Sanctions Synopsis October Edition | Cooke, Young & Keidan

Since our last newsletter, there have been six notable sanctions-related developments, outlined below.

The Court of Appeal judgment in NBT v Mints was handed down.
The High Court has permitted the redemption of loan notes held by a sanctioned entity by payment into court.
A defence of “reasonable belief” that Russia sanctions applied was rejected.
The European Union adopted regulations making crypto-asset transfers traceable.
OFSI publish Disclosure Notice against Wise Payments Limited for breaches of financial sanctions.
Kazakhstan announces it will follow the sanctions regime imposed against Russia

I. The anticipated Court of Appeal judgment in the NBT v Mints ([2023] EWCA Civ 1132) was handed down: “ownership and control” is very broad indeed.

An area of particular interest in this important judgment is the discussion of the “ownership and control” test which – if satisfied – imposes the asset freeze regime on entities that are not expressly named (designated) as being subject to the asset freeze regime. By way of recap, the High Court has held that NBT was not “owned or controlled” by Mr Putin and/or Ms Nabiullina (the governor of the Russian Central Bank, the owner of NBT), noting that (among other reasons) other major Russian banks were (unlike NBT) expressly designated.

The Court of Appeal however disagreed with the High Court’s reasoning, stating that the “ownership and control” test should indeed be interpreted broadly: does the designated person “call the shots”? ([229]). The “absurd consequences” that may arise from that interpretation in the context of the Russia sanctions “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…Mr Putin is at the apex of a command economy. In those circumstances…in a very real sense (and certainly in the sense of Regulation 7(4)), Mr Putin could be deemed to control everything in Russia.” [233]

Indeed, this judgment may have wide-ranging ramifications because it suggests that the list of entities that is subject to the asset freeze regime in the Russia sanctions is much longer than previously thought. Furthermore, these comments will no doubt be relevant in the context of other sanctions regimes, such as Belarus (considering the designation of Mr Lukashenko). However, the government’s first official reaction (published on the FCDO’s website on 16 October 2023) suggests that the effects of this judgment may be more limited, and that there is no presumption “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.” (Available here.) The FCDO is exploring options for reducing the uncertainty created by this Court of Appeal judgment.

Finally, the current version of the legal fees general licence expires at the end of the month, and the renewed version (if any) will be eagerly awaited.

II. Redemption by payment into court: Fortenova Grupa DD v LLC Shushary Holding & Ors (“Fortenova”) [2023] EWHC 1165 (Ch)

Fortenova concerned the redemption of loan notes (with a face value of roughly €400m) issued by the Claimant, a company that is part of a Central and Southeastern European food producing conglomerate, and held by the Defendant, a designated subsidiary of a sanctioned Russian bank, pursuant to a Subscription Agreement. The Claimant wanted to redeem the notes before their maturity date in September 2023 to effectuate proposed refinancing, but because of the Russia sanctions, the sums required to redeem the notes could not be paid to or for the benefit of the Defendant. Therefore, the Claimant sought an order that moneys be paid into Court, and it would then be for the Defendant to apply for the moneys to be released from there, when and if sanctions are lifted. The Defendant opposed, although “not strenuously”, this course of action, “obviously prefer[ring] payment to be made to a blocked account in its name within the EU” ([5]).

Michael Green J accepted in full the Claimant’s argument that (i) the Claimant had a contractual right, under the Subscription Agreement, to redeem the notes voluntarily, in whole or in part, prior to the final contractual maturity date; (ii) a chargor’s equitable right to redeem its security should not be clogged or fettered, and a court of equity should give effect the equity of redemption whenever it is exercised; so (iii) because it appeared as though a suitably blocked account within the EU could not be identified, there was no alternative but for the moneys to be paid into court ([10], [35]-[38], [43]). Interestingly, the Court said that the fact that the Defendant may not be able to retrieve the funds from the court funds office for a lengthy period of time (potentially not until after the resolution of the war in Ukraine) was a reason in favour of permitting redemption of the notes, otherwise the Claimant would “be left in a state of paralysis due to the irredeemability of the security” ([42]).

III. Defence of “reasonable belief” that Russia sanctions applied rejected: Celestial Aviation Services LTD v UniCredit Bank AG, London Branch [2023] EWHC 1071 (Comm)

In an earlier judgment (summarised in our previous synopsis), Christopher Hancock KC held that the Claimant was entitled to receive payment under seven letters of credit from the Defendant-bank, and the Defendant’s arguments that payment was unlawful under both the Russia Sanctions and the USA Sanctions were rejected. In this consequential judgment, the Court considered whether the Defendant had a reasonable belief that it was prohibited from making payment under the letters of credit such that the defence afforded by section 44 of the Sanctions and Anti Money-Laundering Act 2018 (“SAMLA”) was available to it. S.44 SAMLA provides a complete defence to civil liability for any person who unlawfully does a sanctioned act, or who unlawfully does not do a non-sanctioned act, but who nonetheless acted in the reasonable belief that that action or non-action followed the regulations.

The Court held that (i) the Defendant’s decision not to make payment under the letters of credit was taken because it did subjectively believe that the Russia sanctions prohibited it from doing so; but (ii) that belief was not a reasonable one in the circumstances because “what should have been clear was that the obligation to pay the Claimants, which was a wholly independent obligation owed to the Claimants and not in any way dependent on receipt of funds from [a sanctioned entity], was unaffected by” the Russia sanctions ([16]). As in his earlier judgment, therefore, Christopher Hancock KC put significant emphasis on the “autonomy principle”, a principle so strong that it rendered the Defendant’s subjective belief unreasonable in this case.

This case illustrates that this defence is not a carte blanche for refusing to perform contracts allegedly due to sanctions.

IV. EU Regulations imposed making crypto asset transfers traceable

On 3 May 2023, the European Parliament ratified the “Regulation on information accompanying transfers of funds and certain crypto-assets and amending Directive (EU) 2015/849 (recast)”. The Regulation introduces a payment service provider duty to accompany transfers of funds with information on both the payor and the payee, and another duty on crypto-asset service providers to supplement crypto-assets transfers with information on the originator and the beneficiary. The Regulation has been introduced to stop the evasion of sanctions regulations, as well as to target money laundering, terrorist financing, and organised crime, all such activities damaging “the integrity, stability and reputation of the financial sector, and threaten[ing] the internal market of the Union as well as international development”.

V. OFSI publish Disclosure Notice against Wise Payments Limited for breaches of financial sanctions.

On 31 August 2023, OFSI issued a report against Wise Payments Limited (“Wise”) for breaching the Russia Sanctions. The breach related to a cash withdrawal of £250 from a business account with Wise held by a person designated under the regulations.

Whilst the value of the breach was deemed to be low “OFSI considered that Wise’s systems and controls, specifically its policy surrounding debit card payments were inappropriate” which made the breach “moderately severe” overall and enabled the funds to be made available to a company owned or controlled by a designated person. Ultimately, OFSI concluded that no monetary penalties were to be imposed.

In making its determination, OFSI did take into account various mitigating factors including (among others) the low value of the breach, Wise’s complete disclosure in response to OFSI’s requests for information, and remedial actions taken. The case does however demonstrate the risk of being ‘named and shamed’ in relation to a relatively low value breach.

VI. Kazakhstan announces it will follow the sanctions regime imposed against Russia.

On 28 September 2023, following talks with the German Chancellor Olaf Scholz, Kazakh President Kassym-Jomart Tokayev confirmed that “Kazakhstan has declared unambiguously that it will follow the sanctions regime. We maintain contacts with the relevant organizations on observing the sanctions regime, and I believe Germany should have no worries regarding possible steps to circumvent the sanctions regime”. Presumably, this is a reference to EU sanctions but could also extend to US and (possibly) UK sanctions.

It will be interesting to see how (precisely) this intention will be implemented. Apart from increasing the importance of compliance for companies doing business in Kazakhstan, complying with the sanctions regime is likely to add further tension to contracts involving trade or business in the region. For example, disputes arising out of contracts that cannot be performed or allegedly should not be performed due to sanctions may continue to increase.