Uncertainty Over Control Test in Sanctions Relating to Russia

One such important development, which has increased uncertainty regarding the scope of sanctions, has arisen from the British Court of Appeal’s recent ruling in Mints v PJSC National Bank Trust and PJSC Bank Okritie Financial Corporation, which was handed down on October 6.

This article summarises the sanctions regime and considers the recent ruling in Mints.

In the context of Russia, Bermuda follows Britain’s sanctions regime through a modified version of the Russia (Sanctions) (EU Exit) Regulations 2019, which apply in Bermuda as a result of Regulation 2(1) of the (Bermuda) International Sanctions Regulations 2013.

The regime operates on the basis that, once a person (natural or legal) has been designated (ie, made subject to sanctions), two general principles apply:

• “Funds” and “economic resources” of the designated person are frozen, such that no person may “deal with” them
• No person may make “funds” and “economic resources” available to the designated person

A critical conceptual component is “control” over assets, as defined by Regulation 7, which sets percentage requirements for shareholdings in companies, etc, but also imposes a broad catch-all test of whether it is “reasonable, having regard to all the circumstances” to expect that control by the designated person can be exercised, directly or indirectly.

An otherwise prohibited transaction can take place if a licence is issued, under an appropriate statutory ground, by Bermuda’s Financial Sanctions Implementation Unit and the British Secretary of State.

The Mints judgment is important, and legally interesting, in that it considers the application of these principles to litigation itself, in addition to having wider ramifications for the control test under Regulation 7.

The matter involved a claim for $850 million, brought by two Russian banks against members of the Mints family, asserting that the Mints conspired with representatives of the banks to enter into uncommercial transactions.

The claim was brought before Russia’s invasion of Ukraine on February 24, 2022, and the second claimant became designated four days after the invasion.

The first claimant, a 99 per cent-owned subsidiary of the Central Bank of Russia, was not individually designated but, on the defendants’ case, was subject to the same asset-freeze owing to being “owned or controlled” by designated persons — including President Vladimir Putin.

Three issues are considered in the ruling: entry of judgment in favour of the claimants, licensing of various costs orders — including payment of costs to a designated person — and “control” over an entity through the exercise of political office.

In respect of the first issue, the court found that entering judgment for the claimants would not make a “fund” available to a designated person.

The “fund” does not come into existence until the judgment is entered — which creates the judgment debt — and the 2019 Regulations contemplate that the fund pre-exists.

The words “make funds available” are also simply not suitable to describe the court’s function in entering judgment.

Further, although a cause of action is an “economic resource”, entering judgment does not involve “dealing with” that resource because it is not exchanged for funds, goods or services — as per Regulation 11(5). Given that the cause of action ceases to exist and is replaced by the judgment — pursuant to the doctrine of merger — there is no exchange.

The court also reached these conclusions without reliance on the principle of legality, ie, that certain fundamental common law rights, specifically the right of access to the courts, will not be treated as restricted unless this is clearly intended by primary legislation.

The defendants were also unsuccessful on the second issue, given that statutory grounds exist to license various costs orders.

Owing to ruling against the defendants on those issues, the court declined to rule on the third issue, but it did provide guidance on this point.

On the basis of the “catch-all” provision in Regulation 7, the court concluded that control is exercised by whoever “calls the shots”.

Consequently, in the context of Russia’s command economy, Mr Putin “could be deemed to control everything in Russia”.

In doing so, the court disagreed with the approach taken in the appealed judgment, which had concluded, in effect, that there was a carve-out in respect of control through political office. The court was driven to this finding on the basis of statutory interpretation.

The court’s ruling, therefore, provides clarity on the first two issues but has increased uncertainty in respect of issue three, due to the much wider ambit of the control test under Regulation 7: any Russian company could potentially be controlled by a designated person, ie, Mr Putin.

Accordingly, anyone undertaking business with a Russian entity should consider this point carefully, and take appropriate legal advice.

First Published in The Royal Gazette, Legally Speaking column, November 2023