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Following the Court of Appeal’s obiter comments in PJSC National Bank Trust and another v Boris Mints and others where it suggested that every company in Russia might be subject to sanctions on the grounds that they could be controlled by Vladimir Putin, there has been some uncertainty surrounding the correct interpretation of the “control” test in the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Russia Regulations”).
Over a month since the judgment in Mints, the Foreign, Commonwealth and Development Office (“FCDO”) and the Office of Financial Sanctions Implementation (“OFSI”) have now issued updated guidance on these points, and the case has also been considered by the High Court in Litasco SA v Der Mond Oil and Gas Africa SA and another.
Following these developments, it emerges that the FCDO and OFSI will not presume that an entity is subject to sanctions based solely on its presence in Russia or its association with a designated public official. The FCDO indicate that they will seek to designate public bodies if they are of the view that they are controlled (for the purposes of the Russia Regulations) by a designated public official.
However, the FCDO and OFSI stress that a non-designated entity may still be asset frozen if there is sufficient factual evidence to demonstrate that a designated individual exercises control over the entity. Particularly, they expressly call out a situation where a payment to a public body is de facto a payment to a designated public official as being prohibited.
As such, while the guidance is helpful, there remains uncertainty for the market associated with the “control” test. A number of market participants have asked OFSI whether the government might consider amending the Russian Regulations (and sanctions regulations more generally) to facilitate greater certainty given the strict liability nature of the regime – although this does not seem to be immediately likely.
PJSC National Bank Trust and another v Boris Mints and others
On 6 October 2023, the Court of Appeal handed down judgment in the Mints case where it held, obiter, that one of the defendants PJSC National Bank Trust (“PJSC NBT”) would be subject to sanctions restrictions under Regulation 7(4) of the Regulations.
In the UK, a company will be subject to sanctions restrictions if it is considered “designated” or if it is “owned or controlled” by a designated person. The test for whether a company is “owned or controlled” by a designated person is set out in Regulation 7 of the Regulations. This includes the provision at Regulation 7(4) which states that a company will be subject to sanctions restrictions if:
“it is reasonable, having regard to all the circumstances, to expect that [a designated person] would (if [they] chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that the affairs of [the company] are conducted in accordance with [their] wishes”.
In applying this test to PJSC NBT, the Court of Appeal formed the view that since PJSC NBT was 99% controlled by the Central Bank of Russia, it was therefore “controlled” by two designated persons, Vladimir Putin and the Governor of the Central Bank.
The Court of Appeal then went one step further and said obiter that, whilst the first instance judge may have resisted this conclusion out of concern that this would lead to the conclusion that “every company in Russia was “controlled” by Putin and hence subject to sanctions”, given that “Mr Putin is at the apex of a command economy”, then, in the sense of Regulation 7(4), “Mr Putin could be deemed to control everything in Russia.”
These comments subsequently gave rise to concerns that “everything in Russia” would be considered controlled by Mr Putin and therefore subject to sanctions, a reading which would lead to a considerable widening of the sanctions regime.
For a full analysis of the decision in Mints, please see here.
Litasco SA v Der Mond Oil and Gas Africa SA and another
On the backdrop of these concerns, the High Court considered the Mints case in its 15 November 2023 judgment on Litasco SA v Der Mond Oil and Gas Africa SA and another.
Faced with a claim for summary judgment in relation to non-payment of a contractual debt, the defendants argued that they had been unable to make the payment due to sanctions. Citing Mints, they argued that since the claimant was a subsidiary of Lukoil Oil Co, a Russian-incorporated private company, it was therefore controlled by Vladimir Putin for the purposes of Regulation 7(4) and thereby subject to an asset freeze.
In his judgment, Foxton J engaged with the comments made in Mints but took a slightly different approach. Whilst he held that “it is strongly arguable that President Putin has the means of placing all of Litasco and/or its assets under his de facto control, should he decide to do so”, he argued that, instead, “the better interpretation of Regulation 7(4) is that it is concerned with an existing influence of a designated person over a relevant affair of the company … not a state of affairs which a designated person is in a position to bring about”.
On this basis, Foxton J opted to focus not on whether Mr Putin’s position might allow him to exercise control over the claimant but, rather, whether he was exercising such control at the time in question. In particular, he considered that the relevant question was not just whether Mr Putin controlled the claimant but rather, given the facts in question concerned whether the defendants were able to “make funds indirectly available” to the claimant, whether such a payment would “make funds indirectly available” to Mr Putin.
Foxton J held that the defendants had not submitted any evidence to show that the claimant was “presently under the de facto control of President Putin” or that “funds received by Litasco on payment of this debt would be used in accordance with President Putin’s wishes” and thereby held that the Regulation 7(4) test was not satisfied.
However, whilst this case provides a useful insight as to how the judiciary may seek to apply the comments in Mints (and appears to represent a sensible and pragmatic approach to interpretation of the Russia Regulations, in line with the purposive approach adopted in Celestial Aviation v Unicredit [2023] EWHC 663 (Comm)) subsequent guidance has suggested that it may not be sufficient to consider only whether control is exercised at a particular time, and that scope for future or potential control should be taken into consideration.
Government guidance post-Mints
In response to the immediate concerns following Mints, the FCDO issued a preliminary statement on 16 October 2023 stating that:
These statements provided some initial reassurance which was further supplemented on 17 November 2023 when the FCDO and OFSI issued joint guidance.
On the question of public officials’ control over public entities, this guidance confirmed that the FCDO “does not generally consider designated public officials to exercise control over a public body in which they hold a leadership function, such that the affairs of that public body should be considered to be conducted in accordance with the wishes of that individual”.
Further, on the question of public officials’ control over private entities, the guidance clarified that, for the purposes of Regulation 7(4), “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”.
This advice therefore provides some useful clarity in demonstrating that there is no assumption that a public or private entity will be caught under Regulation 7(4) purely as a result of its association with Mr Putin or its incorporation in Russia.
However, the guidance is clear that both public and private companies may still be deemed to be controlled by a designated public official for the purposes of Regulation 7(4) if there is sufficient evidence to demonstrate that a designated individual exercises control over the company. In the case of a public entity, the guidance suggests that such control might be demonstrated if the designated person derives significant personal benefit from payments to the public body.
Building on this point in a subsequent webinar on 20 November 2023, FCDO and OFSI stressed that this was merely an illustrative example of instances which might demonstrate control and not an exhaustive list. Accordingly, FCDO and OFSI stressed that each query must be dealt with on a case-by-case basis and that companies and law firms are still required to carry out their own due diligence to ascertain whether such control might exist. As such, there remains uncertainty for the market as to the impact of the control test.
Further, whilst FCDO and OFSI noted in the webinar that they are still considering the points in Litasco, they encouraged companies and individuals to consider not only whether a designated public official can exercise control in the present, but also whether there are any potential or future steps which might be anticipated and which might give rise to such control.
For access to the guidance issued on 17 November 2023, please see here.
23 November 2023
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