Posted: 27/11/2023
Further clarification on the ‘ownership and control’ test has been provided by the Office of Financial Sanctions Implementation (OFSI) and Foreign, Commonwealth & Development Office (FCDO), as well as by the High Court in a recent decision.
The High Court has rejected the suggestion that Vladimir Putin could be viewed to ‘control’ every company in Russia for UK asset freeze-test purposes, and emphasised that the question of whether there is such ‘control’ depends on the specific circumstances of each case. Following this decision, the OFSI and FCDO issued joined guidance on ownership and control, which confirms this decision.
Following the Court of Appeal’s judgment (see this previous article on Mints v PJSC National Bank Trust [2023] EWCA Civ 1132) and obiter comments on ‘ownership and control’, the OFSI and FCDO have published a joint statement.
The joint statement can be found here. It provides helpful guidance, specifically that the UK government does not consider that Mr Putin exercises indirect or de facto control over all entities in the Russian economy merely by virtue of his occupation of the Russian presidency.
In terms of public bodies, the FCDO clarifies that it does not ‘generally consider designated public officials to exercise control over a public body in which they hold a leadership function’. The FCDO made it clear that it did not intend that the sanction measures were to prohibit routine transactions with public bodies, including the following non-exhaustive list: taxes; import duties; licenses; and other ordinary/incidental payments.
The joint statement does warn however that in situations where there was sufficient evidence to demonstrate that the designated person exercises control over the public body, within the meaning of the regulation (ie regulation 7(4) of the Russia (Sanctions)(EU Exit) Regulations 2019), then the relevant legal test under UK sanctions regulations may be met. A key consideration would be 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 joint statement also provides that ‘[t]here is no presumption on the part of the UK government that a private entity is subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which that official has a leading role in economic policy or decision-making.’ As such, the FCDO clearly requires further fact-specific evidence to demonstrate that the relevant official exercises de facto control over that entity.
Clearly overruling the obiter discussion in the Mints case, the joint statement clarifies that in so far as regulation 7(4) of the Russia (Sanctions) (EU Exit) Regulations 2019, the UK government does not consider that President Putin exercises indirect or de facto control over all entities in the Russian economy. The statement clarifies that ‘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’.
Additionally, the High Court has handed down a binding decision in relation to the ‘ownership and control’ test, rejecting previous suggestions that Vladimir Putin could be viewed as being able to ‘control’ every company in Russia for UK asset freeze-test purposes. It confirms that the question of whether there is ‘control’ depends on the specific facts of each case, and the central focus is whether the sanctioned person is exercising de facto control of the funds made available to an entity.
The High Court granted summary judgment against an oil trading company that defaulted on an instalment for a purchase of Nigerian crude oil bought from a subsidiary of a Russian oil company. Summary judgment was also granted against the buyer’s parent company guarantor.
The court applied and distinguished the obiter comments arising out of the judgment in Mints v PJSC, and in doing so, dismissed the sanctions defences put forward by the defendants.
Background
On 29 April 2022, Litasco, a Swiss oil marketing and trading company which is wholly owned by Lukoil PJSC, a Russian oil company, entered into a contract to sell Der Mond, a Senegalese oil company, 950,000 barrels of ERHA (Nigerian) crude oil, CFR Dakar, Senegal. The cargo was delivered but Der Mond failed to pay the full balance of the purchase price, and Litasco commenced proceedings to recover the unpaid amount.
The defendants put forward two arguments; one concerning force majeure, and the other, sanctions. Both arguments were dismissed, but this analysis will focus only on the sanctions arguments.
The sanctions defence
Neither Litasco nor Lukoil PJSC were sanctioned entities under the UK Russia (Sanctions) (EU Exit) (Amendment) Regulations 2019. Litasco’s former CEO, Mr Alekperov, was sanctioned, but had stood down after he was sanctioned and only held 8.5% of the stakes in the company, which was far below the required threshold to exert a controlling stake in Litasco. There was also no evidence that he continued to exercise control over Lukoil.
Moreover, in contrast to the Mints case, where the Russian bank was 97.9% owned and controlled by a Russian public body (the Central Bank of Russia) and described as ‘an organ of the Russian state’, over which President Putin exercised de facto control, the defendants in this case did not point to any similar evidence that showed Litasco as being under the de facto control of Mr Putin.
Mr Justice Foxton explained that a ‘better interpretation of regulation 7(4) is concerned with an existing influence of a designated person over a relevant affair 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, for regulation 7(4) purposes, of companies of whose existence he was wholly ignorant, and whose affairs were conducted on a routine basis without any thought of him.’
The judge also endorsed Mr Rabinowitz KC’s summary of the effect of regulation 7(4), namely that it applies ‘when the designated person ‘calls the shots’…not the wider formulation… if the designated person calls the shots, or can call the shots’.
In coming to his decision, Mr Justice Foxton noted that 'the issue of control has, as its central focus, the ability of the designated person to control the use of the funds made available’ and that there was no evidence to show that making funds available to Litasco amounts to ‘making funds indirectly available to’ the Russian president.
Mr Justice Foxton’s judgment, happily coinciding in time with the joint statement by OFSI and the FCDO, clarifies that the ‘control and ownership’ test is not as open-ended as the Mints decision had suggested, and that a fact-specific approach is required in each case. Together, these sources have provided some much welcomed clarification vis-à-vis both public bodies and private entities. Nonetheless, due diligence remains as necessary as ever to ensure the relevant entity is not in fact controlled by a designated person.
This article was co-authored with Melwinder Gill, trainee solicitor in the marine, trade and energy team.
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