Ownership and Control

On Friday 17 November 2023, the Office of Financial Sanctions Implementation (OFSI) and the Foreign, Commonwealth and Development Office (FCDO) published specific guidance on Ownership and Control in the UK’s sanctions regime, titled ‘Ownership and Control: Public Officials and Control guidance’*. Amid some recent uncertainty as to the proper interpretation of the Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations), specifically Regulation 7(4), this new guidance provides some much-needed clarification but significant questions remain.

*You can read the full guidance here.

Background

As we explained in our update on 15 November 2023, concerns had been raised following the Court of Appeal’s judgment in Mints about the effect of the designation of public officials in certain jurisdictions. The wide interpretation given to Regulation 7(4) of the Regulations by the Chancellor had left open the possibility that the Russian President Vladimir Putin’s position at the apex of a command economy and his ability to “call the shots” meant that he was able to achieve the result of ensuring that any Russian company’s affairs are conducted in accordance with his wishes – thus satisfying the definition of control in Regulation 7(4) and deeming private entities in Russia to be designated in the same way as Mr Putin. Given the similar wording in other UK sanctions regimes, the consequences of the designation of other high profile public officials might have been vast.

The FCDO had indicated shortly afterwards that it was exploring options to clarify its position but that there was no presumption on behalf of the Government that a private entity based in or incorporated in any jurisdiction in which a public official was designated is sufficient evidence to demonstrate that the relevant official exercise control over that entity.

There have been two recent developments in terms of the position of public officials and Ownership and Control. Firstly, the High Court had to consider the effect of Regulation 7(4) in light of the Mints judgment in Litasco SA v Der Mond Oil and Gas Africa SA and Anor [2023] EWQHC 2866 (Comm). Secondly, the FCDO and OFSI jointly issued the promised update on Ownership and Control in relation to public officials.

Litasco

Litasco was a judgment of Foxton J and concerned a dispute over the sale of a cargo of Nigerian crude oil, CFR Dakar, where the Defendant failed to pay the balance of the purchase price to the Claimant, Litasco. The Claimant made an application for summary judgment and one of the points that the Court had to decide was whether there was an arguable sanctions defence. 

One argument put forward by the Defendants, in writing rather than orally, was that Litasco was controlled by Mr Putin within the meaning of Regulation 7(4) and that payment of the balance of the purchase price would have constituted making funds indirectly available to a designated person. No evidence was put before Foxton J that arguably showed that Litasco was under the de facto control of Mr Putin (in contrast to the position in Mints where it was a concession of control), and Foxton J regarded the suggestion as wholly improbable.

He indicated that he would be prepared to assume that it was strongly arguable that Mr Putin had the means of placing all of Litasco and/or its assets under his de facto control, should he decide he wanted to do so. But he also held that the better interpretation of Regulation 7(4) concerns the existing, not potential, influence a designated person holds over an entity. To recap, under Regulation 7(4) a designated individual (P) is deemed to control an entity (C) if: 

“[…] 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.”

OFSI and the FCDO clarify the position

On 17 November 2023, OFSI and the FCDO published some welcome guidance on the proper interpretation of “control” under Regulation 7(4). They reaffirmed their earlier stance, as well as addressing potential control and the issue Mr Putin’s designation, which have both divided judicial opinion.

On the potential control point, the guidance states that whether the affairs of a public entity could be controlled in accordance with a designated person’s wishes (if they so chose) will depend on specific circumstances. It goes on to give the example of the designated person deriving significant benefits from payments made to the public entity, to the extent they effectively amount to payments made to that designated person, as a possible relevant consideration. 

OFSI did also confirm in a recent webinar that they do not consider the Russian Foreign Ministry to be “controlled” by Mr Sergei Lavrov, the Foreign Minister, for the purposes of Regulation 7(4), nor do they consider Rosatom (the state-owned nuclear energy corporation) to be subject to financial sanctions by virtue of their designated board members, to give two specific examples.

As regards Mr Putin, the FCDO and OFSI clarified that they do not consider him to exercise control over all companies in Russia by virtue of his occupation of the Russian Presidency. Furthermore, in the context of public officials exercising control over private entities, they consider that “sufficient evidence on a case-by-case basis” is required to meet the threshold in Regulation 7(4). It would seem that the broad assumption that because Mr Putin can “call the shots” over any company in Russia should he wish is insufficient evidence that an otherwise non-designated Russian entity is in fact designated by way of Mr Putin’s designation.

Looking ahead

The FCDO/OFSI intervention should allay fears that more Russian entities than previously thought are sanctioned by virtue of Mr Putin’s designation and reaffirms the stated intention of the FCDO to designate public entities in their own right wherever possible. 

Although helpful clarity has been provided on the application of Regulation 7(4), the burden remains on persons or entities to conduct their own due diligence to a degree which satisfies the regulators and the courts.