UK Sanctions Update: Welcome clarification from the FCDO and OFSI that 'ordinary' companies in Russia are not deemed controlled by the president
Published on 17th Nov 2023
The guidance reacts effectively to a recent controversial Court of Appeal decision
Last month we reported on a surprise decision by the English Court of Appeal in Boris Mints v PJSC National Banke, with profound implications for UK businesses with Russian interests. In Mints, the Court of Appeal expressed the view that "in a very real sense (and certainly in the sense of [the applicable regulation], Mr Putin could be deemed to control everything in Russia".
The wide-ranging implications of that view arise from the way UK sanctions are imposed. Any designated person (that is, a person placed on the UK's Consolidated List by the UK government) is subject to financial sanctions and UK persons are prevented from dealing with that person. However, those sanctions also apply to any entity "owned or controlled" by a designated person.
"Control" is defined in the regulations as including where:
"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 Court of Appeal was concerned with whether the Central Bank of Russia (which is not itself a designated person) was "controlled" by President Putin and/or Ms Elena Nabiullina (the governor of the Central Bank of Russia), both of whom are designated persons, and found that they were.
Although not part of the formal judgment and therefore not strictly binding, that view had significant ramifications, with any entity controlled by President Putin (potentially, any company in Russia) now caught by the UK sanctions regime.
Clarification from the FCDO and OFSI
As we previously indicated, the Court of Appeal's opinion on "control", referred to above, was clearly not intended or expected by the UK government or OFSI (the financial sanctions enforcement body).
The anticipated guidance from OFSI and the FCDO (the Foreign, Commonwealth and Development Office) has now been released.
It sets out examples of what could amount to "control". This includes:
- having the right to exercise a dominant influence over an entity, for example pursuant to a provision in its Memorandum or Articles of Association;
- having the right to exercise a dominant influence referred to in the point above, without being the holder of that right (including by means of a front company); or
- having the ability to direct another entity in accordance with one’s wishes. This can be through any means, directly or indirectly. For example, it is possible that a designated person may have control or use of another person’s bank accounts or economic resources and may be using them to circumvent financial sanctions.
In relation to public bodies, OFSI confirms that it does not generally consider designated public officials to exercise control over a public body in which they hold a leadership function. Nor does it intend routine transactions with public bodies – such as the payment of taxes, licence fees, and import duties – to be prohibited.
In relation to private, "ordinary" Russian companies, it is confirmed that there is no presumption that a private company is subject to the control of a designated public official (for example, President Putin) just because such a company is based in, or incorporated in Russia. The guidance concludes that: "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. 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".
The guidance also makes it clear that this approach applies to all countries and not just Russia.
Osborne Clarke comment
This guidance provides some much needed reassurance that transactions with an otherwise non-sanctioned Russian commercial company or business will not be caught by a wide interpretation of the "control" test under the UK Russian sanctions regime. It also confirms that the same position applies to public bodies.
The High Court had, prior to this guidance, also indicated that it did not agree with the Court of Appeal's approach in Mints. In the recent decision of Litasco SA v Der Mond Oil and Gas Africa SA, Foxton J had found that, although President Putin might have the means to place all of the claimant under his de facto control, that was not enough to satisfy the relevant provision of the sanctions regulations.
Although the confirmation from the UK government has come via guidance rather than amendment to the regulations, UK businesses will now likely consider that this issue is effectively resolved and that a period of uncertainty for businesses that have operations in or relating to Russia is concluded.