'Who calls the shots?' – FCDO issues guidance on ownership and control in UK sanctions regulations

Key takeaways

On 17 November 2023, the Foreign, Commonwealth & Development Office (FCDO) released guidance regarding the meaning of ownership and control in all UK sanctions regimes, including the Russia (Sanctions) (EU Exit) Regulations 2019 (the "Russia Regulations").

The FCDO's guidance stated that it will not automatically consider that a designated public official (such as President Putin) exercises 'control' over a public body in which that official holds a leadership function such that the public body should be considered as being conducted in accordance with the 'wishes' of that official for the purposes of Regulation 7(4) of the Russia Regulations.

In clarification which may come as a relief for organisations and practitioners dealing with private entities which are based in or have links to Russia, the FCDO has stated in its guidance that specific evidence would be required to show that President Putin (or any other designated public official) exercises control for the purposes of the UK sanctions regulations over a particular private entity.

The Guidance follows the FCDO's statement last month which was issued in response to the Court of Appeal's decision in Mints, in which the Government said that it was "carefully considering" the impact of this decision.

In Mints the Court of Appeal suggested, obiter, that the consequence of applying Regulation 7(4) of the Russia Regulations (regarding the meaning of 'owned or controlled directly or indirectly') "might well be that every company in Russia was 'controlled' by Mr Putin and hence subject to sanctions".

Practical significance

It is clear from the FCDO's Guidance that the intention of the UK sanctions is not to issue a complete prohibition on organisations and individuals from dealing with private entities in Russia. Specific evidence will be required for a designated public official to be considered to exercise control over an entity in each case. The FCDO has also confirmed that it does not intend for sanctions measures to prohibit routine transactions with public bodies, such as taxes, import duties, licences etc.

The FCDO's Guidance is to be welcomed. However, in light of the FCDO's caveat that it remains possible on a case-by-case basis for a designated public official to be considered to exercise control over a private entity (or, for that matter, a public body), it is likely that businesses and practitioners will continue to adopt a cautious approach to this issue.

Mints

The Guidance follows the decision in Mints, in which the Court of Appeal dismissed an appeal by four defendant Russian businessmen who were accused by two claimant Russian banks of conspiring to enter into uncommercial transactions in a claim worth approximately $850 million.

At first instance, the Defendants sought to stay the proceedings on the basis that the second claimant bank, PJSC Bank Okritie Financial Corporation ("Bank Okritie"), had been put on the UK sanctions list after it had commenced the claim for "supporting and obtaining a benefit from the Government of Russia". Whilst the first claimant bank, PJSC National Bank Trust ("NBT"), is a 99% owned subsidiary of the Central Bank of Russia (and both President Putin and the Governor of the Central Bank of Russia, Ms Elena Nabiullina, were themselves subject to sanctions), NBT was not subject to sanctions.

At first instance the Defendants' application to stay the proceedings and obtain a release from their undertakings was dismissed.

The key issues for the Court of Appeal to determine were:

1. Whether a judgment can lawfully be entered for a designated person by the English court following trial at which it has been established that the designated person has a valid cause of action? (The Entry of Judgment Issue).
2. Whether, 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: (i) the payment by a designated person of an adverse costs order; (ii) the satisfaction by a designated person of an order for security for costs; (iii) the payment by a designated person of damages pursuant to a cross-undertaking in an injunction; and (iv) the payment of a costs order in favour of a designated person? (The Licensing Issue).
3. Does a designated person 'control' an entity within the meaning of Regulation 7 where the entity is not a personal asset of the designated person but 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 Control Issue).

Under Regulation 7 of the Russia Regulations, an organisation will be 'owned or controlled directly or indirectly' by a person if:

(i) that person either holds (directly or indirectly) a majority of shares or voting rights or the ability to appoint or remove a majority of the board of directors of the organisation; or

(ii) that person can conduct (whether directly or indirectly) the affairs of the organisation in accordance with its wishes.

The Court of Appeal held:

• On The Entry of Judgment Issue – that the Russia Regulations do not prevent a designated person from bringing civil proceedings. The right of access to the court is a fundamental common law right which can only be restricted if the relevant legislation clearly has that effect (expressly or impliedly), which the Russia Regulations do not. The Russia Regulations also do not prevent the court from entering judgment on a designated person's claim. A cause of action is an economic resource but not a 'fund' (which only arises when the judgment debt is created); and entering a judgment in favour of a designated person does not deal with or make funds available to that person.
• On the Licensing Issue – that OFSI can license all the points referred to at (2) above.
• On the Control Issue – whilst the Court's finding in favour of the Respondent/Claimant banks on the Entry of Judgment and Licensing Issues meant that the Control Issue did not arise, obiter, the Court adopted a broad view of the "ownership and control" test under the UK sanctions regime, finding that control "by virtue of political office" fell within the scope of the test. The Court found that on the correct application of Regulation 7(4) NBT was controlled by both President Putin and/or Ms Nabiullina. The Court alluded to the fact that the logical outcome of this test might well be that every company in Russia was controlled by President Putin and subject to sanctions.

Litasco SA v Der Mond Oil and Gas Africa SA & Anor [2023] EWHC 2866 (Comm)

The Court of Appeal's decision in Mints was subsequently discussed by the High Court in Litasco, which was determined shortly before the FCDO's Guidance was released.

The judge considered that it was perhaps unsurprising that the Court of Appeal in Mints had concluded that NBT was subject to the control of President Putin, given NBT was 99% owned and controlled by the Central Bank of Russia, whose board members are appointed on the basis of a proposal to the Duma with the agreement of the President of Russia.

Foxton J sought to distinguish Litasco from NBT on this basis, as he considered that the Defendants in Litasco had not pointed to any similar evidence that Litasco was presently under the de facto control of President Putin. Interestingly, at [69] the Judge admitted that he would be prepared to assume that it is "strongly arguable" that President Putin had the means of placing all of Litasco and/or its assets under his de facto control.

However, the position adopted by the Judge in Litasco, that 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, appears consistent with the FCDO's Guidance that specific evidence is required to establish that a designated person exercises control over a particular entity.

Both the Chancellor of the High Court, Sir Julian Flaux, in Mints and Foxton J in Litasco appeared to endorse the summary given by the Counsel for the Appellants in Mints that Regulation 7(4) applies when the designated person 'calls the shots'.