Since our last newsletter, there have been four notable sanctions-related developments, outlined below.
- OFSI issued guidance on due diligence regarding “ownership and control”.
- The High Court considered and elaborated on the “ownership and control” test.
- A bank was not permitted to rely on sanctions to avoid payment obligations.
- A challenge to a sanctions designation failed
I. Due diligence for “ownership and control”
The asset freeze sanctions imposed on Russia under the Russia (Sanctions) (EU Exit) Regulations 2019/855 (the “Russia Sanctions”) apply not only to individuals expressly designed by OFSI, but also to entities “owned or controlled directly or indirectly” by a sanctioned person (Regulation 7).
OFSI’s Guidance now clarifies that if a breach of the Russia Sanctions has occurred, OFSI will consider “appropriate due diligence conducted on the ownership and control of an entity to be a mitigating factor where the ownership and control determination reached was made in good faith and was a reasonable conclusion to draw from such due diligence” ([3.24] of the Guidance). The Guidance also gives examples of the due diligence efforts that may be expected.
II. Meaning of “ownership and control”: PJSC National Bank Trust v Mints (“Mints”)  EWHC 118 (Comm)
This judgment is significant because it considers the “ownership and control” test in the Russia Sanctions. Briefly, this requirement can be satisfied if either of the tests set out in Regulation 7(2) or Regulation 7(4) are satisfied, with the broad wording of the former creating much uncertainty: although Regulation 7(2) provides objective criteria for assessing ownership and control, Regulation 7(4) is more ambiguous, and provides that ownership and control can be established if it is “reasonable, having regard to all the circumstances, to expect that [the sanctioned person] would…be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of [the company] are conducted in accordance with [the designated person’s] wishes.”
In considering the wording of Regulation 7(4), the Court held that because Regulation 7(2) is directed to “ownership, direct or through a chain of companies or via a nominee”, the test in Regulation 7(4) should be interpreted in that context, and is therefore “essentially ‘backstopping’ any form of ownership and control which falls slightly outside [Regulation] 7(2)”; it is apt to capture discretionary trusts or other sophisticated financial mechanisms such as Liechtenstein Anstalts or Jersey Foundations, which permit designated persons to retain “effective control” ().
III. Payment obligations allegedly subject to sanctions: Celestial Aviation Services Ltd v UniCredit Bank AG (London Branch)  EWHC 663 (Comm)
The Claimant, a lessor of aircraft, provided aircraft to two Russian businesses under leases entered into before the Russia Sanctions came into force. The Claimant sought payment under seven letters of credit, confirmed by the Defendant-bank, which related to the leases. The Defendant-bank resisted payment on the ground that it was unlawful to do so under both the Russia Sanctions and the US Russian sanctions regime (the “USA Sanctions”). Christopher Hancock KC rejected both arguments. Although much turned on the wording the sanctions, it is notable that the Court adopted a purposive interpretation of the relevant regulations ().
For the Russia Sanctions, Regulation 28 (which essentially prohibits “directly or indirectly provid[ing], to a person connected with Russia, financial services …”) was “by its nature prospective” and therefore was not intended to affect payment obligations which arose prior to enactment of the Russia Sanctions. In any event, performance of the payment obligation did not infringe the sanctions regime because, “by the time that the payment obligation under the Letters of credit had accrued, the aircraft had long since been supplied to Russian companies” ().
The Court also considered the “asset freeze” sanction in Regulations 11 and 13. The Defendant’s argument that, because the sanctioned issuing bank had a legal interest in the letters of credit (rights to preserve their terms), it was prevented from paying because doing so would “change the character of the letters of credit since … it would extinguish the obligation of [the designated bank] to pay the Claimants”, was rejected (). In addition to the fact that the Defendant’s obligations matured prior to the imposition of sanctions, the Defendant “was not dealing with [the sanctioned bank’s] property when making payment … [it] was instead satisfying its own independent … obligations” (, ).
As to the USA Sanctions, the Defendant-bank’s argument that, because the credit letters stipulated for payment in USD, the USA Sanctions prevented it from making payment, was rejected. The Court held that, even if it were the case that payment by a correspondent bank in America would infringe the USA Sanctions, it remained open for “the customer … to demand such payment in cash” because “where the fundamental obligation is to make payment, and where it is possible to make such payment, then the bank must do so” (-).
IV. De-designation challenges: LLC Synesis v SOSFCADA (“Synesis”)  EWHC 541 (Admin)
Synesis concerned LLC Synesis’ challenge to its listing as a designated person under The Republic of Belarus (Sanctions) (EU Exit) Regulations 2019 (the “Belarus Sanctions”). Briefly, LLC Synesis provided software to the Belarusian Government which enabled the Government to target individuals engaged in “democratic opposition in Belarus”. The FCDO consequently sanctioned LLC Synesis as it had “reasonable grounds to suspect” that it was an “involved person”, as defined by the Belarus Sanctions; LLC unsuccessfully sought Ministerial review of that finding; and finally, LLC Synesis judicially reviewed that Ministerial review decision.
In rejecting LLC Synesis’ challenge, Jay J drew a distinction between the statutory threshold and the standard of review applied by the Court, the former requiring a “state of mind”, the latter a “state of affairs” (). On the statutory threshold, he said that the “net goes far wider” than material and information that would be admitted in a court of law, encompassing hearsay, allegations, and ‘intelligence’ (). The standard of review to be applied is the so-called “Wednesbury standard”: a Court would only intervene if the decision was so unreasonable that no reasonable decision-maker could come to it. On the facts, and given the wide “margin of appreciation” for “the making of expert judgments in an area of government policy”, there was no Wednesbury error by the FCDO (, ), demonstrating that the Courts will take a ‘hands off’ approach to review of Ministerial decisions in this area. This judgment is likely to be relevant to challenges of designations under the Russia Sanctions, given the similarities in the approach to designation.