First Significant UK Sanctions Judgment Handed Down

At a Glance

• 2023 has seen the first court rulings on challenges to the UK’s post-Brexit sanctions regime.
• The definition of “control” under Regulation 7 of the Russia Regulations has been interpreted widely enough by the Court of Appeal to potentially include almost every company in Russia.

Background

In response to Russia’s invasion of Ukraine in February 2022 the UK, in parallel with the U.S. and the EU, significantly expanded its sanctions against Russia by imposing wide restrictions on trade, aircraft, shipping, immigration and financial sanctions including asset freezes against designated individuals and entities, restrictions on financial markets and services and directions to cease doing business.

The sanctions are set out in the Russia (Sanctions) (EU Exit) Regulations 2019 (Russia Regulations) which have had 20 sets of often extensive amendments since the invasion of Ukraine in February 2022. There have also been several sets of amendments to the similar Republic of Belarus (Sanctions) (EU Exit) Regulations 2019 (Belarus Regulations). These regulations are made under the Sanctions and Anti-Money Laundering Act 2018 which replaced the EU sanctions rules that had applied pre-Brexit.

The Office of Financial Sanctions Implementation (OFSI), a department of HM Treasury, has significantly expanded since the invasion in order to deal with the increased volume of work but, perhaps inevitably given the rapid expansion of the sanctions, implementation has not been without its difficulties in their detailed application. This has prompted a number of legal challenges which are working their way through the UK courts.

Court Rulings

The first two judgments concern challenges brought by designated persons.

In the Synesis case (LLC Synesis v Secretary of State for Foreign, Commonwealth and Development Affairs [2023] EWHC 541 (Admin)) judgment was handed down by the High Court in March 2023. LLC Synesis, a Belarusian technology company, lost its challenge against its designation which had related to its provision of a video surveillance system to the Belarus government.

In the Shvidler case (Shvidler v Secretary of State for Foreign, Commonwealth and Development Affairs [2023] EWHC 2121 (Admin)), decided in the High Court in August 2023, Eugene Shvidler also failed in his challenge to being a designated person under the Russia Regulations. His designation related to being an associate of Roman Abramovich and also a director of Evraz plc which has extractive operations in Russia.

These decisions show that the courts will allow the Foreign, Commonwealth and Development Office (FCDO) a wide discretion in deciding who to designate for sanctions purposes and that concerns about individual rights or hardships will not count against foreign policy aims of the highest order.

The outcome of the third case is more significant and has been widely anticipated.

The Boris Mints case (Boris Mints and others v PJSC National Bank Trust and Another [2023] EWCA 118 (Comm)) was originally commenced in the High Court in 2019 and later appealed, with judgment handed down in October 2023. The Claimants were two banks NBT and Bank Otkritie. There were three questions relating to sanctions that were dealt with by the court in this appeal:

1. Can a judgment be lawfully entered by the court for a designated person, following a trial which has established that they have a valid cause of action?
2. Can OFSI authorise litigation steps such as favourable or adverse costs orders or payment of damages in relation to a designated person?
3. Does a designated person (in this case Vladimir Putin or Elvira Nabiullina, the governor of the Central Bank of Russia) “control” an entity within the meaning of the Russia Regulations, where the entity is not a personal asset of the designated person, but they can nevertheless exert influence over it as a result of employment or political office held at the relevant time?

The Court of Appeal unanimously dismissed the appeal. It upheld the decision of the High Court in favour of the banks that the entry of a judgment in support of a designated person was not prohibited by the Russia Regulations. On the second point, the Court of Appeal also upheld the decision that the litigation steps in question could be authorised by OFSI.

However, the most significant part of this judgment was in reference to the third question of the interpretation of “control” in Regulation 7 of the Russia Regulations. Although the discussion on this point did not affect the outcome as a result of the conclusions reached on the first two questions, the point was still addressed as it had been fully argued by the parties and it was of general significance.

It was found that NBT is “controlled” by Putin and/or Nabiullina within the meaning of the Russia Regulations. The Court of Appeal stated the importance of interpreting Regulation 7 within the plain meaning of its wording. It was found that the Regulation covers a designated person who exercises control over another company, irrespective of whether they have any form of ownership of the company. “Control” was interpreted in terms of sufficient influence and power, rather than direct ownership, and there is no limit in the provision as to how this control is achieved. Flaux C noted that although the implications of this are wide and far reaching — the “consequence might well be that every company in Russia was “controlled” by Mr Putin and hence subject to sanctions” — it is the correct interpretation of the Regulations in their current form. “Control,” as stated in the Russia Regulations, has a “clear and wide” meaning and it looks likely that there will be a significant increase in the number of Russian entities that fall within the sanctions.

FCDO has commented that it is considering the implications of the judgment but where it considered that a public official was exercising control over a public body it would designate the public body. There was also no presumption that the existence of a designated public official in Russia (or elsewhere) was sufficient evidence that they exercised control over a private entity based or incorporated in that country.

Conclusions

The analysis of “control” in the Boris Mints case, amongst other case law, has demonstrated that the Russia Regulations may lead to a much wider range of sanctioned entities than originally expected. The effect of the Flaux C’s interpretation is so broad that in effect any Russian entity in Russia’s “command economy” could now be caught by Regulation 7. Whether a further appeal to the Supreme Court, or a re-writing of the Russian Regulations are coming remain to be seen, but for the time being, the implications of this ruling will be extensively felt.