In major sanction-imposing jurisdictions including the EU, US and UK, the concepts of 'ownership' and 'control' are two which – whether used independently or together - do not benefit from globally consistent definitions. Although these concepts may have plain and obvious definitions in everyday life, in the world of sanctions they are important concepts, used to determine – for example – scenarios in which an entity which is not itself a 'designated person' (i.e. directly subject to financial sanctions) is nevertheless considered to be subject to financial sanctions because they are 'owned' or 'controlled' by such a person. Well known examples include Chelsea Football Club, which became subject to sanctions last year, by virtue of its ultimate owner – Roman Abramovich – being made a 'designated person' by the UK Government.
Here in the UK, both concepts are now becoming subject to increased judicial scrutiny, forcing the government's hand to issue fresh guidance.
The case of Boris Mints & Ors v PJSC National Bank Trust & Anor  EWCA Civ 1132 caused waves among the sanctions community due to its incredibly wide interpretation of the circumstances in which a designated person could be considered to have "control" over an entity under Regulation 7 of the Russia (Sanctions) (EU) Regulations 2019 ("the Regulations"). In summary, the Court of Appeal held that there is no limit to the "means or mechanism" by which a designated person is able to control an entity. This is particularly significant, bearing in mind that the UK financial sanctions regime envisages that an entity can be considered to be controlled by another designated person (and therefore subject to the same asset freeze provisions) if "it is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person’s wishes" (Regulation 7(4) of the Regulations).
In the Commercial Court, it was held that control by political office fell outside the broad remit of Regulation 7(4) and that only control by "corporate office ", through which a person exercises the power of their position within the corporate hierarchy, would be sufficient. However, the Court of Appeal did not agree and stated that there was "no justification for any such political carve-out, and still less for a corporate carve-out which does not distinguish between different forms of non-ownership control or calling the shots".
These comments naturally caused some consternation amongst sanctions watchers and businesses as they attempted to assess the impact of the Court's reasoning, including if a particular person might "call the shots" and the perhaps surprising and almost offhand assertion in the final paragraph of the judgment that Vladimir Putin could be "deemed to control everything in Russia".
It should be noted that in Mints, the question of whether or not the relevant entity, PJSC National Bank Trust (NBT), was owned or controlled by a designated person was not dispositive and the Court's assertion in relation to Putin was obiter. However, it led to many inferring that doing business with any Russian entity may – due to Putin's status as a 'designated person' – constitute a violation of UK sanctions.
Effect of Mints in other cases
Litasco SA v. Der Mond Oil & Gas Africa SA & another  EWHC 2866 (Comm) was the first reported case to consider Mints and its view on a designated person's control over an entity without that person forming part of its corporate structure. Here the Court had to decide whether a private Russian company was owned or controlled by a designated person, which led to an analysis of the reasoning in Mints on whether the entity may be under the control of Putin, a designated person. The Court distinguished the facts in Litasco on the basis that the company was a private company and not a public body such as the Russian Central Bank in Mints that controlled 99% of NBT. Further, the Court stated that even though Putin had the power to place the Russian parent company under his control should he wish to, the Court held that for the purposes of Regulation 7 (4), it is the current state of affairs of the entity and any existing influence that matters, not the state of affairs that an individual – including Putin - could bring about.
What Guidance says
While Litasco was clearly an attempt to take a pragmatic approach, minimising the impact of Mints and its effect to predominantly public bodies, the Court of Appeal made clear that the narrowing of the control test for the purposes of the UK sanctions regime is a matter for Parliament and it is widely expected that legislation would be passed (or existing legislation amended) to deal with this issue. We have yet to see parliamentary legislation, however; in the meantime OFSI has issued – in collaboration with the Foreign, Commonwealth & Development Office - the Ownership and Control: Public Officials and Control guidance (the "Guidance"), published on 17 November 2023.
There are a few notable points to take away from the Guidance:
- The Guidance explicitly targets the obiter in Mints and bluntly states that "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." Thereby mitigating the drastic implication that every non-designated company in a country could be considered to be controlled by a powerful figure due to the political framework of a country (not just Russia). However, the concern remains that the Guidance is simply a sticking plaster, papering over the cracks in the UK's regime, as identified by Mints, the only proper solution to which may be replacement provisions on 'ownership and control'.
There is some minor clarification in relation to how one should deal with public bodies that have a designated person in a position of leadership. According to the Mints interpretation of Regulation 7, the entire public body could be considered a sanctioned entity in circumstances where a designated person is in control of its affairs. However, the Guidance states, that the UK "would not generally consider designated public officials to exercise control over a public body in which they hold a leadership function", implying that the public body as whole would not – in those circumstances – be subject to the asset freeze provisions. However, it goes on to say – somewhat paradoxically - that measures targeting public officials should not prohibit certain routine transactions from taking place with public bodies.
- There is little useful guidance on how to reasonably determine whether an entity's affairs are being conducted in accordance with a person's wishes and is therefore in that individual's control. The Guidance re-iterates the criteria for assessing direct or indirect control set out in the UK financial sanctions general guidance but this is not new guidance. The Guidance further states 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."
Analysis and the impact for UK companies
We await further updates on the potential for new or amended legislation to address these issues.
In the meantime, the indications in the Guidance that a private entity is not subject to the control of a designated public official simply because that official has a leading role in that jurisdiction, and that a public body is not sanctioned just because its leader is, provides some relief for those who work in or with jurisdictions targeted by UK sanctions.
In addition, the Guidance provides some comfort that – even on a strict, Mints-style interpretation of the Regulations – the risk of enforcement action may be low for cases involving similar fact patterns. However, in order to properly address this 'liability gap' often created where guidance contradicts legislation, each case will need to be carefully analysed and considered on its own facts and – bearing in mind the non-legally binding status of the Guidance - taking appropriate steps to manage enforcement risk will be an ever present consideration. The Guidance also provides little comfort for entities seeking to address the risks that may be posed by the commercial arrangements they may have in place with entities in jurisdictions targeted with UK sanctions, including those that may have links to a designated person or persons. Some entities may be looking to exit such arrangements or refrain from performing certain contractual obligations, in order to remain compliant which would need to be sufficiently justified in order to mitigate the risk of contractual liability.