Recent Developments in the “Ownership and Control” Test under UK Financial Sanctions Regulations

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The Issue

1. The English courts recently discussed the issue of whether a designated public official can be said to “own or control, directly or indirectly” an entity, through their office, for the purposes of UK financial sanctions regulations, and the UK government issued guidance regarding the same.

General Background

1. The UK’s Office of Financial Sanctions Implementation (“OFSI”) maintains a publicly available, consolidated list of asset freeze targets and list of persons named in relation to UK financial and investment restrictions (the “Sanctions List”).
2. The Sanctions List does not necessarily include entities that are “owned or controlled” by designated persons, but which may be subject to the same restrictions by virtue of such ownership and control. This test of “ownership and control” may determine whether persons who are not listed/designated are nevertheless subject to UK financial sanctions.
3. One such test of “ownership and control” that appears across UK sanctions regulations is: “it is reasonable, having regard to all the circumstances, to expect that P would (if P chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with P's wishes” (the “Test”).
4. It is worth pausing to consider the breadth of the Test (e.g. “having regard to all the circumstances” and “by whatever means and whether directly or indirectly”) and how it is subjective.
5. How this applies in relation to designated public officials was recently discussed by the Court of Appeal in Mints v PJSC National Bank Trust & Anr [2023] EWCA Civ 1132 (the “Mints Case”).

The Mints Case

1. The Mints Case arose out of an application by the Defendants to stay proceedings on the basis that the Second Claimant (and, so they argued, the First Claimant) became subject to financial sanctions (the “Application”) under the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Regulations”).
2. One of the issues was whether the First Claimant, National Bank Trust PJSC (“NBT”), was “owned or controlled” by Mr Putin and/or Ms Nabiullina, the governor of the Central Bank of Russia (both of whom were designated) for the purposes of the Test (as contained in regulation 7(4) of the Regulations) (the “Issue”).
3. The Issue was ultimately resolved to be one of interpretation and whether the “[Test] extends to a designated person’s power to control companies through their office, as opposed to personally.”
4. In the Commercial Court, Cockerill J found that the Issue was not material to deciding the Application. She did, however, express the brief and tentative conclusion that the Test was not satisfied because it does not extend to control of companies through political office. The Court of Appeal stated that Cockerill J’s concern was that if it did “the consequence might well be that every company in Russia was “controlled” by Mr Putin and hence subject to sanctions”.
5. The Court of Appeal agreed with Cockerill J that the Issue was not relevant to the outcome of the Application, and so its comments are obiter, but it disagreed with her finding that the Test did not extend to control of companies through political office. It commented that Cockerill J had put an “impermissible gloss on the language of the [Test]” and instead found that the Test:
   1. “does not have any limit as to the means or mechanism by which a designated person is able to achieve the result of control, that the affairs of the company are conducted in accordance with his wishes”; and
   2. “[is] apt to cover the case of a designated person who, for whatever reason, is able to exercise control over another company irrespective of whether the designated person has an ownership interest in the other company, economic or otherwise.”
6. The Court of Appeal stated that if the consequence of its broader interpretation of the Test is that every company in Russia is “controlled” by Mr Putin and subject to sanctions, “which may well be the case,” then the solution is instead for “the executive and Parliament to amend the wording of the Regulations to avoid such a consequence.”

Subsequent Case Law

1. In Litasco SA v Der Mond Oil and Gas Africa SA [2023] EWHC 2866 (Comm), the Defendants sought to oppose an application for summary judgment for sums due under contract to Litasco, a wholly-owned subsidiary of Lukoil PJSC, a Russian oil company (not state-owned), on the basis that the Claimant was controlled by Mr Putin by virtue of his political office. The Defendants did not point to any specific evidence that Litasco was presently under the de facto control of President Putin.
2. Whilst the Foxton J was “prepared to assume 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…[the Test] is concerned with 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” (emphasis added).

Summary of UK Government Guidance

1. Soon after the Court of Appeal judgment in the Mints Case, OFSI and the Foreign, Commonwealth and Development Office (“FCDO”) issued guidance as to the meaning of “ownership and control” with respect to public officials across all UK sanctions regimes (including the Regulations) (the “Guidance”). The Guidance notes that the policy intention is “to ensure that sanctions cannot be easily circumvented.”
2. The Guidance makes a distinction between public and private bodies. In relation to public bodies, it provides that:
   1. If FCDO considers that a public official is exercising control over a public body under UK sanctions regulations, then it will look to designate that body when designating that public official.
   2. Where public bodies are not so designated, they will not generally be considered to be controlled by designated public officials that hold leadership functions within such bodies. FCDO does not intend to prohibit routine transactions with public bodies (such as paying taxes, fees or import duties, for instance).
   3. Public bodies may however be controlled by designated public officials where there is sufficient evidence of such control. The example given in the Guidance (but which does not specifically appear in the Regulations) is where the designated public official derives significant personal benefit from payments to the public body, such that they amount to payments to that person rather than the public body.
3. In relation to private bodies, the Guidance provides that (with seeming reference to the Mints Case):
   1. The UK government does not presume that a private entity is subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which that official has a leading role in economic policy or decision making. Further evidence would be required to satisfy the Test, and this will be required on a case-by-case basis.
   2. 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; and a person should only be considered to exercise control over certain private entities where this can be supported by sufficient evidence on a case-by-case basis.

Concluding Remarks

1. There is no consensus amongst judges as to the correct interpretation of the Test as it applies to designated persons in political office. The Guidance is welcome, but it still ultimately requires persons to carry out their own due diligence as to the risks of a person being “owned or controlled, directly or indirectly” by another, and does not prescribe the level or type of due diligence that should be carried out. This can be challenging where the Test is broad and subjective, and where information can be hard to come by; and where breaches of UK financial sanctions attract strict civil liability and fines of up to £1m by OFSI, and potentially criminal liability.

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