UK: Bank Otkritie v Mints Case And Ownership And Control

Key Takeaways

• On 17 November 2023, the Foreign, Commonwealth & Development Office (FCDO) and Office of Financial Sanctions Implementation (OFSI) published new guidance on Ownership and Control: Public Officials and Control (the New Guidance). This follows and clarifies the UK Court of Appeal judgment on 6 October 2023 in Boris Mints & Ors v PJSC National Bank Trust & Anor(the Mints Case) which resulted in ambiguity as to whether sanctioned public officials should be considered to control public and private Russian entities by virtue of their status as public officials.
• The New Guidance builds on the FCDO's earlier response of 16 October 2023 (the 16 October Response) to confirm that the FCDO "does not generally consider designated public officials to exercise control over a public body in which they hold a leadership function" and that the UK government does not consider "President Putin to exercise indirect or de facto control over all entities in the Russian economy merely by virtue of his occupation of the Russian Presidency".
• The New Guidance re-affirmed that ownership and control must be determined using situation-appropriate, risk-based due diligence on a case-by-case basis, and that a public official would only be considered to exert ownership or control over a relevant entity if there was "sufficient evidence" to do so under the relevant legal tests read in conjunction with associated guidance (See Enforcement Guidance and NCA Red Alert for example).
• These clarifications were echoed in the 15 November 2023 UK High Court judgement in Litasco SA v Der Mond Oil and Gas Africa (the Der Mond Case) and at the 20 November 2023 webinar with OFSI and FCDO officials.
• However, despite the clarifications provided in the materials referenced above, currently, there remains outstanding ambiguities on the scope and construal of ownership and control, as flagged in the Law Society and Bar Council Sanctions and Anti-Money Laundering (AML) Working Group joint note (the Law Society Note) issued on 13 November 2023. ¹

Analysis

• On 6 October 2023, the UK Court of Appeal issued its judgement on the Mints Case—a dispute where two Russian banks, PJSC National Bank Trust (NBT) and PJSC Bank Otkritie Financial Corporation ("Otkritie"), claimed that the defendants conspired with the banks' representatives to "enter into uncommercial transactions with companies connected with the [defendants] by which loans were replaced with worthless or near worthless bonds".
• In that judgement, the UK Court of Appeal provided obiter comments on the question of ownership and control with respect to public officials, further to Otkrite's sanctioned status and the defendants' claim that NBT should be similarly deemed sanctioned because, despite not being formally listed, it was nonetheless 'owned' or 'controlled' by sanctioned persons President Putin and Elvira Nabiullina (the Governor of the Central Bank of Russia (CBR)) given NBT's 99% ownership by the CBR and the CBR's statutory obligation to pass 75% of its profits to the Russian Federal Budget.
• In interpreting Regulation 7 of The Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulation) on the definition of ownership and control, the UK Court of Appeal concluded that the qualifying conditions—which include whether it is reasonable to expect that a person would be able to ensure that the affairs of the entity are conducted in accordance with the person's wishes—were drafted widely enough to allow one to infer and establish control by whatever means, including political and corporate office, and that the presence of such persons in NBT's ultimate corporate structure gave grounds for claiming NBT owned or controlled by President Putin and Elvira Nabiullina.
• Whilst the UK Court of Appeal acknowledged that the consequence of such a reading "might well be that every company in Russia was 'controlled' by Mr Putin and hence subject to sanctions", they claimed that it was "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".
• To the UK Court of Appeal, the "the absurd consequences" which may result from this interpretation "arise not from giving the Regulation its clear and wide meaning but from the subsequent designation by the Government of Mr Putin, without having thought through the consequences 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".
• In the wake of these comments, the FCDO issued the short-form 16 October Response, where they clarified that:
  • The "FCDO would look to designate a public body where possible when designating a public official if FCDO considered that the relevant official was exercising control over the public body".
  • "There is no presumption on the part of the Government that a private entity based in or incorporated in Russia or any jurisdiction in which a public official is designated is in itself sufficient evidence to demonstrate that the relevant official exercises control over that entity".
• Despite that response, the Law Society Note issued on 13 November 2023 continued to highlight the "extreme degree of uncertainty" surrounding the notion of 'control' further to the points raised in the Mints Case. Among other things, the Law Society Note stated that the UK government had been inconsistent in their own application and tacit construal of this "extremely broad test" and that the meaning and application of control continued to be "uncertain in a number of key respects". For example:
  • When is it reasonable to expect that a person (P) could achieve the result that the affairs of an entity (C) are conducted in accordance with that person's wishes (if P chose to, in most cases or in significant respects, by whatever means directly or indirectly)?
  • How is this to be determined, and with what level of due diligence?
  • What does in "significant respects" mean?
  • Is "if P chose to" confined to meaning if P chose to at present; or if not, what are the temporal limits—for example, if P could not at present control C based on C's current management, but had the means to change C's management, is the test satisfied or not?
  • What is the place of the "dominant influence or control" test (as separately set out in paragraph 9(3)(d), Schedule 1 of the Regulation) when control is already covered at article 7(4) of the Regulation?
• Against the background of this wider uncertainty, OFSI issued New Guidance on 17 November 2023. The New Guidance repeats the points made in the 16 October Response and further clarifies that:
  • "[T]he FCDO does not generally consider designated public officials to exercise control over a public body in which they hold a leadership function" and that the FCDO "does not intend for sanctions measures targeting public officials to prohibit routine transactions with public bodies, including (but not limited to): taxes, fees, import duties, the purchase or receipt of permits, licences or public utility services, or any other ordinary and incidental payments".
  • "[T]he 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".
• However, designated public officials could still be considered controlling an entity "if there was sufficient evidence to demonstrate that the designated individual exercises control over the public body" to the satisfaction of the relevant legal tests. For example, "whether the designated person derives a significant personal benefit from payments to the public body, such that they amount to payments to that person rather than the public body". The New Guidance contains additional examples of such sufficient evidence and confirms that there is no "one-size fits all approach" to due diligence—the appropriate level and type of due diligence must be determined on a case-by-case basis.
• By providing this New Guidance, OFSI and FCDO have aligned with conflicting court comments made in the Der Mond Case, which stated that one could not consider President Putin as 'controlling' Litasco SA (a Swiss oil trading company owned by Lukoil PJSC, a Russian oil company) by mere virtue of his presidency, since ownership and control is "concerned with an existing influence of a designated person over relevant affairs of the company, not a state of affairs which a designated person is in a position to bring about. Were matters otherwise, it would follow that President Putin was arguably in control [...] of companies of whose existence he was wholly ignorant, and whose affairs were conducted on a routine basis without any thought of him".
• At a webinar on 20 November 2023, OFSI and FCDO officials re-iterated the expectation that companies should undertake risk-based due diligence of ownership and control issues and that the required levels of due diligence ought to be judged on a case-by-case basis. However, they did not provide further substantive guidance or respond to requests for clarificatory revisions to legislation. Accordingly, various ambiguities as flagged in the Law Society Note remain unaddressed to date despite the clarifications supplied in the New Guidance.

Footnote

1. See joint note linked under "the 'control' test" heading of the Law Society Guidance webpage.

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