Sanctions: the 'ownership and control’ test and judgments in favour of sanctioned parties – the Court of Appeal has its say

Posted: 10/11/2023

Mints v PJSC National Bank Trust and PJSC Bank Otkritie Financial Corporation [2023] EWCA Civ 1132

A significant and arguably controversial ruling relating to the UK-Russia sanctions regime and the ability of a sanctioned person to litigate in the English courts has recently been handed down by the Court of Appeal. 

The judgment confirmed that UK sanctions legislation does not prevent the entry of a judgment against a sanctioned person. The court went on to comment in passing that the wide wording of regulation 7(4) makes clear that there is no limit as to how a designated person can achieve control, and that the clear, plain and wide language could mean that Vladimir Putin controls every company in Russia. 

Although this was most likely not the intention of the regulation when it was introduced, the Court of Appeal said that if this was its effect, then it was the job of Parliament to change the law, and not for judges to ’put a gloss on the language’. The Court of Appeal also confirmed the UK’s Office of Financial Sanctions Implementation’s (OFSI) powers in relation to issuing licences relating to costs awards. 

Background

Prior to the Russian invasion of Ukraine, claims amounting to US$850 million were brought against Boris Mints and others by two Russian banks – PJSC National Bank Trust (NBT) and Banke Otkritie. The banks alleged that representatives from NBT and Otkritie conspired with entities linked to Mints and entered into uncommercial transactions, where existing loans were replaced with what has been described as ‘worthless or near worthless’ bonds.

After the litigation commenced, on 28 February 2022, Otkritie was designated as a sanctioned entity by the OFSI. NBT, however, is not a designated person.

The Court of Appeal decision particularly concerns the effect of the Sanctions and Anti Money Laundering Act 2018 (SAMLA) and the Russia (Sanctions) (EU Exit) Regulations 2019.

High Court decision

The court at first instance dismissed the defendants’ application for a stay of the proceedings. 

The High Court’s main findings were that judgment can be given in favour of a sanctioned person, and that no OFSI licence would be required. The court also held that the OFSI is permitted to provide a licence to a sanctioned person to pay certain adverse costs orders, security for costs and cross-undertakings in damages. It also confirmed that the ownership and control test does not cover control which is exercised from those in political office. 

Basis of appeal

Three key issues were raised during the appeal.

• The ‘entry of judgment issue’ and whether the court could lawfully enter judgment on a designated person’s claim. Alternatively, would it be appropriate to stay the proceedings indefinitely until the designated person was removed from the sanctions list?
• The ‘licensing issue’ – could OFSI license: (i) the payment of an adverse costs order by a designated person; (ii) the satisfaction of an order for security for costs by a designated person; (iii) the payment of any damages by a designated person that might be awarded in respect of the cross-undertakings in damages; and/or (iv) payment of costs order in favour of a designated person?
• The ‘control issue’ – whether PJSC National Bank is also subject to a sanctions regime, even though it is not listed as a designated person, on the basis that it is in fact ‘owned/controlled’, for the purposes of the 2019 regulations, by at least two designated persons: the President of the Russian Federation, Vladimir Putin and Ms Elvira Nabiullina, governor of the Russian Central Bank. It is worthwhile to note that the contention here was that the designated persons had the ability to exert influence over the entity by virtue of their political office rather than any ‘direct control’.

Court of Appeal decision

The Court of Appeal determined each of the three issues.

Entry of judgment issue
The Court of Appeal agreed with the High Court. The entry of judgment was not prohibited under regulation 12, because the entry judgment does not ‘make funds available’. Additionally, a claimant does not ‘deal with’ an economic resource by using its cause of action to obtain judgment because there was no exchange within the meaning of regulation 11(5) of the 2019 regulations. Furthermore, the court was also not in breach of 11(5) as the words ‘dealing with’ are not appropriate to describe the exercise by the court of its functions. 

The Court of Appeal was ‘firmly of the view’ that even if the defendants were correct that entry of a money judgment was prohibited, it would not be appropriate to grant a stay of the proceedings. 

Licensing issue
The Court of Appeal agreed with the first instance judge that the OFSI was entitled to issue licences that authorised the relevant litigation-related activities on the basis that such activities could come under the ‘extraordinary expenses’ licensing ground.  The court held that it was necessary to take a broad approach to the licensing grounds contained in the Russia regulations, so as to not frustrate the right of access to the court by any party.

The Court of Appeal held that the OFSI could license on all matters listed under ‘licensing issues’ above. 

Control issue
Although the control issue did not arise, because judgment could be entered for the claimants and they could obtain licences, the court addressed it briefly. It considered that the first claimant was controlled within the meaning of regulation 7, by designated persons, ie Mr Putin and/or Ms Nabiullina. The Court of Appeal held that:

• the wording of regulation 7(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. This concept of control not dependent on ownership…’;
• regulation 7(4) was broadly worded and the use of the words ‘in all the circumstances’ and ‘by whatever means’ makes it clear that the provision does not have any limit as to the means/mechanism by which a designated person may be able to achieve the result of controlling the affairs of a company; and
• paragraph 225 of the judgment raised the first instance judge’s concern that if the defendants had been right, the consequence would have been that every company in Russia was ‘controlled’ by Mr Putin and would therefore be subject to sanctions. The judgment, however, goes on to provide that: ‘If, as may well be the case, that is a consequence of giving Regulation 7 its correct meaning, then the remedy is not for the judge to put a gloss on the language to avoid that consequence, but for the executive and Parliament to amend the wording of the Regulations to avoid such a consequence.’

Conclusion

The concerning point within the decision is that the Court of Appeal has now recognised a new approach, which could mean that ‘every company in Russia’ possibly falls foul of regulation 7 and therefore would need to be treated as a designated person. 

This only adds to the confusion as to how the control test ought to be applied. The decision also confuses how other Russian state-owned entities ought to be viewed and whether they too would now fall foul of regulation 7 and therefore be treated as designated persons.  

Although the Court of Appeal’s view on ‘control’ is obiter and therefore not binding, the fact remains that, as matters stand, the view represents the highest judicial opinion on the control issue for the time being. 

In the aftermath of the judgment, the Foreign, Commonwealth & Development Office (FCDO) issued a statement on 16 October 2023 that the UK government is considering the impact of the judgment, in particular, the court’s stance on PJSC National Bank Trust being ‘controlled’ by a designated person, by virtue of their political affluence. The FCDO also clarified that the UK government would not form an automatic assumption that an entity is controlled by a public official who is designated, without having ample evidence to demonstrate the extent of control exerted by the public official. 

The FCDO’s statement vis a vis the ‘control issue’ goes some way in distancing itself from the obiter discussion in the Mints judgment. A clear determination and understanding on the ‘control issue’ is critical in determining whether an entity is designated. We can expect and hope for further developments from the FCDO with a view to restoring clarity in this respect.

If you have any queries regarding the judgment or its implications for your business, please contact our specialist sanctions team. 

This article was co-authored with Melwinder Gill, trainee solicitor in the marine, trade and energy team. 

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