Thought for the Week: Are all Russian companies "controlled" by Putin?
23 October 2023
23 October 2023
An English Court of Appeal judge recently suggested in the case of PJSC National Bank Trust (NBT) and PJSC Bank Otkritie (Otkritie) v Mints & ors [2023] EWCA Civ 1132 that every company in Russia could be regarded as "controlled" by Russian President Vladimir Putin and therefore targeted by UK financial sanctions. We take a look at the implications.
The underlying claim was brought by two Russian banks: Otkritie and NBT, including against four individuals (the Mints). Shortly after, the UK government designated Otkritie as the target of an asset freeze under the Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia Regulations). NBT was not designated. However, the Russia Regulations contain provisions extending the effect of asset freezes to persons "owned or controlled directly or indirectly" by targets of asset freezes.
The defendants applied to stay the litigation, on the basis that both of the Russian claimant banks were targets of sanctions.
The defendants alleged that although NBT was not specifically designated, it was controlled by designated persons and therefore subject to financial sanctions, as it was 99 per cent owned by the Russian Central Bank and therefore ultimately controlled by the Governor of the Central Bank Ms Elena Nabiullina or Mr Putin, as it was required by law to transfer 75 per cent of its profits to the Russian Federation. Both Mr Putin and Ms Nabiullina are designated as targets of a UK asset freeze.
The two issues to be decided by the Court aside from that of control were: (1) whether it could lawfully enter a judgment when a party was a target of financial sanctions; and (2) whether the Office of Financial Sanctions Implementation (OFSI) could licence the payment of costs or damages to a party so targeted.
The Court of Appeal upheld the earlier judgment, refusing a stay on both issues: concluding that the English court could make a judgment in favour of a sanctioned entity and that OFSI could licence the payment of costs or damages.
Whether or not Mr Putin controlled NBT therefore did not affect the decision on the stay. However, the issue "being of some general significance," Sir Julian Flaux PC addressed it anyway, on an obiter basis (therefore his comments are not binding precedent, but would be persuasive in future).
He found that for the purposes of Regulation 7 (the "control" provisions in the Russia Regulations), there was no limit to the mechanism by which a person can exercise "control" over a company – this could be exercised through political office. Put another way, the question was who "calls the shots"? Sir Julian stated that Mr Putin is "at the apex of a command economy" and, therefore "could be deemed to control everything in Russia". Whilst he recognised this led to "absurd consequences", meaning that any Russian entity could potentially be treated as targeted by UK sanctions, he regarded this as a result of the UK government's choice to list Mr Putin as a "designated person".
So how might this affect those dealing with Russian entities?
The UK's "control" test has always been difficult to navigate given its broad drafting, and the Court's recent judgment only serves to emphasise that. The government will be feeling pressure to act quickly to resolve the uncertainty. Watch this space, and in the meantime, keep an eye on our UK Sanctions Tracker for all the latest developments.
Authors: Philip Linton, Tom Cummins, Angus Rance, Sophie Law
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.