UK clarifies approach to sanctions ‘ownership and control’ test

The guidance, issued by the Foreign, Commonwealth and Development Office (FCDO) and Office of Financial Sanctions Implementation (OFSI), follows a controversial decision by the Court of Appeal last month (‘Mints’) in which it observed, among other matters, that two state-owned Russian banks could be deemed to be “owned or controlled directly or indirectly” by Putin – a ‘designated person’ for the purposes of the 2019 Russia (Sanctions) (EU Exit) Regulations (‘the sanctions regulations’).

In a separate judgment, issued earlier this month, the High Court in London ruled that the appeal court’s conclusions in the Mints case did not necessarily apply to private businesses in Russia. Mr Justice Foxton found “no arguable case” that Litasco, a Swiss oil company wholly owned by Russia’s Lukoil PJSC, was “controlled” by Putin for the purposes of the sanctions regulations. The court considered in the Litasco case that the relevant issue was whether a sanctioned individual was in fact, at that time, exerting influence over the business rather than whether that individual could exert such influence at some future point.

Sanctions expert Stacy Keen of Pinsent Masons said that these developments would come as a “welcome relief” to those who had lawful reasons to continue to deal with Russia-incorporated entities or interact more generally with the Russian state and state-owned entities.

“FCDO is explicit in its guidance that it does not intend for sanctions measures targeting public officials to prohibit routine transactions with public bodies including, for example, payment of taxes, import duties and public utility services,” she said.

“A key takeaway from the guidance is the expectation on due diligence. Although the guidance gives comfort that the FCDO does not ‘generally consider’ designated public officials to exercise control over a public body, it does not rule it out as a possibility. Careful consideration should be given of the likely influence any designated individual, including one holding political office, may be able to exert over a company,” she said.

According to the new guidance, the ownership and control test – which, in a Russian context, is set out in regulation 7 of the sanctions regulations – is intended to “ensure that sanctions cannot easily be circumvented” in scenarios where a state-owned or private business is genuinely controlled by a sanctioned official. Whether an entity is owned and controlled by a designated person will depend on the circumstances, and UK individuals and businesses interacting with counterparts in countries to which sanctions regimes apply are expected to “fully consider” the risks of doing so.

The guidance, in line with other publications issued on the UK sanctions regimes, does not specify the nature of any due diligence UK individuals and businesses should undertake. It could, however, include “conducting your own research, requesting further information from the entity, and taking legal advice if unsure about your obligations”, it says.

Public bodies in which public officials who are designated persons perform leadership functions will not automatically be considered by the FCDO as being controlled by that designated person, according to the guidance. Whether control does exist will depend on the circumstances, and may include where 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 guidance states that, where the FCDO believes that the designated person does in fact control the public body, it will seek to designate the public body at the same time as designating the individual.

In cases involving private entities, the guidance states that “no presumption” exists that these will be considered subject to the control of a designated public official simply because they are based or incorporated in that public official’s jurisdiction. Evidence of control will be required. The guidance explicitly refers to the more controversial comments made by the judges in the Mints appeal, stating: “The 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. 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”.

The judge in the Litasco case was able to completely distinguish the position of the oil company from that of the banks in the Mints case, one of which was “97.9% (or 99.9%) owned and controlled by a Russian public body, the Central Bank of Russia” – which, the parties argued, made it “… ‘an organ of the Russian state’ over which president Putin exercised de facto control”. “Against that background, it is perhaps not surprising that it was conceded in that case that [the bank] was subject to the control of president Putin,” Mr Justice Foxton said in his judgment.

“The defendants in this case did not point to any similar evidence said to show (or arguably show) that Litasco was presently under the de facto control of president Putin. Lukoil is not a state-owned body and there is no suggestion that it functions as an organ of the Russian state,” he said.

While the judge acknowledged it to be “strongly arguable” that Putin could in fact step in and take control of Litasco and its assets, he said that the “better interpretation” of the regulations was to do 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,” he said.