On 6 October 2023, the Court of Appeal handed down judgment in the case of Mints & ors v PJSC National Bank Trust & anor [2023] EWCA 1332.

The judgment confirmed that the UK’s sanctions do not preclude the English courts from entering judgments in favour of sanctioned parties and that the UK HM Treasury’s Office of Financial Sanctions Implementation (OFSI) may issue licences authorising a sanctioned party to undertake various litigation-related activities, such as the payment of costs or damages.

The court also made important obiter comments regarding how “control” should be interpreted for the purposes of the UK’s Russian sanctions regime, as imposed by the Russia (Sanctions) (EU Exit) Regulations 2019/855 (the UK Russia Regulations), and its wider sanctions regimes too.

This article focusses on the ramifications of the Court of Appeal’s reasoning relating to “control”, the subsequent judicial treatment of the issue and the UK Government’s response.

The Court of Appeal’s treatment of the “control” test

Under the UK Russia Regulations, the prohibition on dealing with funds owned, held or controlled by a designated person, and on making funds available to or for the benefit of a designated person, extends to entities owned or controlled, directly or indirectly, by the designated person.

Regulation 7 of the UK Russia Regulations sets out two conditions for establishing “ownership” and “control”. The first condition is that a person holds, directly or indirectly, more than 50% of the shares or voting rights in an entity, or the right to appoint or remove a majority of the board of directors of the entity. The second condition is that it is reasonable, having regard to all the circumstances, to expect that the 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 entity’s affairs are conducted in accordance with their wishes. These provisions are common across all UK regulations creating asset freezing sanctions.

In non-binding judicial commentary, known as obiter dicta, the Court of Appeal observed that the second condition had been phrased “in wide terms”, and “does not have any limit as to the means or mechanisms by which a designated person is able to achieve the result of control”. Adopting this wide reading of the second condition, the Court of Appeal went on to conclude that PJSC National Bank Trust, a subsidiary of the Central Bank of Russia, was “controlled” by Russian President Vladimir Putin, noting that it was reasonable to conclude that Putin could, if he wanted, “call the shots” with regard to its activities.

The potentially drastic ramifications of this train of reasoning were immediately picked up by the Court of Appeal, which acknowledged that, as “Putin is at the apex of a command economy […] Putin could be deemed to control everything in Russia”. Following this reasoning to its logical end would entail all Russian entities could be considered to be indirectly targeted by the UK’s asset freezing restrictions and, in turn, UK persons and entities could be prohibited from dealing or transacting with any Russian entity whatsoever in the absence of an exception or licence.

Permission to appeal to the Supreme Court was refused in the Court of Appeal’s final order of 10 October 2023. We understand, however, that an application for permission to appeal has been filed with the Supreme Court. It therefore remains possible that these issues will be considered by the Supreme Court in due course.

Down a slippery slope

Looking at the Court of Appeal’s reasoning, it appears to be flawed for a number of reasons including:

• any analysis of “control” will necessarily be fact sensitive, and an assumption that, because Putin is “at the apex of a command economy”, he could “control” the entire Russian economy appears to be a very substantial oversimplification of the factual position;
• various prohibitions have been introduced by the UK Government after Putin’s designation in February 2022 which target the Russian Government. Should the Court of Appeal’s reasoning be adopted to mean that the UK’s asset freezing restrictions targeting Putin also extended to the entire Russian Government, these distinct prohibitions would have been unnecessary as the UK’s asset freezing restrictions would have already made it unlawful to provide anything whatsoever to the Russian Government in the ordinary course;
• the UK Government has designated various Russian companies as asset freeze targets after Putin’s designation in February 2022. If Putin’s designation as an asset freeze target had been considered by the UK Government to target the entirety of Russia’s economy with a UK asset freeze, then the individual designations of these Russian entities would have been unnecessary; and
• OFSI’s General Guidance has historically stated, and continues to expressly state, that “the UK Government will look to designate owned or controlled entities/individuals in their own right where possible”.¹ It appears unlikely that certain entities in fact “controlled” by Putin have not been designated as UK asset freeze targets, simply because they have inadvertently been overlooked by the UK Government. Rather, in many cases, we would assume that a specific decision has been made by the UK Government not to designate these entities in their own right, based on both domestic and international geopolitical and broader policy considerations.

We note, too, that the obiter statement stopped short of saying that Putin did, in fact, control everything in Russia. It merely noted that Putin “could be deemed” to control everything in Russia. It follows that he could also be deemed not to control everything in Russia. This softer language may have played a role in the subsequent High Court decision in Litasco (on which see below).

The High Court expresses its views

• On 15 November 2023, the Court of Appeal’s judgment in Mints was considered by the High Court in Litasco SA v Der Mond Oil and Gas Africa SA and Locafrique Holding SA [2023] EWHC 2866 (Comm) with the judge reaching more nuanced conclusions on the issue of control.
• The High Court considered that, while PJSC National Bank Trust was 99.9% owned and controlled by a Russian public body – the Central Bank of Russia – private entities such as Litasco and Lukoil were not presently owned or controlled in an equivalent manner, and there was no evidence that funds received by such private entities would be used in accordance with Putin’s wishes. While Putin arguably could have the means of placing Litasco and/or Litasco’s assets under his de facto control, should he decide to do so, the Court found that this was not the present position (and so Litasco should not be treated as targeted).

The High Court went on to conclude that Regulation 7 of the UK Russia Regulations is better interpreted as being concerned with a designated person’s existing influence over an entity’s affairs, as the opposite interpretation would result in the illogical result of Putin controlling “companies of whose existence he was wholly ignorant, and whose affairs were conducted on a routine basis without any thought of him”.

The UK Government’s response

The UK Government has responded to the Mints judgment by issuing guidance which, unusually, adopts a contrary position to the Court of Appeal.

The guidance:

• reiterates that the UK Government “will look to designate owned or controlled entities/individuals in their own right where possible”;
• in relation to public bodies, clarifies that the UK Government 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 that individual’s wishes;
• states that asset freezing restrictions targeting various public officials are not intended to prohibit routine transactions with such officials’ associated public bodies, such as the payment of taxes, fees and import duties; and
• in relation to private entities, states that there is no presumption that a private entity is subject to the control of a designated public official, simply because that private entity is based or incorporated in a jurisdiction in which that public official has a leading role in economic policy or decision-making. Further fact-specific evidence in each particular case is necessary to demonstrate that the relevant official exercises “control” over a private entity.

Restoring clarity?

The UK Government’s clarification of its position in relation to the control test is clearly welcome and, despite the UK’s strict liability financial sanctions regimes, companies subject to UK sanctions will be able to take some comfort from it, particularly in relation to the risk of enforcement by OFSI.

Stepping back, however, in the absence of a ruling from the Supreme Court conclusively clarifying the law or the law being changed, the Mints judgment undoubtedly increases the risks for UK companies that continue to do business with counterparties in jurisdictions where senior public officials are targeted by UK asset freezing sanctions such as Russia, Syria, Afghanistan, and Myanmar. This risk is particularly acute in the context of contractual disputes, where the sanctions status of a counterparty may be critical in determining whether certain contractual rights, such as a termination right or a right not to pay, can be exercised.

In practical terms, as matters stand, companies will need to take particular care when transacting with state owned enterprises, and public bodies, in Russia and other countries where key government figures have been targeted particularly with UK asset freeze sanctions, with enhanced due diligence and contractual protections likely being necessary.

Footnote

1. Page 17, UK FINANCIAL SANCTIONS - General guidance for financial sanctions under the Sanctions and Anti-Money Laundering Act 2018, OFSI, August 2022.