Has the scope of the "ownership and control" test in relation to sanctions changed?

On 6 October 2023, the Court of Appeal issued its judgment on Boris Mints & others v PJSC National Bank Trust & PJSC Bank Okritie Financial Corporation. This judgment explores whether a designated person can pursue litigation under the UK sanctions regime relating to Russia. Whilst it was not necessary for the Court of Appeal to determine the issue of when a designated person is considered to "control" an entity in this case, it did consider this issue and its comments have potentially wide ranging application for the scope of sanctions.

Background overview

The judgment related to an appeal concerning ongoing litigation in the Commercial Court commenced in June 2019. 

PJSC National Bank Trust (First Claimant) and PJSC Bank Okritie Financial Corporation (Second Claimant) brought a claim for US$ 850 million against the Defendants alleging that they, together with representatives of the Claimants, entered into uncommercial transactions with companies connected with the Defendants, by which loans were replaced by worthless or near worthless bonds. The Claimants obtained freezing orders against some of the Defendants.

The claim was moving towards trial at the time of the Russian invasion of Ukraine. Shortly after the invasion, the Second Claimant was sanctioned: it was subject to an asset freeze. The First Claimant, which is a 99% owned subsidiary of the Central Bank of Russia, was not formally sanctioned (though the Defendants argued it is subject to the same asset freeze).

The Defendants sought a stay of the proceedings and release from the undertakings which they have given to the court in connection with the freezing orders obtained against them. The application was initially decided in the Claimants' favour. The Defendants appealed the decision and the appeal case considered the following three significant issues:

1. Can a judgment be lawfully entered for a designated person by the English court following a trial at which it has been established that the designated person has a valid cause of action?
2. In circumstances where the Office of Financial Sanctions Implementation (OFSI) can license the payment of a designated person’s own legal costs, can OFSI also license various costs orders that allow for payment by or to a designated person?
3. Does a designated person “control” an entity within the meaning of Regulation 7 of Russia (Sanctions) (EU Exit) Regulations 2019 (Regulations) where the entity is not a personal asset of the designated person but where the designated person is able to exert influence over it by virtue of the political office that he or she holds at the relevant time?

The Court of Appeal decision

Issue 1 and Issue 2 were decided in the Claimants' favour. It was held that a money judgment can be lawfully entered for a designated person and, if such a claim made by a designated person is successful, OFSI can issue licences to allow that designated person to pay their own legal costs, and to allow for various costs orders. 

Regarding Issue 3, relating to when a designated person is deemed to "control" an entity under Regulation 7, as the conclusions relating to Issue 1 and Issue 2 were in the Claimants' favour, the issue of control did not arise. The Court of Appeal did not therefore need to determine this issue. Nonetheless, as it was considered to be an issue of general significance and had been subject to full legal argument, the Court provided obiter comments.

A wide interpretation was given to Regulation 7 of the Regulations, with the Court of Appeal being swayed by the Defendants' argument that a designated person can 'control' entities directly or indirectly by virtue of power from their political office.

Regulation 7(4) was considered to apply if the designated person does or can 'calls the shots' , and the way in which this was done was irrelevant.

This meant that, in the present case, the First Claimant was controlled within the meaning of Regulation 7 by President Putin and/or Governor Elvira Nabiullina (both being designated persons). The First Claimant would therefore also be subject to sanctions on this analysis despite not being a formally designated person.

Some of the key obiter comments included the following:

1. The judge in the lower court treated the second condition in Regulation 7(4) as an adjunct or backstop to the first condition in Regulation 7(2), concluding that there was a carve-out from the concept of control for political office. The judge put an "impermissible gloss on the language of the Regulation" due to the concern that the consequences of the appellants being correct as to the construction of the Regulation would mean that every company in Russia was "controlled" by President Putin and therefore subject to sanctions. If that is a consequence of giving Regulation 7 its correct meaning then the remedy is for Parliament to amend the wording of the Regulations to avoid this consequence [225].
2. Regulation 7(2) contains wording that is apt to cover instances of a designated person who, for whatever reason, is able to exercise control over another company irrespective of whether the designated person has an ownership interest in the other company, economic or otherwise [227].
3. The wording of Regulation 7(2) is primarily concerned with ownership but it does also deal with holding a right through control rather than or irrespective of ownership. This is surprising since the whole Regulation is concerned with the meaning of "owned or controlled directly or indirectly" and Regulation 7(1) makes it clear that a company is owned or controlled directly or indirectly by another if either of the two conditions is met. In other words, both conditions relate to ownership or control, and it is not the case that the first condition is concerned with ownership and the second condition is concerned with control [228].
4. The second condition is in wide terms and the use of the words "in all the circumstances" and "by whatever means" makes it clear that the provision does not have any limit as to the means or mechanism by which a designated person is able to achieve the result of control of a company's affairs [229].

Commentary

This judgment has the potential to significantly widen the scope of economic sanctions, particularly for public bodies based in Russia and Russian state-owned entities.

This causes a number of practical difficulties for businesses dealing with such entities in that assessing what constitutes "control" as part of the due diligence process is now arguably going to be more challenging. How do you find out "who calls the shots"?

Following the judgment, on 16 October 2023, the Foreign, Commonwealth & Development Office (FCDO) issued a statement stating that the government was carefully considering the impact of the judgment, especially the Court of Appeal's views that the First Claimant is "controlled" by Designated Persons by virtue of their political office. 

The FCDO has attempted to provide some clarity by stating that it:

"would look to designate a public body where possible when designating a public official if FCDO considered that the relevant official was exercising control over the public body. 

There is no presumption on the part of the Government that a private entity based in or incorporated in Russia or any jurisdiction in which a public official is designated is in itself sufficient evidence to demonstrate that the relevant official exercises control over that entity.

In the interests of reducing any uncertainty, we are exploring the options available to the Government in clarifying this position further."

It remains to be seen whether the UK government will amend the wording of the legislation to limit the scope of the ownership and control test, or whether the government will issue further guidance on the matter.

However, for now, the broad interpretation given to the wording of Regulation 7 cannot be ignored and businesses cannot shy away from the fact that this now puts even greater pressure on them to ensure they are conducting thorough due diligence in matters involving Russian counterparties. This is especially important given the strict liability for civil penalties.

In circumstances where businesses may have already entered into commitments with Russian counterparties, careful consideration should be given to ensure that those counterparties are not controlled de facto by designated Russian political figures.