The Office of Sanctions Implementation was following up on a release from the Foreign, Commonwealth and Development Office which arose from a decision in the Court of Appeal of England and Wales in the case of Boris Mintss and others v PJSC National Bank Trust and PJSC Bank Okritie Financial Corporation with judgment (here: https://www.judiciary.uk/wp-content/uploads/2023/10/Mints-v-PJSC-judgme…) handed down on 6th October.

It is a complex judgment based upon the UK's labyrinthine counter-money laundering and sanctions legislation and regulations.

The circumstances are that, in 2019, the banks (here the Respondents) issued proceedings, in London, against the appellants. The claim was, in essence, that the Mints, of which there are four) conspired with representatives of the banks to enter into transactions which were "uncommercial" and by which the banks would suffer losses of USD850 million. The banks obtained freezing orders and the litigation, which is still on foot, proceeded.

Then Russia invaded Ukraine. A rash of sanctions were issued including one against PJSC BANK OKRITIE FINANCIAL CORPORATION as "the second claimant (i.e. the respondent in the present case) on the basis of being satisfied that it is “supporting and obtaining a benefit from the Government of Russia”."

The Orders, the Court seems to imply, made no sense because the First Respondent owns 99% of the Second Respondent yet was not subject to sanction.

The Mints as appellants claim that the sanctions should apply to the First Respondent because under Russian Law must pay 70% of its profits to The Russian Federation and, therefore, any benefit the original litigation produced will, in whole or in part, be passed to Russia in breach of the sanctions.

It is a long and complex judgment which also takes account of relevant EU law and the transitional and replacement laws following the UK's withdrawal from the EU.

From a layman's perspective, it seems clear-cut.

1. There's a parent company under the substantial control of a sanctioned state. But for whatever reason, that company was not expressly named under the sanctions regime when others were. Is that company nevertheless covered under the general sanctions as are other non-specified companies?

2. If there is a clear channel for funds to the Russian state, is it not logical to assume that the entire chain through which those funds channel is subject to at least the general sanctions?

3. This passage from the judgment, referring to the case at first instance, is pivotal: [the judge] pointed out that it was not suggested that this case was in the territory of a
clear express derogation but rather what was being asserted is a clear implicit
derogation. She identified the appellants’ central point that the derogation from
the fundamental right is “clearly authorised” by The Sanctions and Anti Money Laundering Act, in particular section 3(1)(a) and Regulation 12 which provide that: "a person must not make funds available … to a designated person", submitting that those words cannot, by any process resembling construction, be read as if they said: "save that a judgment debt may be made available to a designated person."

4. The Act restricts the rights of persons designated under the sanctions regime to access to the courts. It does not restrict general rights. In short, the Court of Appeal found, the rishg to challenge the designation in court is restricted but it is open to the parties to continue the litigation. However, where any moneys are ordered to be paid to a sanctioned person, the sanctions apply to the making of the payment ordered as a matter which is entirely discrete from the litigation relating to the claim.

5. The much more tricky question is the status of the frozen funds. The Mints claimed, in essence, that the freezing of "the funds or economic resources of designated persons" is actually a dealing with assets" by or on behalf of a sanctioned entity. Was the court, then, dealing with such assets by making an order? There are deep questions of law considered including the British Virgin Islands case of Taruta in which the judge, obiter said "sanctioned entities retain all their civic rights, including full access to the Courts and an entitlement to have their rights and obligations determined by this Court". The court also agreed with our observation at 4, above, and cited Lord Justice Arden in R v R that the EU Regulation in 2014 "prohibited not the making of a court order but the satisfaction of claims."

There is a great deal more considered but on that point, it is all supportive.

But all of that is background as to why the UK Government is confused and has issued a notice admitting that it is trying to decide what the judgment means in terms of UK issued sanctions.

This is what the government says in its statement: ""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. "

Why does it matter?

There has been a "rule of thumb" that, for sanctions purposes, where a company that is not specifically designated would be treated as designated where a designation of a person met the "significant control" test used for money laundering KYC and company registration purposes.

Now, it appears, that rule of thumb was not correct and that UK GOV requires actual evidence that the designated person exercises control. That would also extend to directors and even non-directors in a position to, but not necessarily proved to, exercise control.

This, it is here argued, a ludicrous proposition. The obtaining of such evidence would be a huge burden on businesses whose only interest in a transaction is to pay it and to avoid making a payment to or for the benefit of a designated person. To look behind the power to exercise control to the actual exercising of that control is a fundamentally different task.

The Treasury, it is here submitted has got it wrong and instead of sitting around scratching its head should fix it, quickly, simply and easily by aligning the sanctions regime with the beneficial owner and persons with substantial control regimes in place for other purposes.

Nigel Morris-Cotterill is a pioneer in the field of financial crime risk and compliance and may be contacted via LinkedIn at https://www.linkedin.com/in/nigelmorriscotterill/