Does the Russian state “control” companies within its territory?

Questions considered by the English Court of Appeal could have a significant impact on sanctions compliance.

On October 6, 2023, the English Court of Appeal (Court of Appeal) handed down its judgment in Mints v PJSC National Bank Trust [2023] EWCA Civ 1132. The judgment considered the English High Court’s decision in PJSC National Bank Trust and another v Boris Mints and others [2023] EWHC 118 (Comm), and concerned a claimant’s access to a UK court where, during the proceedings, one of the claimants became a UK designated person under the Russia (Sanctions) (EU Exit) Regulations 2019 (Russia Regulations).

Background to the proceedings

The parties commenced proceedings prior to the Russian invasion of Ukraine in 2022. PJSC National Bank Trust (NBT) and PJSC Bank Otkritie Financial Corporation (Otkritie) had brought an $850m claim, in which they alleged that representatives from NBT and Otkritie conspired with companies connected to Mints to enter into uncommercial transactions where existing loans were replaced with “worthless or near worthless” bonds.

On February 28, 2022 (four days after the Russian invasion of Ukraine) one of the claimants, Otkritie, was listed as a UK designated person on the basis that it was a bank that was “supporting and obtaining a benefit from the Government of Russia”. For the purposes of the judgment, it is important to note that President Vladimir Putin is also listed as a UK designated person, as is Ms Elena Nabiullina (the governor of the Central Bank of Russia).

The Court of Appeal examined three core questions in its judgment, namely:

  1. Can an English court lawfully enter judgment for a UK designated person under the Russia Regulations?
  2. Is the Office of Financial Sanctions Implementation (OFSI) able to license payments of an adverse costs order, the satisfaction by a designated person of an order for security for costs, the payment by a designated person of damages pursuant to cross-undertakings, and the payment of a costs order in favour of a designated person? It was not contested that OFSI can license the payment of legal costs of a designated person.
  3. By virtue of the political office that a designated person holds, can it be said that they “control” an entity within the meaning of the Russia Regulations? Ultimately, because of its findings in respect of the first two questions, the Court of Appeal was not required to reach a decision in respect of this third question. However, it did provide some commentary on the issue of control that has the potential to expand significantly the application of the Russia Regulations, which we address in more detail below.

The Court of Appeal decision

The Court of Appeal dismissed Mints’ appeal and upheld the decision of the High Court.

In considering these issues, the Court of Appeal had regard to the principle of legality and emphasized that the fundamental right of access to the Court can only be curtailed where this is expressly provided for in legislation. By seeking to stay the proceedings indefinitely because of the Russia Regulations (which is ultimately what the application would be seeking), this would impermissibly hinder that right.

In respect of the first issue, the Court of Appeal found that entry of a judgment in favor of Otkritie (a UK designated person) would be lawful, agreeing with the High Court that a judgment is not a “fund” for the purposes of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), such that, by handing down a judgment in favor of a designated person, it is not “making funds available” to a designated person (which would be in contravention of the Russia Regulations).

The Court of Appeal emphasized that there is a distinction between assigning an existing judgment debt (which would constitute “making funds available”) as compared with the entry of a judgment. The Court of Appeal reached this conclusion without needing to have regard to the principle of legality. However, the Court noted that its position was consistent with both the principle of legality as well as the provisions of SAMLA, which the Court considered did not clearly curtail access to the Courts (either by making the entry of judgment unlawful or by refusing designated persons access to the English courts).

OFSI licensing grounds

As regards the second issue concerning the availability of OFSI licensing grounds, the Court of Appeal noted that there is no basis to suggest that the available OFSI licensing grounds should be construed narrowly. As to the facts of this case, the Court of Appeal found that the licensing ground relating to the payment of “reasonable professional fees for the provision of legal services” is drafted naturally such that it is sufficiently broad to cover payments provided for the designated party’s own legal fees or to another party, and the payment of adverse costs orders and security for costs was within the scope of this ground. Whether OFSI could license the payment of damages under the cross-undertaking would only arise if the claimants lost the litigation.

The Court of Appeal did not consider this issue in detail given that the outcome of the underlying proceeding was speculative, although it noted the High Court was correct to determine that OFSI could issue a licence for damages in excess of the security provided as an extraordinary expense. In any event, the Court of Appeal found the issue did not give rise to a need to immediately stay the proceedings.

Turning to the final issue of “control”, because the CoA determined the first two issues in favour of NBT and Okritie, the “control issue” was only considered briefly by way of commentary. The Court of Appeal reached a different view to the High Court in this regard, noting that the meaning of “control” under regulation 7 of the Russia Regulations is sufficiently broad to mean that NBT (an entity that is not a UK designated person) is “controlled” by President Putin and/or Ms Nabiullina.

The Court of Appeal rejected the High Court’s view that there was a carve out to establishing “control”, insofar as those holding political office are concerned. The Court of Appeal contended that, in reaching this view, the High Court had imposed an “impermissible gloss on the language of the Regulation because of a concern on her part that, if the appellants were correct about the consequence of the Regulation, the consequence might well be that every company in Russia was ‘controlled’ by Mr Putin.”

Instead, the Court of Appeal considered that the construction of the Russia Regulations was such that this may well be the case, and that it was not for the Courts to narrow such a construction, but rather for the executive and Parliament to amend the legislation.

A question of control?

Despite these being obiter remarks, if the Court of Appeal’s interpretation of “control” under regulation 7 of the Russia Regulations is followed, it could have a significant impact on companies seeking to remain in compliance with the sanctions. By way of background, the UK’s asset freeze prohibitions target not only persons or entities specifically listed as UK-designated persons, but also entities that are “owned or controlled, directly or indirectly” by a UK-designated person, even if those “owned” or “controlled” entities themselves do not appear on UK sanctions lists. As a result, based on the Court of Appeal’s approach, a much larger group of non-listed Russian entities may be considered to be UK designated persons.

However, when making its obiter remarks, the Court of Appeal did not address the core factual considerations that should be analyzed when assessing whether control has been established under the Russia Regulations. In our view, such a broad brush approach is not in line with the UK’s general approach to sanctions (namely to impose targeted sanctions), nor is it consistent with OFSI’s guidance on financial sanctions, which seeks to provide clarity as to the identity of those persons designated, noting: “… the UK Government will look to designate owned or controlled entities/individuals in their own right where possible”.

In addition to the core factual considerations that should be analyzed in accordance with OFSI guidance, not following the requirement to consider entities and their operations on a case-by-case basis would also be inconsistent with OFSI’s enforcement guidance, which makes clear that appropriate due diligence should be undertaken in forming such an assessment and that it “will consider appropriate due diligence conducted on the ownership and control of an entity to be a mitigating factor where the ownership and control determination reached was made in good faith and was a reasonable conclusion to draw from such due diligence”.

UK sanctions regulations

It remains to be seen whether OFSI or others in the government responsible for UK sanctions regulations will clarify this important issue and/or propose further changes to the regulations to ensure clarity on the approach to “control”. By the same token, the Russian Regulations and associated guidance have not changed, and so it is still the case that companies should adopt a risk-based approach to sanctions compliance, having regard to the specific context of the parties they are dealing with and underlying activities, and undertake the requisite due diligence to determine how to proceed.

In a welcome statement made at the time of publishing this briefing, the Foreign, Commonwealth and Development Office confirmed that it was carefully considering the judgment and the extent to which it may seek to clarify the position on this issue. In particular, it noted that it would “look to designate a public body where possible when designating a public official” and 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.”

OFSI also confirmed that it consulted with the FCDO following the judgment and supports this statement, and is continuing to work through the impact of the judgment with its stakeholders.

David Harris (UK) is co-head of the Contentious Financial Services Group London; Nathan Condoleon is a regulatory and trade compliance lawyer; and Madeleine Parker is an international trade and sanctions lawyer, based in London Norton Rose Fulbright

With thanks to Nisha Patel for her assistance with the preparation of this article.