This update provides a brief summary of some notable recent developments in the UK sanctions world, including interesting commentary from the Court of Appeal on a potentially wide interpretation of the "ownership and control" test, which was rapidly followed by a statement from the Government suggesting such an interpretation should be limited, and the Office of Financial Sanctions Implementation's ("OFSI") first use of its public disclosure enforcement power.

New judicial commentary on "ownership and control"

The concept of ownership and control has been a topic of significant interest in the sanctions world since Russia's invasion of Ukraine in February 2022. The recent judgment in Mints v PJSC National Bank Trust and anor [2023] EWCA Civ 1132 ("Mints"), from the Court of Appeal, has added to this discussion as Sir Julian Flaux, the Chancellor of the UK High Court, opined on the concept of ownership and control by reference to the Russia (Sanctions) (EU Exit) Regulations 2019 ("Russia Regulations").

By way of background, where a person is designated as being subject to financial sanctions in the UK, their name will be specifically included on the 'Consolidated List'. As is the case with sanctions imposed by the US and EU, an asset freeze and some other financial services restrictions will also apply to entities that are owned or controlled, directly or indirectly, by a designated person. It is noted in OFSI's Financial Sanctions General Guidance that those "entities may not be designated in their own right, so their names may not appear on the Consolidated List. However, those entities are similarly subject to financial sanctions."

The absence of a clear designation can create significant uncertainty, for instance when deciding whether a business can continue an existing commercial relationship or enter into a new contractual arrangement. An entity will generally be treated as being owned or controlled where:

  • the designated person holds (directly or indirectly) more than 50% of the shares or voting rights in the relevant entity;
  • the designated person has the right (directly or indirectly) to appoint or remove a majority of the board of directors of the entity; or
  • it is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person's wishes (which was the main subject of the judicial commentary).

For the purposes of this article, we will not go into any significant detail concerning the reasoning behind the case, other than to say that the underlying claim was originally brought by two Russian banks back in June 2019 (for US$850 million, on the basis that the appellants had entered into certain uncommercial transactions) and that sanctions were not initially relevant to the proceedings.

Following Russia's invasion of Ukraine, one of the claimant banks, Bank Okritie ("Okritie"), was almost immediately designated as subject to UK sanctions (i.e. within a few days of the invasion), with the other claimant, National Bank Trust ("NBT"), not being designated (even though it is closely linked to the Central Bank of Russia).

The appellants therefore applied to stay the proceedings. This was on the basis that Okritie was already designated under the Russia Regulations and that NBT should also be treated as designated, by virtue of being indirectly owned or controlled by at least two other persons, through the Central Bank of Russia, who were subject to UK sanctions (specifically Russia's President, Vladimir Putin, and the governor of the Central Bank of Russia, Elena Nabiullina).

The application before the Judge was concerned with three matters: (i) whether the Court was permitted to issue judgment in favour of sanctioned persons, (ii) certain OFSI licensing criteria for litigation purposes and (iii) whether NBT was, in fact, controlled by designated individuals for sanctions purposes.

Only the third question will be explored for the purposes of this update, noting that the Judge agreed with the court of first instance that a judgment could, regardless of their sanctioned status, still be entered in favour of a designated person and that OFSI was able to grant licenses pertaining to litigation activities, which provides some helpful clarity for those parties involved in litigation with sanctioned persons.

On the third question, relating to ownership and control, the court of first instance found that NBT was not owned or controlled by designated persons for the purposes of the Russia Regulations, on the grounds that if the Government had intended NBT to be subject to sanctions, given the relative size of its operations and its importance, it would have been specifically added to the Consolidated List.

Due to the decision's "general significance", the Court of Appeal chose to also opine on the concept of ownership and control. As outlined above, an entity will generally be treated as being owned or controlled for the purposes of the UK sanctions regime where it can be said that the affairs of the entity are conducted in accordance with the person's wishes. On this point, Sir Julian Flaux disagreed with the court of first instance that the relevant test, contained in the Russia Regulations 7(4), should be interpreted narrowly and instead stated that "there is no justification for any such political carve-out and still less for a corporate carve-out in the wording of the [Russia Regulations], which does not distinguish between different forms of non-ownership control or calling the shots."

More generally, the judgment in Mints noted that the context of the control (for example, whether the control occurred in the administration of a public office or in a personal capacity) was irrelevant for sanctions purposes, and that the controller did not have to have a personal involvement in the goings-on which give rise to the control.

Within this context, the judgment concluded that because of how widely drafted the Russia Regulations are, the "absurd consequence" was that Putin could be "deemed to control everything in Russia" and thus the logical conclusion for the Judge was that almost every state-owned business in Russia, and potentially even wider commercial entities, could be indirectly caught by the UK sanctions regime (as currently drafted).

While the Court's comments in this regard are in obiter – and therefore are not legally binding – they certainly represent a potentially significant widening of the current approach taken in the UK to the concept of ownership and control. Following Mints, the Foreign, Commonwealth and Development Office ("FCDO") released a statement on 16 October 2023 emphasising that "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 addition to indicating that it intended to clarify this position further, potentially through further guidance or legislative changes.

While we can expect that further clarification from the FCDO will likely seek to narrow the wide interpretation of ownership and control outlined in Mints, until such a time that this position is clarified, the judicial commentary will be seen as an important factor when assessing the links between an entity and a designated person.

This is ultimately an area which has long worried businesses, given the difficulty at times in unpicking the relationships between sanctioned persons and entities in which they might have an economic or other interest. Until such a time as the Government position is made clearer, unfortunately it will continue to be an area of concern, and this emphasises the need to be even more careful when carrying out ownership and control analysis.

OFSI first use OF 'Name and shame' Power

On 31 August 2023, OFSI used its new power of public disclosure, conferred by the Economic Crime (Transparency and Enforcement) Act 2022 ("ECA"), for the first time against Wise Payments Limited ("Wise") in lieu of a monetary penalty. As outlined in our article on the ECA , the power of disclosure allows OFSI to publish a report where an entity has technically breached sanctions regulations, in circumstances where the use of financial or other penalties is considered to be disproportionately punitive to the seriousness of the breach (but some form of enforcement response is considered to be necessary).

In this case, a decision was made by OFSI to make the public disclosure following Wise allowing a withdrawal of £250 from a business account held by a company owned or controlled by a sanctioned person (the day after the individual had been added to the UK sanctions list). This was considered by OFSI to be making funds available to a sanctioned person in breach of the Russia Regulations, although they treated the breach as only being of 'moderate severity'.

OFSI's first use of its public disclosure power highlights that even a relatively small breach of sanctions legislation can result in enforcement action.

As part of making its enforcement decision, OFSI recognised a number of mitigating factors in favour of Wise including:

  • the value of the breach;
  • the fact that a voluntary disclosure had been made by Wise;
  • Wise assisting OFSI as part of its investigation (i.e. responding to information requests);
  • no evidence of Wise deliberately breaching sanctions; and
  • a number of remedial actions taken by Wise following the breach such as (i) no longer providing services to the sanctioned person, (ii) employing further individuals in Wise's sanctions team and increasing the presence of these staff over the weekend and (iii) changing its policy so that both debit cards and the relevant customer account were immediately blocked following a potential sanctions flag (pending a review).

The above provides other businesses with some helpful examples of steps they can take to further reduce the chance of a sanctions breach occurring in addition to highlighting that, following an actual or suspected breach, working with OFSI can potentially limit financial exposure.

The first use of this public disclosure power by OFSI also acts as a timely reminder that adverse publicity in relation to breaches of sanctions laws (especially breaches connected to the Ukraine crisis) act as a strong incentive to businesses to ensure that their policies and procedures are up-to-date and that screening searches are undertaken regularly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.