Sanctions tracker: recent Russia sanctions developments

17 November 2023

In this post, we provide a round-up of key recent Russia sanctions developments in the UK, including new and amended general licences, guidance from the Office of Financial Sanctions Implementation (“OFSI“) and developments in respect of sanctions on gold and circumvention.

Designations and NCA red alert in respect of gold

There has been an increased focus in recent months on addressing issues of sanctions circumvention and on 8 November 2023, the UK designated a number of individuals and entities suspected of assisting the Russian State in circumventing sanctions. The National Crime Agency (the “NCA“) (together with the National Economic Crime Centre, OFSI and other relevant agencies) issued a red alert in respect of gold-based financial and trade sanctions circumvention on the same day.

More specifically, the UK designated 29 individuals and entities suspected of operating in and supporting Russia’s gold, oil and strategic sectors, bringing the total number of persons designated by the UK to over 1,800. The individuals and entities designated include two of Russia’s largest gold producers, as well as several UK, Jersey and Dubai-based entities and individuals suspected of supporting or enabling the circumvention of restrictions in place in respect of the gold, oil and other strategic sectors of the Russian economy. Many of the entities designated operate in the extractives or energy sectors.

A red alert is a means by which the NCA provides information to non-law enforcement bodies, including the private sector, to combat and disrupt serious crime. The NCA has previously issued a red alert in respect of sanctions evasion typologies (a more detailed review of this and the key indicators of sanctions evasion is available in our previous blogpost here).

The most recent red alert (the “Alert“) is intended to provide information in respect of the common techniques used to evade sanctions related to gold and provides a summary of the relevant sanctions applicable to gold, which include:

  • A prohibition on the import of gold exported from Russia into the UK in force since 21 July 2022;
  • trade restrictions prohibiting the provision of funds and certain services to the Russian gold sector where the intention is for the gold to enter the UK;
  • financial restrictions which prohibit the provision of financial services to certain specified entities for the purposes of foreign exchange reserve and asset management which apply to gold bullion; and
  • asset freezes imposed on designated persons.

The Alert notes that gold is a significant income stream for Russia and can be used as an alternative means of exchange to circumvent sanctions. The Alert provides a summary of common circumvention techniques and indicators of circumvention (eg gold from conflict-affected areas, incomplete paperwork, cash-based transactions, etc), noting that typologies are likely to be different for the various forms of gold. The Alert also signposts certain industry guidance, including in respect of supply chain due diligence.

New and amended general licences

A number of general licences (“GLs“) have been issued or amended since the beginning of October 2023. The two new GLs relating to the Russian sanctions regime are:

  • General Licence INT/2023/3626884, issued on 6 October 2023, which permits the payment of certain fees associated with filings of UK-incorporated entities to Companies House by/ on behalf of designated persons and those subject to a UK asset freeze. This GL was amended on 19 October 2023 to clarify the definition of “UK DP” and the payments permitted under the GL; and
  • General Licence INT/2023/3744968 issued on 25 October 2023 in respect of legal fees owed by individuals and entities designated under the Russia and Belarus sanctions regimes (replacing INT/2023/2954852, which we discussed in more detail in our blogpost here and here). The new GL resets the professional legal fees caps and the expenses caps and extends the deadline for reporting a payment received under the GL to 14 days (up from 7 days). The new GL also requires that engagement letters sent to OFSI must be unredacted and that the Group ID of the relevant designated person must be included in a report.

OFSI has also amended several GLs since the beginning of October, including:

  • General Licence INT/2023/3024200 in respect of prior contractual obligations was amended to change the definition of “Contractual obligation” and clarify some of the permissions, whilst also expanding the lists of excluded contracts;
  • General Licence INT/2022/1552576 in respect of the payment of London Court of International Arbitration (“LCIA“) costs was amended to change the definition of “Arbitration Costs” which may be paid to the LCIA by/on behalf of a designated person;
  • General Licence INT/2022/1839676 in respect of passenger rail or passenger air travel using certain designated Russian providers was amended to clarify that a UK Person may only purchase relevant tickets from a Designated Person or a subsidiary for passenger rail or air journeys originating in, or within, Russia; and
  • General Licence INT/2022/1875276 in respect of the continuation of Business and Basic Needs for Telecommunications Services and News Media Services was extended to 30 May 2026 and several minor changes were made to the GL.
Correspondence banking restrictions

As highlighted in our previous post, the UK’s Russia statutory guidance was amended on 29 September 2023. The updated guidance now includes an amended FAQ 5 which sets out OFSI’s view that UK financial institutions do not need to freeze funds received indirectly via a designated bank in circumstances where neither the sender nor the receiver of the funds are designated persons and there are no designated banks in the transaction chain after the UK financial institution.

The guidance had previously indicated that funds received from or via a designated bank should be frozen and could not be released without an appropriate licence. The revised FAQ includes a note that, while the response to the FAQ sets out OFSI’s view of the law as it stands, the Government intends to amend the Russia Regulations to prohibit UK financial institutions from processing payments received from or via a designated bank (ie to revert to the position set out in the guidance prior to the amendment).

The reason for the change in position at this time is not immediately obvious and the distinction between funds received via and funds remitted from a designated person is not easy to rationalise with the legislation, if (in either case) the designated person does not own, hold or control the funds in the hands of the recipient. For practical compliance purposes, it is however helpful to have clarity on OFSI’s position on this point. The introduction of  General Licence INT/2023/3566356 which allows certain payments to be returned to a non-designated person, despite passing through a designated bank before reaching the UK financial institution, appears to be for purely clarificatory purposes. The introductory wording to the GL indicates that it was issued “to provide certainty to relevant institutions and does not represent a determination by OFSI that the actions contemplated by the general licence are prohibited by financial sanctions regulations”. However, the GL reiterates that the Government intends to legislate to prohibit UK credit and financial institutions from processing payments that are transferred via a designated bank at any point in the banking chain (without stating when this might be done) so the GL may possibly be a preparatory step taken in advance of this legislative change.

New technical guidance on interception and monitoring prohibitions

On 17 October 2023, new technical guidance was published in respect of the telecoms interception restrictions in place under the Russia, Belarus, Myanmar (Burma), Iran, Syria and Venezuela regimes. The guidance provides further information in respect of certain specific terms used in the schedules to the relevant sanctions regulations.

Judicial developments

in R. (on the application of Mikhail Fridman) v HM Treasury [2023] EWHC 2657 (Admin) the High Court dismissed all grounds of challenge raised by an individual designated under the sanctions regime. In doing so the court made comments on the proper role of judicial review and evidence in such proceedings, in keeping with the recent trend of insisting on procedural rigour in public law cases. A more detailed overview of the case is available on our blog here.

 

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Court takes a tough stance in challenge to sanctions decisions on judicial review principles

13 November 2023

In R. (on the application of Mikhail Fridman) v HM Treasury [2023] EWHC 2657 (Admin) the High Court dismissed all grounds of challenge raised by an individual designated under the sanctions regime. In doing so the court made comments on the proper role of judicial review and evidence in such proceedings, in keeping with the recent trend of insisting on procedural rigour in public law cases.

Key points

  • The court will be very slow to allow post-decision evidence in a judicial review context, unless it is considering proportionality in the context of a human rights challenge. Such evidence is inconsistent with the proper role of judicial review as only considering the lawfulness of a decision and the process leading up to it.
  • The statutory wording in the sanctions legislation makes clear that a licence allowing use of frozen assets can only be granted if certain statutory purposes are fulfilled but does not require a licence to be granted in those circumstances, meaning OFSI has a residual discretion to refuse a licence application even where the statutory tests are made out.
  • In the context of the sanctions regime and published guidance making it clear the onus was on the applicant to fulfil relevant criteria, public law principles did not require OFSI to advise an applicant for a licence or make its own inquiries to fill in any evidential gaps.
  • From a sanctions perspective, the decision is also of interest in setting out extracts from OFSI’s internal (and previously non-public) guidance regarding its approach to licensing requests made on behalf of “sanctioned oligarchs” under the basic needs licensing ground.

Background

The claimant is a businessman who was “designated” under the sanctions regime which addresses the Russian invasion of Ukraine: the Russia (Sanctions) (EU Exit) Regulations 2019/855 (the “2019 Regulations“) made under s1 of the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA“). SAMLA ss38-40 provide for court review of certain sanctions decisions, and in determining whether a decision should be set aside, the court must apply the principles applicable in judicial review.

Designation results in an asset freeze such that use of the claimant’s assets and resources can only be made by obtaining a licence (or pursuant to an exemption). The claimant had already been granted licences to use what the court described as “substantial sums” for various matters, including his basic needs and payments to third parties such as professional advisers and his own staff, but in these proceedings he challenged the refusal of other applications for licences authorising further payments to third parties. Saini J noted that the payments which formed the subject of the present claim were relatively modest when compared to the existing authorised sums which ran into several millions.

The Office of Financial Sanctions Implementation (“OFSI“) forms part of HM Treasury and is responsible for administering this licensing regime under the 2019 Regulations. Under the statutory regime a licence may only be issued where the application satisfies certain statutory purposes, including meeting basic needs and payment of prior obligations. Any application must provide evidence and demonstrate that all relevant criteria are met. OFSI has issued public guidance concerning the licence application process which notes that detailed evidence is required and the onus is on the applicant. OFSI also had internal guidance concerning licences aimed at meeting basic needs to ensure a consistent approach (the Basic Needs Framework introduced in May 2022, and the Licensing Caseworker’s Guide introduced in September 2022).

Judgment

The court considered the different licence decisions under challenge and found that OFSI correctly directed itself in law, bearing in mind the purpose of the sanctions regime, and came to lawful and rational conclusions. All grounds of challenge were dismissed.

There was a question as to whether OFSI has an overriding or residual discretion which permits it to refuse a licence even if the relevant statutory purpose test is fulfilled. Saini J considered that it did, based on the statutory language which enables, but does not require, the grant of a licence in those circumstances. He noted however that this residual discretion may be narrower or wider depending on which statutory purpose is in issue, commenting that it may be difficult to rationally exercise the discretion to refuse something which has been assessed as truly a basic need compared to meeting a prior obligation payment. Of course, that discretion is not unbounded but is subject to traditional public law principles, including consistency with the purpose of the legislation and rationality.

Additional late grounds of challenge

The claimant had made an application to amend his claim to advance two new grounds just one working day before the substantive hearing. No good reason was said to have been put forward to explain why the application to amend was made so late. Certain aspects of that application were opposed and all the opposed elements were refused by the court. Saini J emphasised that in both private law and public law cases, the courts are required to have a much greater appreciation of the effects of amendments on the court and other parties than was previously the case, for example an amendment may cause prejudice to another party that cannot be precisely quantified, but which is nonetheless real.

The claimant’s first proposed new ground alleged that the licensing decisions would result in a disproportionate interference with fundamental rights under the Human Rights Act 1998 (“HRA“). The court noted that the 2019 Regulations overall amount to a lawful and proportionate statutory interference with rights, despite this being a draconian regime of freezing assets, in light of the public interest. The question is therefore whether the specific individual decisions being challenged amount to a breach of those rights. To meet the criticism that this point had not previously been pleaded the claimant sought to argue that every case where there is an infringement of public law in a licensing decision amounts to a violation of rights under the HRA. The court did not accept that submission, explaining that even if a licensing decision was based on a misdirection in law or irrational (making it unlawful in traditional public law terms) that does not mean relevant rights have been violated. Such a decision remains “in accordance with law”, which requires certainty, accessibility and a sufficient legal basis in domestic law. To show a disproportionate interference with rights, a claimant must (independently of the public law error) prove with evidence that the result of the decision (for example, not being permitted to make a certain payment), has in fact had a disproportionate impact. Given the extent of the sums already authorised under the claimant’s licences, Saini J took the view that this argument would have no realistic prospect of success.

Secondly the claimant sought to argue that the use of the internal guidance on basic needs was unlawful as an undisclosed policy. Saini J agreed that a policy should be published if it informs discretionary decisions in respect of which the potential object of those decisions has the right to make representations, and where the individual would not otherwise be able to make relevant and targeted representations. However, a public authority is entitled to supplement its published guidance with internal guidance which is not inconsistent with the published policy, as here with the guidance on basic needs. Although this ground was not considered to have sufficient prospects of success, Saini J did recommend that OFSI considers making public its internal guidance as a matter of good administrative practice, whilst still emphasising that the onus is on the applicant to supply all supporting evidence.

In any event the application to advance both additional grounds was refused for case management reasons as being far too late.

Post-decision evidence

During the course of the proceedings the claimant made successive applications to adduce new factual and expert evidence, resulting in the material before the court amounting to nearly 3,000 pages. The court considered that part of the reason for this was the claimant’s view that the court should act as the primary decision-maker in whether the relevant licence applications should be granted. This is not the role of the court under SAMLA. OFSI has the institutional competence to determine licence applications according to the criteria in the 2019 Regulations, a process involving fact-sensitive determinations based on an evaluation of the evidence provided by each applicant. Since SAMLA specifies that the court must apply judicial review principles, that means the rationality of OFSI’s decisions falls to be assessed by reference to the material before the decision maker at the time of the original decision. Generally, evidence in judicial review is used to identify the target decision, the process which led to it, and the material before the decision-maker, in order to establish a public law error in either that target decision or the process leading to it. Post-decision evidence may be admitted where the court has to undertake an objective assessment of proportionality (for example in considering whether there has been a breach of the HRA), but that was not the case here since the late HRA ground was not allowed to proceed.

This basic position on evidence was not altered by the fact that CPR 79 applied to these proceedings, since the provisions concerning adducing evidence there could not alter the judicial review principles the court was directed to apply by primary legislation.

As in public law generally, the court was not here standing in the shoes of the defendant but rather considering whether to set aside the original decision. The court does not have the expertise in the specific area which the particular defendant entrusted with decision making possesses.

It was also relevant that in circumstances where the burden is on the applicant in the licensing application process, some of the late evidence would have been available to the claimant at the time of his original application. The claimant argued that the evidence could have been reasonably available to OFSI if inquiries had been made, relying on the Tameside duty to make inquiries. However under that duty a public authority is not obliged to conduct investigations to identify all potentially relevant material, and a court should not intervene merely because it considers that further inquiries would have been sensible or desirable. It should intervene only if no reasonable authority could have been satisfied on the basis of the inquiries made that it possessed the information necessary for its decision. That was not the case here. Nor did procedural fairness require OFSI to advise the applicant or fill in evidential gaps, bearing in mind the context of the published guidance which made it clear that the onus is on the applicant to satisfy relevant criteria.

Comment

Some aspects of this decision turned on the specific wording and purpose of the sanctions regime, and the court certainly seems to have been swayed by the fact that the claimant had already benefitted from licences authorising significant payments despite his assets being frozen. The clarity on OFSI’s role and obligations will be welcomed and should serve as a warning to applicants for licences to ensure they provide full and substantial evidence during the application process. Those applying for licences will also wish to have regard to the internal guidance referred to in the judgment (and it is to be hoped that OFSI takes forward the Court’s suggestion that the full guidance is made public as a matter of good administrative practice). From a sanctions practitioner’s perspective, the confirmation that OFSI has a residual discretion to refuse a licence application even where the statutory tests are made out – but that the extent of this discretion will vary as between licensing grounds – is also of significance.

However the judgment also has wider relevance in emphasising the strict approach the Administrative Court is currently taking to ensuring the confines of judicial review are respected, and insisting on procedural rigour on issues such as late applications and flooding the court with evidence. The court has repeatedly made it clear that such practices are just as likely to be criticised in public law cases as in private law proceedings.

 

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Sanctions tracker – new UK guidance following Mints decision on ownership and control

18 October 2023

Our previous briefing commented on the recent Court of Appeal decision in Mints v PJSC National Bank Trust [2023] EWCA Civ 1132 and, particularly, the court’s consideration of the “ownership and control” test under the UK sanctions regime. In summary, the court concluded that there was no carve-out to the ownership and control test for control exercised through political office and, accordingly, it could be said that Vladimir Putin (Russian President and a designated person) may be deemed to control “everything in Russia” for the purposes of the statutory instrument imposing the UK’s Russian sanctions regime.

In an effort to resolve some of the uncertainty arising from this decision, the Foreign, Commonwealth & Development Office (the “FCDO”) has this week published a statement noting that it is “carefully considering” the impact of the Court of Appeal’s decision. The statement goes on to say that the FCDO would look to designate a public body where possible when designating a public official, if it concluded that the relevant official was exercising control over the public body. The FCDO state that there “is no presumption on the part of the UK government that a private entity based in or incorporated in Russia, or any jurisdiction where a public official is designated, is in itself sufficient evidence to demonstrate that the relevant official exercises control over that entity”. The statement concludes by noting that the FCDO is exploring the options available to the government in clarifying this position further.

This statement helps to support the (common sense) conclusion that the UK government did not intend for all Russian companies to be subject to sanctions restrictions by virtue of Mr Putin’s designation, and may provide some comfort to companies that they will not face enforcement action solely on the control theory articulated by the Court of Appeal in circumstances where they deal with non-designated private sector Russian entities. That said, the statement does not have the force of law, and is somewhat equivocal in relation to the position of public sector bodies, such that an amendment to the relevant legislation would be the optimal route to ensure clarity in this area.

 

 

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Court of Appeal confirms judgments can be entered in favour of Russian sanctioned parties but leaves uncertainty in relation to the “ownership and control” test

13 October 2023

The Court of Appeal has confirmed that UK sanctions do not preclude the entry of judgments in favour of Russian sanctioned parties: Mints v PJSC National Bank Trust [2023] EWCA Civ 1132.

The court also held that the Office of Financial Sanctions Implementation (OFSI) is entitled to license a sanctioned party to pay an adverse costs order, security for costs or damages on a cross-undertaking in damages. It can also license payment of a costs order in favour of a sanctioned party.

Significantly, although obiter (in light of the findings summarised above), the court also considered the “ownership and control” test under the UK sanctions regime, which sets out the circumstances in which companies which are not themselves designated persons must be treated as subject to asset freeze restrictions on the basis of their ownership or control by such persons. The court concluded that, contrary to the High Court’s finding, there was no carve-out to the ownership and control test for control exercised through political office and, accordingly, it could be said that Mr Vladimir Putin (Russian President and a designated person) may be deemed to control “everything in Russia” for the purposes of the regulations.

Although obiter, the court’s comments on this issue will plainly give rise to additional uncertainty for UK businesses dealing with Russian counterparties, particularly state-owned entities and government bodies (as well as businesses in other jurisdictions where UK sanctions have been imposed on political organisations and leaders).

It is unlikely that the UK government can have intended for all Russian companies to become subject to restrictions by virtue of Mr Putin’s designation, in circumstances where only 160 businesses were listed as designated at the time of the first instance decision, and a Foreign Office press release issued at the time of the designation of the governor of the Central Bank of Russia, Ms Elvira Nabiullina, stated that the government did not consider that she controls the Central Bank of Russia for the purposes of the sanctions regime. In addition, although the court heard submissions on the interpretation of the relevant regulation, it was not asked to determine whether Mr Putin does in fact control every company in Russia and the court cannot be taken to have made a factual finding in these terms.

Nonetheless, it would likely provide clarity if the government would review the wording of the regulations in order to make its intentions clear.  In the meantime, clarification from OFSI as to the basis on which it will (or will not) take enforcement action based on this theory of control is likely to be welcomed by the market.

Background

The appeal arose in ongoing proceedings brought by the claimants, PJSC National Bank Trust (NBT) and PJSC Bank Otkritie Financial Institution (Bank Otkritie), in respect of an alleged conspiracy between their representatives and the defendants to enter into uncommercial transactions with companies connected with the defendants. The claimants had obtained a freezing injunction in support of the proceedings.

Russia invaded Ukraine in the course of the proceedings and, shortly after, Bank Otkritie was made a “designated person” for the purposes of the UK asset freezing measures. NBT, which is 99% owned by the Central Bank of Russia, is not a designated person, and nor is the Central Bank itself.

The defendants sought an order to stay the proceedings and discharge cross-undertakings given in connection with the freezing injunction. They argued that: (i) the asset freeze restrictions extended to NBT because it is controlled by two designated persons – Mr Putin and Ms Nabiullina; (ii) the imposition of sanctions precluded judgment being entered against either of the claimants; and (iii) the defendants would be prejudiced were the proceedings to continue, because the claimants could not lawfully satisfy adverse costs orders, provide security for costs or pay any damages awarded on their cross-undertaking.

High Court decision

The High Court (Cockerill J) dismissed the defendants’ application, holding that if judgment could not be entered in favour of a sanctioned person, their fundamental common law right to access the courts would be curtailed. This had not been clearly authorised in the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), and the Russia (Sanctions) (EU Exit) Regulations 2019 (2019 Regulations) made under s.1 of SAMLA. Nor, as a matter of statutory interpretation, would entering judgment in a sanctioned person’s favour amount to making funds available to them or to dealing with their funds. The High Court therefore held that judgment can be entered on the claim of a sanctioned person.

The court ruled that OFSI is entitled to license a designated person to pay adverse costs awards, security for costs or damages on a cross-undertaking. It also held that, even if it was reasonable to assume that the affairs of NBT are conducted in accordance with the wishes of Mr Putin and Ms Nabiullina (this point having been conceded by NBT), the “ownership and control” test does not encompass control obtained via political office.

We discuss the High Court decision in more detail in our blog post here.

Key issues before the Court of Appeal

The High Court granted permission to appeal, in view of the importance of the issues raised. The appeal concerned three issues:

  • Entry of judgment issue: can a judgment be lawfully entered for a designated person by the English court following a trial at which it has been established that the designated person has a valid cause of action?
  • Licensing issue: in circumstances where OFSI can license the payment of a designated person’s own legal costs, can OFSI also license the payment by a designated person in respect of: (i) an adverse costs order; (ii) an order for security for costs; (iii) an order for damages pursuant to a cross-undertaking in an injunction?
  • Control issue: does a designated person control an entity which is not a personal asset of the designated person, but over which the designated person is able to exert influence by virtue of the political office they hold at the relevant time?

Decision

The Court of Appeal (Sir Julian Flaux, Chancellor (who gave the lead judgment), Newey LJ and Popplewell LJ) dismissed the appeal.

Entry of judgment issue

The defendants’ submissions focussed on whether the UK sanctions regime authorised a derogation from the fundamental common law right of access to courts. The Court of Appeal agreed with the High Court’s ruling that this engaged the “principle of legality”, a principle of statutory interpretation which provides that fundamental common law rights can only be curtailed if that is clearly authorised (either expressly, or in clear and unambiguous implicit terms) by primary legislation.

The Court rejected the defendants’ submission that entering judgment would give rise to a judgment debt, which as a matter of statutory interpretation would make “funds” available to designated persons, and would amount to “dealing” with their funds, in breach of Regulations 11 and 12 of the 2019 Regulations. In addition, applying the principle of legality, the regulations do not amount to a clear and unambiguous prohibition on the court entering a judgment in favour of sanctioned persons.

The Court of Appeal agreed with the High Court’s conclusion that the backdrop to the enactment of SAMLA and the 2019 Regulations made clear that Parliament intended to continue the EU sanctions regime (which SAMLA and the regulations replaced), without substantive changes. The previous regime permitted a judgment debt to be paid to sanctioned persons, provided the payment was made into a frozen account (and therefore presumably also for judgment to be entered), and so SAMLA and the 2019 Regulations cannot have been intended to introduce a radical change to the scope of the regime by blocking access to the courts without express wording to the contrary.

Even if the defendants had been correct that entry of a judgment was prohibited, it would not be appropriate to grant a stay of the proceedings. The principle of legality requires that the relevant provision is interpreted as authorising only such intrusion as reasonably necessary to fulfil the objective of the provision in question. Instead of staying the proceedings, the court could have instead entered a declaratory judgment or judgment on liability with quantum deferred.

Licensing issue

The Court of Appeal confirmed the High Court’s finding that OFSI has the power under the 2019 Regulations to grant licences authorising payment of adverse costs orders, security for costs or damages pursuant to cross-undertakings.

Schedule 5, paragraph 3 of the 2019 Regulations permits OFSI to issue a licence “to enable the payment of… reasonable professional fees for the provision of legal services”. This drafting is neutral as to whether the legal services are provided to the designated person or another party, and are wide enough to encompass both. It must therefore allow for the payment of adverse costs orders. It was common ground between the parties that if paragraph 3 permits the payment of adverse costs orders, it must also cover security for costs.

As for damages on the cross-undertaking, the Court of Appeal ruled that OFSI would be entitled to issue a licence under Schedule 5, paragraph 5 of the 2019 Regulations, which enables the payment of “an extraordinary expense of a designated person to be met”. It held that any liability for such damages in excess of the security that had already been paid into court could be an extraordinary expense.

Control issue

Regulation 7(4) of the 2019 Regulations provides that an entity (C) is owned or controlled directly or indirectly by another person (P) if, inter alia, it is reasonable to expect that P would, having regard to all the circumstances, be able “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 noted that because it had found that judgment can be entered in the claimants’ favour and they are entitled to obtain the necessary licences, the question of whether NBT is a controlled person under the regulation did not arise. The court nonetheless addressed the matter obiter, as it had been fully argued and is of general significance.

NBT had conceded at first instance that, if control by virtue of political office could amount to “control” for the purposes of the 2019 Regulations, then NBT would be regarded as controlled for these purposes. The court considered that the High Court had been wrong to conclude that Regulation 7(4) does not encompass control gained by virtue of political office. That is not borne out by the clear and plain language of the provision, and the use of the words “in all circumstances” and “by whatever means” makes clear that there is no limit as to how a designed person can achieve control.

Thus, the court concluded that NBT is controlled by Mr Putin and/or Ms Nabiullina, and went further by commenting that “Mr Putin is at the apex of a command economy. In those circumstances […], in a very real sense (and certainly in the sense of Regulation 7(4)) Mr Putin could be deemed to control everything in Russia.” Ms Nabiullina is the governor of the Central Bank of Russia, which owns 99% of NBT, and her political office reports to Mr Putin, as President.

The court recognised that its conclusions could give rise to absurd consequences, but considered that these arose from the UK government’s designation of Mr Putin “without having thought through the consequences”. This was not a matter for the court to resolve by putting a gloss on the language of the regulations. It was for the executive and Parliament to amend the wording of the regulations to avoid such a consequence.

 

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Sanctions tracker: FCA reports on review of firms’ sanctions controls

2 October 2023

In this post, we provide a round-up of key recent Russia sanctions developments in the UK and EU, including the findings from the Financial Conduct Authority’s (“FCA”) review of firms’ sanctions controls.

UK

FCA review of sanctions systems and controls

On 6 September, the FCA published the results of a recent programme to assess the systems and controls relating to sanctions compliance for over 90 firms across a range of sectors. The review involved proactive assessments of firms’ controls, using a new analytics-based tool, as well as the use of specific intelligence and reporting.

As a result of this work, the FCA has identified a number of examples of both good and bad practice which firms should consider carefully against their own systems and controls in this area. The FCA’s findings cover five key themes:

  • Governance and oversight: perhaps unsurprisingly the FCA identified that firms that had undertaken advanced planning were better placed to implement UK sanctions at speed following the invasion of Ukraine in February 2022. Firms should therefore consider what (if any) further planning they can/should be undertaking in order to be able to respond to future sanctions escalations. The FCA’s observations in this area also relate to the management information provided to senior management on sanctions, noting that they expect improvements to be made where firms cannot show that senior management receive sufficient information or in cases where firms are reliant on global sanctions policies which may not be aligned to the UK position.
  • Skills and resources: the FCA found that some firms still lack adequate resources to ensure effective sanctions screening and note the risks arising where backlogs arise in this area.
  • Screening capabilities: the findings in this area emphasise the importance of firms being able to demonstrate that their sanctions screening tools are properly calibrated, both to the UK sanctions regime and to the risks faced by the firm.
  • Customer due diligence (“CDD”) and know your client (“KYC”) procedures: consistently with some of the themes emerging from recent enforcement action, the FCA note that they have continued to identify instances of low quality CDD and KYC assessments and backlogs which may contribute to a failure to identify sanctioned individuals.
  • Reporting breaches to the FCA: the FCA emphasise the importance of timely and accurate reporting, noting that they have observed inconsistencies across firms.

FCA supervised firms should consider the FCA’s findings in detail and evaluate their approach to identifying and assessing sanctions risks, taking action where appropriate. The FCA note that they will continue to work closely with partner agencies and industry to share information and coordinate where appropriate. Where the FCA identify issues, they will “seek out the root causes and ensure effective remediation, which could include the use of regulatory tools”. Firms should therefore assume that sanctions systems and controls will continue to be an area of supervisory focus for the FCA.

Recent challenge to UK designation

In a recent High Court case, a British citizen sought to challenge the Foreign Secretary’s decision to designate him as subject to the UK’s asset freeze under the challenge process set out in the Sanctions and Anti-Money Laundering Act 2018. The challenge was dismissed with the court finding that, ultimately, the executive remains best placed to assess the effectiveness and appropriateness of different methods of achieving its objectives, and the court will be reluctant to second guess those decisions.

For more detail, please see our separate blogpost.

New general licences and licensing grounds

On 29 September, the UK’s Russia statutory guidance was amended to include a new licensing ground regarding various trade sanctions prohibitions on the provision of particular goods and services to Russia. The Export Control Joint Unit will consider licensing transactions that are necessary for the purposes of divestment from Russia.

On the same day, the Office of Financial Sanctions Implementation (“OFSI”) published a new general licence (“GL”) permitting the return of payments which:

  • have been received by a non-designated credit or financial institution;
  • directly from an institution which is also not designated; but
  • which has at some point in the chain of payments been processed by a designated bank acting as originating, correspondent or intermediary institution; and
  • where the original account holder and intended recipient are also not designated persons.

The GL will apply until 1 December 2023 and is prefaced by a note that it is issued for the purpose of providing certainty and does not reflect a view that transactions of the type outlined above will engage UK sanctions.

OFSI has also recently published a separate GL permitting designated persons to make payments to water companies for water and sewage.

New UK designations

On 29 September, the UK announced the designation of ten individuals and one entity said to have been involved in Russian sham elections in Ukraine. The new designated persons include the Central Election Commission of Russia as well as a number of officials and are listed in this OFSI notice.

Ban on Russian-origin iron and steel

The UK imposed a ban on the import of Russian iron and steel products processed in third countries in April 2023 (see our previous blogpost for details). Those measures came into effect on 30 September.

To accompany the coming into force of the ban, the UK has published guidance on the scope of these restrictions and the supply chain evidence that businesses can provide in order to demonstrate compliance.

EU

New designations

On 8 September, the Council of the EU announced the addition of six individuals to its Global Human Rights asset freeze list on the basis of serious human rights violations in Russia and the occupied regions of Ukraine. The relevant names can be found in Council Implementing Regulation (EU) 2023/1715.

Commission guidance

The European Commission has continued to update and expand its Russia sanctions FAQs. In addition, the Commission has published specific guidance for EU operators in relation to the due diligence that should be undertaken to address the risk of sanctions circumvention.

 

Susannah Cogman
Susannah Cogman
Partner
+44 20 7466 2580
Elizabeth Head
Elizabeth Head
Of Counsel
+44 20 7466 6443

OFSI updates guidance on enforcement and monetary penalties for financial sanctions breaches and publishes first breach report without imposing a monetary penalty

8 September 2023

On 31 August 2023, the Office of Financial Sanctions Implementation (“OFSI“) published several updates to its Enforcement Guidance. These provide some further clarity about OFSI’s assessment of financial sanctions breaches, and approach to its power to publish details of a financial sanctions breach where it has decided not to impose any monetary penalty (a “Disclosure Report“).

The updates provide that:

  • OFSI categorises financial sanctions breaches as follows: lesser severity, moderate severity or sufficiently serious to justify a civil monetary penalty. Those categories were not previously referred to in OFSI’s Enforcement Guidance.
  • Lesser severity cases are likely to be dealt with via a private warning letter, provided there are no significant aggravating factors, and the breach does not form part of a wider pattern. Moderate cases are likely to be dealt with via a Disclosure Report if OFSI considers a warning letter would be too lenient but a monetary penalty would be disproportionately punitive.
  • In addition to moderately severe cases, Disclosure Reports may also be considered to be fair and appropriate under other circumstances, including where there are valuable lessons to be learnt for the industry and, exceptionally, where it is not in the public interest to issue a monetary penalty (e.g. in humanitarian cases). Reports highlighting industry lessons may focus on an individual case or several cases of a similar nature which may be aggregated.
  • Disclosure Reports will usually publicly name the firm or individual who has committed the breach and provide a summary of the facts of the breach. Where such a person is named, OFSI will contact them in advance to provide them with the opportunity to make any representations in relation to its finding.

Also on 31 August 2023, OFSI published a Disclosure Report for the first time. Firms will wish to consider this report and whether it has any read-across value for their systems and controls.

Commentary

When OFSI first acquired the power to publish Disclosure Reports in June 2022, there was uncertainty about how, and how extensively, this would be used. This was particularly so in light of the relatively low number of monetary penalties imposed by OFSI to date for breaches of UK financial sanctions. The updates to OFSI’s Enforcement Guidance, and first Disclosure Report, provide a clear indication of OFSI’s intention to use this type of report to communicate its expectations about sanctions compliance. Many will welcome an increase to the level of guidance and commentary provided by OFSI, given the comparatively limited practical guidance available to those seeking to comply with UK financial sanctions. Equally, there remains significant interest in whether and when OFSI will take enforcement action against persons who have deliberately sought to breach financial sanctions, as opposed to financial institutions who have sought to comply, made an error, and self-reported their breach.

 

Susannah Cogman
Susannah Cogman
Partner
+44 20 7466 2580
Elizabeth Head
Elizabeth Head
Of Counsel
+44 20 7466 6443
Ali Grodzki
Ali Grodzki
Senior Associate
+44 20 7466 6329

Sanctions tracker: UK issues general licence in respect of legal services restrictions

23 August 2023

The UK introduced restrictions on the provision of legal services to Russia in June 2023 (as summarised in our previous post). Since then, the legal industry has raised a number of concerns about the drafting of the relevant legislation, culminating in the issuance of a new general licence (the “GL”) which seeks to address some of the most significant unintended consequences arising from the new restrictions. In this post, we review the provisions of the GL and the remaining issues with these restrictions, as well as providing a round-up of key recent Russia sanctions developments in the UK and EU.

Continue reading →

Sanctions tracker – UK introduces legal services restrictions

30 June 2023

The UK’s long-awaited sanctions restricting the provision of legal services to Russia were announced on 29 June. The announcement gives a somewhat misleading impression of the law, and we summarise the new restrictions in this post.

The new measures are introduced by the Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2023 (the “Amending Regulations”), which amend the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Russia Regulations”). Continue reading →

Sanctions tracker: EU adopts 11th sanctions package and UK introduces Russia-related legislation

29 June 2023

Following its announcement of an 11th package of Russia sanctions in May (which we covered here), the European Union has now adopted the package. Key elements of the 11th sanctions package include fresh targeted sanctions against individuals and entities, an enlargement of restrictions on the sale, export and transit of certain goods and technology, as well as additional measures to prevent sanctions circumvention.  We summarise the key elements in this post, along with a round-up of other recent sanctions developments from the UK. Continue reading →