The recent English Court of Appeal judgment on Mints & others v PJSC National Bank Trust & PJSC Bank Otkritie Financial Corporation  EWCA Civ 1132 (“Mints”) on 6 October 2023 discussed several fundamental issues pertaining to concepts under the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”) and the secondary sanctions regulations thereunder, in particular the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Regulations”). The judgment can be found here.
Sir Julian Flaux C (who wrote the leading and only substantive judgment) dealt with several issues in respect of the appeal, one of which was the “control” test under SAMLA and the Regulations. Sir Flaux C’s statements in relation to the “control” test were obiter, given his determination on the other grounds of appeal, but his views followed a four-day hearing and consideration of a reasoned High Court judgment on the point from Cockerill J.
It has been well established that the UK asset freeze measures apply to entities directly or indirectly “owned” or “controlled” over 50% by an asset freeze target. Whilst the “ownership” test has generally been straightforward to apply based on UK company law principles, the concept of “control” has often presented challenges due to the lack of definitive guidance and practical application of the test.
Regulation 7 of SAMLA provides for the meaning of “owned or controlled directly or indirectly”:
“7.(1) A person who is not an individual (“C”) is “owned or controlled directly or indirectly” by another person (“P”) if either of the following two conditions is met (or both are met).
7. (2) The first condition is that P:
(a) holds directly or indirectly more than 50% of the shares in C,
(b) holds directly or indirectly more than 50% of the voting rights in C, or
(c) holds the right directly or indirectly to appoint or remove a majority of the board of directors of C.
7. (3) Schedule 1 contains provision applying for the purpose of interpreting paragraph (2).
7. (4) The second condition is that it is reasonable, having regard to all the circumstances, to expect that P would (if P chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with P’s wishes.”
It is Regulation 7(4) which was the subject of contention in the Mints appeal, and whether it could be said that Mr. Putin or Ms. Nabiullina (both of whom are subject to UK asset freeze measures), could exercise influence over PJSC National Bank Trust and/or PJSC Bank Otkritie Financial Corporation such that the “control” test was satisfied.
Sir Flaux C’s Obiter Dicta
At the heart of the issue was whether Regulation 7(4) was essentially “backstopping” ownership which fell outside the shareholding test under Regulation 7(2), rather than an expansive and standalone concept of “de facto” control. Sir Flaux C’s conclusion was that National Bank Trust was controlled by Mr Putin and/or Ms Nabiullina based on the political office they held. He recognised the potentially dramatic implications of such judgment, but noted “the remedy is not for the judge to put a gloss on language to avoid that consequence, but for the executive and Parliament to amend the wording of the Regulations to avoid such a consequence”.
Sir Flaux C’s views were premised on the following:
- He rejected the view that a sanctioned person’s right to exercise, or actually exercises, dominant influence or control over an entity should be limited to shareholder rights. The rules are wider and apt to catch a designated person who, without being an owner, has sufficient influence or power, possibly through a contract to control the exercise of a right held by another.
- He concluded that Regulation 7(4) was cast in wide terms and does not have any limits as to the means or mechanism by which a designated person is able to achieve the result of control, that the affairs of the company are conducted in accordance with his wishes.
- He rejected Cockerill J’s views that Regulation 7(4) is ancillary to Regulation 7(2), plugging the gap where a designated person has effective personal control and somehow ancillary to Regulation 7(2). In doing so, he rejected submissions that Regulation 7(4) dealt with cases of more complex trust structures, not easy to fit into Regulation 7(2) such as discretionary trusts.
- He rejected Cockerill J’s views that there was a carve out from Regulation 7(4) for control through political office.
- He also rejected submissions that extending the meaning of Regulation 7(4) in such a way cut across the presumption against doubtful penalisation and led to absurd consequences (in short, the suggestion that concluding Mr. Putin was able to exert sufficient control over a company such that the company was tainted by the sanctions against him, would undermine the UK designation programme and indeed the whole Russia sanctions programme). His rationale for this was:
[T]he absurd consequences 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, as he put it, Mr Putin is at the apex of a command economy. In those circumstances, consistently with the concession I mentioned in , in a very real sense (and certainly in the sense of Regulation 7(4)), Mr Putin could be deemed to control everything in Russia.
UK Government Reaction
In response to this case and queries raised by various market operators, legal counsel and commentators, the Foreign, Commonwealth and Development Office (“FCDO”) issued an “e-alert” on 16 October 2023 as follows:
“The Government is carefully considering the impact of the Court of Appeal’s judgment in Mints & others v PJSC National Bank Trust & another, in particular the Court’s views that PJSC National Bank Trust is ‘controlled’ by Designated Persons by virtue of their political office, noting that the case was not decided on this point.
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.
In the interests of reducing any uncertainty, we are exploring the options available to the Government in clarifying this position further.”
Suffice to say that such clarification is eagerly awaited, noting the extensive implications and ramifications this could lead to, if not adequately addressed.