Thought for the Week: Are all Russian companies "controlled" by Putin?

An English Court of Appeal judge recently suggested in the case of PJSC National Bank Trust (NBT) and PJSC Bank Otkritie (Otkritie) v Mints & ors [2023] EWCA Civ 1132 that every company in Russia could be regarded as "controlled" by Russian President Vladimir Putin and therefore targeted by UK financial sanctions.  We take a look at the implications.

The claim

The underlying claim was brought by two Russian banks: Otkritie and NBT, including against four individuals (the Mints).  Shortly after, the UK government designated Otkritie as the target of an asset freeze under the Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia Regulations).  NBT was not designated.  However, the Russia Regulations contain provisions extending the effect of asset freezes to persons "owned or controlled directly or indirectly" by targets of asset freezes. 

The defendants applied to stay the litigation, on the basis that both of the Russian claimant banks were targets of sanctions. 

The defendants alleged that although NBT was not specifically designated, it was controlled by designated persons and therefore subject to financial sanctions, as it was 99 per cent owned by the Russian Central Bank and therefore ultimately controlled by the Governor of the Central Bank Ms Elena Nabiullina or Mr Putin, as it was required by law to transfer 75 per cent of its profits to the Russian Federation.  Both Mr Putin and Ms Nabiullina are designated as targets of a UK asset freeze. 

The two issues to be decided by the Court aside from that of control were: (1) whether it could lawfully enter a judgment when a party was a target of financial sanctions; and (2) whether the Office of Financial Sanctions Implementation (OFSI) could licence the payment of costs or damages to a party so targeted.

Judgment

The Court of Appeal upheld the earlier judgment, refusing a stay on both issues: concluding that the English court could make a judgment in favour of a sanctioned entity and that OFSI could licence the payment of costs or damages. 

Whether or not Mr Putin controlled NBT therefore did not affect the decision on the stay. However, the issue "being of some general significance," Sir Julian Flaux PC addressed it anyway, on an obiter basis (therefore his comments are not binding precedent, but would be persuasive in future).

He found that for the purposes of Regulation 7 (the "control" provisions in the Russia Regulations), there was no limit to the mechanism by which a person can exercise "control" over a company – this could be exercised through political office. Put another way, the question was who "calls the shots"? Sir Julian stated that Mr Putin is "at the apex of a command economy" and, therefore "could be deemed to control everything in Russia". Whilst he recognised this led to "absurd consequences", meaning that any Russian entity could potentially be treated as targeted by UK sanctions, he regarded this as a result of the UK government's choice to list Mr Putin as a "designated person".

Key takeaways

So how might this affect those dealing with Russian entities?

• Potential increase in entities subject to sanctions: whilst not binding, if the obiter comments are followed by other English courts, firms need to be aware that this could hugely increase the number of entities potentially targeted by UK sanctions.
• However, small chance of enforcement action: in response to the judgment, the UK Foreign Office (which is responsible for deciding whom to designate as a target of sanctions) and OFSI have issued statements to the effect that:
  
  
  • when designations are made they will aim to make it clear when they consider that a public body is controlled by a public official by designating both the official and the body; and 
  • there is no presumption that if a private entity is based in or incorporated in Russia that is itself sufficient evidence to demonstrate that a public official in that country exercises control over that entity (which suggests that the Court's obiter comments do not reflect the Government's intended interpretation of the control test).
    
    We are unlikely therefore, to see a raft of enforcement action being taken against firms which have had dealings with Russian companies since Mr Putin's designation.
• Legislative change is on the cards: given the UK Government's statement is not legally binding, the Government may need to amend the Russia Regulations to clarify matters. Options could include employing the US approach (removing the "control" test entirely and leaving only a clearer and more objective "ownership" test – although this is unlikely); or to amend the drafting of the existing "control" test, such as specifying criteria for "control", the existence of which creates a rebuttable presumption, similar to the EU approach (which applied in the UK prior to Brexit); or to include a statutory exemption from the meaning of "control" for political control. Or the government could give its statements about control at the point of designation greater legal force.

• There may be interim measures: We have seen the Government use a general licence when issues have been identified with sanctions legislation after it has come into force (for example, the legal advisory services ban). However, a general licence from OFSI may cover future dealings with Russian entities, but this could not cover previous transactions as licences cannot be retrospective.  Issuance of a licence would also imply that the Government accepted that but for the licence it would be unlawful to deal with entities in Russia.  

The UK's "control" test has always been difficult to navigate given its broad drafting, and the Court's recent judgment only serves to emphasise that.  The government will be feeling pressure to act quickly to resolve the uncertainty.  Watch this space, and in the meantime, keep an eye on our UK Sanctions Tracker for all the latest developments.

Authors: Philip Linton, Tom Cummins, Angus Rance, Sophie Law