picture. Your facts – the Member State holding the assets, the sanctions programme under which the funds are frozen, and the nature of the proposed transaction – change the analysis. For a confidential review of your specific situation, contact Calder & Vance at info@caldervance.com.
What does EU law prohibit, and what does it permit by derogation?
The core prohibition under EU sanctions law is the making available of frozen assets, directly or indirectly, to or for the benefit of a designated person. Releasing blocked funds to the account-holder, to a third party acting on their behalf, or to a connected entity that the designated person controls is prohibited without prior authorisation. The prohibition applies to any person within the EU's territorial jurisdiction and to EU nationals and EU-incorporated entities acting anywhere in the world.
The derogation structure is set out in the relevant Council Regulation and varies by sanctions programme. The most frequently encountered categories are:
- Basic needs derogations, covering food, housing, medical care, and essential utilities. These authorise release of funds sufficient to meet the designated person's reasonable living costs and do not require a finding of exceptional circumstances.
- Pre-existing contractual obligation derogations, permitting completion of a contract entered into before designation, subject to conditions set by the competent authority.
- Extraordinary expense derogations, which cover legal fees and a limited range of other costs. The legal-fees derogation is particularly relevant to asset-holders acting as counsel or holding client funds.
- Specific transaction derogations, granted on a case-by-case basis where the competent authority is satisfied that no designated person benefits and that the transaction serves a legitimate commercial or humanitarian purpose.
Not every derogation category is available under every programme. Some Council Regulations are narrower than others. Practitioners must read the applicable Regulation carefully, not assume uniformity across programmes. Where there is doubt, the stricter prohibition governs.
The ownership and control (the EU test for whether a non-listed entity is caught because a designated person holds ownership or exercises control) is also relevant here. A non-listed subsidiary majority-owned by a designated person has its assets frozen as a practical matter even if the subsidiary is not itself listed. Any release of funds from that subsidiary's accounts engages the same analysis as a release from the designated person's own account.
What are the obligations on asset-holders and financial institutions?
Asset-holders – banks, investment firms, payment institutions, trustees, insurance companies, and any other legal or natural person holding frozen assets – carry active obligations under EU law. Holding the assets is not sufficient compliance. The regime demands more.
First, the obligation to freeze is immediate and self-executing. When a person or entity appears on the EU Consolidated List, assets must be frozen without delay. There is no grace period for commercial relationships. In our experience, firms that rely on periodic batch screening rather than continuous monitoring carry elevated exposure here.
Second, reporting is mandatory. Asset-holders must notify the competent authority of frozen assets. The timing and form of notification differ by Member State. Some competent authorities require notification within a short statutory window following the freeze; others specify an annual reporting cycle. Verify the current position before relying on the timing rules in any particular Member State.
Third, where a derogation application is made, the asset-holder typically participates in or submits the application. In many Member States the application is made by the party seeking to use the funds – the designated person or a connected person – but the asset-holder must not release funds until written authorisation is received. Acting on a verbal indication or a draft authorisation is a compliance failure.
Fourth, record-keeping. The relevant Council Regulations require asset-holders to maintain records of frozen assets and of all transactions in relation to those assets for a substantial period. The records must be available to the competent authority on request.
If a transaction has already been processed without proper authorisation, or if a filing has been refused, an early review can preserve options that narrow with time. Write to us at info@caldervance.com to discuss the position.
How does the EU derogation procedure work in practice?
The derogation procedure under EU law is a national administrative process, not an EU-level licensing procedure. Each Member State competent authority has its own application form, procedural requirements, and decision timelines. The Council Regulation sets the categories and conditions; it does not standardise the procedure.
In broad terms, the sequence is as follows. The applicant – usually the designated person, a connected company, or an authorised representative – identifies the applicable derogation category under the Council Regulation. The application is submitted to the competent authority of the Member State in which the assets are held, or in which the proposed transaction would be executed. Supporting documentation typically includes evidence of the purpose of the intended payment, evidence that the derogation conditions are met, and – for legal-fee derogations – confirmation that the funds will be used only for the permitted purpose.
The competent authority reviews the application against the conditions in the Regulation. Where required by the Regulation, it must notify other Member States and the Commission before granting the derogation. This notification process adds time to the procedure. Once authorisation is granted, it is typically programme-specific, transaction-specific, and time-limited. It does not constitute a general licence for future transactions.
Decision timelines vary considerably. Some competent authorities operate with a target response window measured in weeks; others take considerably longer, particularly for complex or novel applications. In our cross-border practice, we advise applicants to plan for a material lead time and to address cash-flow and contractual commitments accordingly. Have you confirmed the current processing time with the relevant competent authority, or assumed a standard that may not apply?
Where assets are held across more than one Member State – a common position for a designated individual or group with accounts in multiple EU jurisdictions – a separate application is required in each jurisdiction. The competent authorities involved may coordinate, but authorisation in one Member State does not confer authorisation in another.
How does the EU approach compare with OFAC and OFSI?
The EU, OFAC, and OFSI each operate a freeze-and-prohibit architecture, but the derogation and licensing mechanisms differ in structure, authority, and process. A business operating across US, UK, and EU jurisdictions with frozen assets in each must manage three parallel procedures.
Under OFAC, the release of blocked funds requires a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) issued by OFAC itself. OFAC is the sole licensing authority; there is no state-level variation. The 50 percent rule (OFAC's rule treating entities owned 50 percent or more in aggregate by blocked persons as themselves blocked) applies mechanically to determine whether an entity's assets are blocked in the first place. OFAC publishes guidance on processing times, but timelines vary by programme and by complexity of the application.
Under OFSI, the equivalent instrument is a licence issued by the Office of Financial Sanctions Implementation. OFSI is the UK's sole competent authority for financial sanctions licensing, which provides procedural consistency across UK asset-holders. The UK's ownership and control test under the relevant thematic regulations applies a broader test than OFAC's pure ownership rule: control by a designated person, even without majority ownership, can bring an entity within the prohibition. OFSI also has a specific licence category for legal fees and a separate route for basic-needs payments.
The divergence of most practical importance is: a transaction that has been authorised by OFAC is not thereby authorised under EU law, and vice versa. Where both regimes apply – for example, a US-owned EU financial institution holding assets of a dual-listed person – both licences are required independently. A further complication arises from the EU Blocking Regulation, which restricts EU operators from complying with certain US secondary-sanctions measures. The interaction of these instruments requires careful analysis before any release is authorised.
In a recent matter, a financial institution holding assets subject to both EU and UK sanctions designations sought to release funds for pre-designated contractual liabilities. We assessed eligibility under both regimes, prepared and submitted parallel derogation and licence applications, and managed the regulators' queries. The matter confirmed the importance of sequencing applications correctly to avoid one authorisation expiring before the other is received.
What are the principal risk flags for asset-holders and compliance teams?
Several patterns recur in enforcement and in compliance reviews. Asset-holders that manage these points explicitly reduce their exposure materially.
The first risk flag is indirect benefit. A derogation permits a specific payment for a specific purpose. Payment to a third-party creditor of the designated person – a landlord, a medical provider, a law firm – appears straightforward. But if the creditor is itself connected to the designated person, or if the payment discharges a liability that the designated person has guaranteed, the benefit question reopens. Competent authorities and enforcement teams scrutinise payment flows beyond the immediate counterparty.
The second risk flag is the pre-designation gap. A contract signed before designation raises a derogation question. A contract signed after designation but before the asset-holder updated its screening raises a liability question. The two are legally distinct. Do you know the exact date of the contract relative to the listing date?
The third risk flag is the 50-percent-or-control question for the releasing entity. Where the asset-holder is itself majority-owned by a designated person – a holding structure not uncommon in complex corporate groups – its capacity to act without itself requiring authorisation is uncertain. Get the ownership analysis right before submitting the application.
The fourth risk flag is the multi-programme overlap. A person designated under two separate EU sanctions programmes has their assets frozen under each. A derogation under one programme does not carry across to the other. Asset-holders must identify all applicable programmes before preparing the application. This step is missed with uncomfortable frequency.
The fifth risk flag is procedural reliance. Some practitioners assume that a previously granted derogation for a similar payment sets a precedent. It does not. Each derogation is specific to the transaction, the programme, and the period. A second application is always required.
When should an asset-holder or designated person involve counsel?
Early involvement of sanctions counsel is almost always more efficient than late involvement. By the time an asset-holder has processed a payment without authorisation, or a derogation application has been refused on procedural grounds, the options available are materially narrower.
Counsel should be involved at the point when the freeze is applied, to assess whether the designation is correct and whether the assets in question are in scope. Involvement at this stage can identify ownership and control questions that affect whether a derogation is needed at all – or whether an annulment action at the EU General Court is the faster route to resolution.
Counsel should also be involved before the derogation application is submitted, to identify the correct derogation category, draft the supporting documentation, and manage the notification process with competent authorities in multiple Member States where relevant.
A common myth among compliance teams is that derogation applications are straightforward administrative filings that do not require legal input. In our experience, this view is incorrect. Applications that are poorly framed, that fail to address the benefit question, or that do not match the documentation to the correct derogation category are refused or returned. Refusal resets the timeline and may affect the competent authority's assessment of subsequent applications.
The EU General Court route – an annulment action challenging the underlying designation – involves different timing, standing requirements, and procedural rules. It runs in parallel to, and independently from, the derogation process. For a designated person whose assets are frozen indefinitely, an annulment action is often the most important step. The two routes can and often should be pursued together.
Related practices
- Frozen account management under BIS/EAR – US export-control counterpart for blocked-account management and licence applications.
- Release of blocked funds under EU: advanced issues – deeper analysis of multi-programme overlap and annulment interaction.
- Release of blocked funds under the Japan regime – comparative briefing on Japan's asset-freeze and release rules.