“Confusion in their eyes that says it all.” The meaning of ‘control’, the Russia (Sanctions) (EU Exit) Regulations and whether Vladimir Putin really does have the entire Russian economy under his thumb.

Whilst legend has it that the British Empire was built on free trade, following the US war on terror, Britain has firmly turned its back on Adam Smith’s cynosure. This is not the place for a discussion of the economic consequences of the selected targeting of political opponents, both national and personal, but it is now a fact that when dealing with international clients, there is an additional layer of checking required which is growing exponentially in its complexity.

The development of unilateral coercive measures, better known as sanctions, as a political tool was met with flustered hostility by the Office of the UN High Commissioner for Human Rights, but the juggernaut was not to be stopped, and much like the development of the money laundering regime introduced twenty years earlier, has created good work for the legal services sector perhaps at the expense of other areas of the economy and the reputation of the UK as a safe place to do business.

An excellent potted history of the UK sanctions regime is set out by Sir Julian Flaux C at the start of the October 2023 judgment of the Court of Appeal in Mints v PJSC National Bank Trust [2023] EWCA Civ 1132 (see §§4 et seq). Mints was a case where two state-owned Russian banks (the respondents to the appeal) sought $850m from the appellants, on the basis that they conspired with representatives of the banks to enter into various uncommercial transactions by which loans were replaced with worthless or near worthless bonds.

Of the two banks, the second (PJSC Bank Okritie Financial Corporation, ‘Okritie’) was sanctioned in February 2022 on the basis that it was supporting and obtaining a benefit from the government of the Russian Federation. The first of the two banks however (National Bank Trust, ‘NBT’)) although 99% owned by the Central Bank of the Russian Federation (CBRF), was not directly sanctioned.

The appellants’ case was that because NBT was owned or controlled by two sanctioned individuals, the President of the Russian Federation Vladimir Putin, and the Governor of the CBRF Elena Nabiullina, it was subject to the same asset freeze as Bank Okritie by virtue of Regulation 7 of The Russia (Sanctions) (EU Exit) Regulations 2019. The argument for an extension of the sanctions to NBT was supported by the obligation under Russian law for the bank to transfer 75% of its profits to the federal budget of the Russian Federation.

The appellants raised three questions in support of an application to stay proceedings and a discharge of return date undertakings:

1. Whether judgment could be entered for a designated person by an English court following a trial at which it was established that the designated person had a valid cause of action;
2. Whether the Office for Financial Sanctions Implementation (‘OFSI’) could license the payment by a designated person of an adverse costs order, an order for security for costs, a cross-undertaking in damages pursuant to an injunction, or the payment of a costs order in favour of a designated person;
3. Whether a designated person could be said to ‘control’ an entity within the meaning of Regulation 7 where the element of control arose from influence that could be exerted by virtue of political office, rather than direct control of a personal asset.

The Court of Appeal expressed its reluctance to restrict the right of access of any litigant to the courts and on that basis found in favour of the banks in respect of the first and second sets of questions. In particular, the Court held (i) that a claim or cause of action was an “economic resource” rather than a “fund” within the meaning of section 60 (1) of the Sanctions and Anti-Money Laundering Act 2018 and so was not covered by the prohibitions in Regulation 12 on making funds available to a designated person; (ii) that entering a judgment did not amount to “making funds available” to a designated person, since that language was inappropriate to the exercise of judicial functions and in any event it could only be categorised as the creation of a new fund; and (iii) that the claimants were not “using” a cause of action (in breach of the Regulations) by commencing and pursuing proceedings, but asking the Court to enter judgment.

Having reached those conclusions, however, the Court went on to consider, strictly obiter, the third question.

The Court considered the two conditions set out in Regulation 7 above for establishing direct or indirect ownership or control. In summary, these are (i) a holding by the designated person, directly or indirectly, of more than 50% of the shares or voting rights in the entity, or the right to appoint or remove a majority of its directors; and/or (ii) that it would be reasonable to expect that having regard to all the circumstances, the designated person could achieve if they chose the result that the affairs of the entity in most cases or in significant respects were carried out in accordance with the designated person’s wishes. It should be noted that these provisions are common to all asset-freezing sanctions regulations.

The appellants argued that given Mr Putin stood at the apex of what remained essentially a command economy, he could be said to control by virtue of Regulation 7(4) ‘everything in Russia’.

The basis for this extraordinary conclusion arose out of the statutory interpretation principle explained by Lord Diplock in Duport Steels Ltd v Sirs [1980] 1 WLR 142, in that Parliament does not legislate for individual cases but rather categories, and the role of the courts is to establish the meaning of the categories defined within the legislation. Parliament does not legislate for particular consequences, and therefore the absurdity of the consequence is not a basis for establishing the non-applicability of legislation. The Court adopted this reasoning.

In essence, the Court was being critical of HM Government’s decision to designate President Putin without thinking through the consequences within its own regulations.

Sir Julian Flaux C having lit the blue touchpaper, the response was swift. On 17 November, the OFSI issued an update to its guidance, entitled Ownership and Control: Public Officials and Control Guidance. The guidance, which is, it should be noted, of no legal force, represented HMG’s official response to the Mints decision, and observed:

“Specifically, for the purposes of regulation 7(4) of the Russia (Sanctions) (EU Exit) Regulations 2019, the UK government does not consider that President Putin exercises indirect or de facto control over all entities in the Russian economy merely by virtue of his occupation of the Russian Presidency. A person should only be considered to exercise control over certain private entities where this can be supported by sufficient evidence on a case-by-case basis.” 

In the meantime, the High Court (Foxton J) had revisited the issue in a decision of 15 November: Litasco SA v Der Mond Oil and Gas Africa SA and Locafrique Holding SA [2023] EWHC 2866 (Comm).

The claimant was an oil marketing company incorporated in Switzerland, and wholly owned by Lukoil PJSC, a non-state-owned Russian oil company. The dispute arose out of partial non-payment of a debt for the purchase and sale of oil. One of the defences raised to an application for summary judgment was a sanctions defence based on the role of a former director who was a designated individual. This defence failed on the facts.

However, an alternative defence was raised that Litasco was owned by President Putin on the basis set out in Mints. Foxton J however took a perhaps more subtle approach than the Court of Appeal, finding that Lukoil, as a private company, was not under his control, and that the relevant “affairs” of the company for the purposes of Regulation 7(4) in this case related to the availability of funds. He concluded that making funds available to Litasco did not mean making funds available to President Putin. He recognised that President Putin might have the power to bring Litasco and/or its assets under his personal control but considered that the better approach was to consider what the actual state of affairs was with respect to Litasco, rather than what might be the case.

It is believed that there may be an attempt to appeal Mints to the Supreme Court, and so the concerns that those operating in the areas where they may come across designated individuals have about the potential risks arising out of the Mints judgment may have to wait for the final word on the matter.