A recent judgment from the English Court of Appeal raised a potentially significant issue with the definition of ownership and control in relation to designated persons and the entities that they own and control under the UK's Russia sanctions legislation. On October 6, in Mints and others v. PJSC National Bank Trust and another [2023] EWCA Civ 1132, the court opined that Vladimir Putin, as President of Russia and the "apex of a command economy," could be deemed to control everything in Russia. This broad definition would significantly expand the scope of the UK's Russia sanctions, making potentially every company in Russia a designated person under the UK regime as a result of Mr. Putin's personal designation in the UK.
The issue arose because, in addition to its use of the "50% rule" similar to that used in U.S. sanctions laws — which defines ownership and control based on the percentage of shares or voting rights held, the UK regulations provide that a person will also control a company if "it is reasonable, having regard to all the circumstances, to expect that [a person] would (if [the person] 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 [the company] are conducted in accordance with [the person's] wishes." It is this aspect of the ownership and control definition that the court opined covers Mr. Putin. As the "apex of a command economy," the court reasoned, he has the ability to determine the conduct of the affairs of Russian companies and as a result can be deemed to control them, with the consequence being that such non-listed companies could be considered designated persons by virtue of being controlled by a listed designated person.
The Court of Appeal's observations on this topic were commentary ordinarily termed as obiter dicta because the definition of "control" did not need to be determined as a result of other failed aspects of the appeal. Nonetheless, Flaux LJ opined on this issue because it had been fully argued at the hearing. Though obiter does not create binding precedent, it is frequently relied upon in the lower courts to assist with questions of interpretation.
In the judgment, Flaux LJ noted that courts can only interpret legislation as written and that it is for the executive to amend the wording of regulations to avoid unintended consequences. However, it is not a simple process to amend the text of the regulations, which would require a further act of Parliament, and any amendment would need to apply to more than just the Russia-related sanctions because similar wording is employed across each of the UK's different sanctions regimes.
Given the potential impact of this judgment, it will be interesting to see the approach that the UK government adopts as a result. On October 16, the Foreign, Commonwealth and Development Office (FCDO) issued a statement about the case, indicating that it does not agree with the broad implication that merely being a public official is evidence of control of an entity by a designated person such that non-listed companies become designated. The FCDO also stated that the government was further exploring options to clarify the position on this issue.
The prospect of the government clarifying the wording at some point in the future will not provide comfort to those UK persons who may now find themselves potentially in breach of current sanctions laws under the Court of Appeal's reading, although the release of the FCDO statement indicates that it is unlikely that enforcement action will be taken on this basis alone. However, if the Court of Appeal's position is more widely adopted, its interpretation could have considerable repercussions for UK-registered businesses and those doing business in the UK (as well as other UK persons, such as British nationals) who engage with Russian companies. To that end, UK persons should start considering the viability of continued interactions with Russian companies, particularly those that are state-owned, and ensure that they have considered the risks of sanctions breaches as a result of a broad reading of the definition of control.
For questions about this decision or the UK's Russia sanctions, please reach out to the authors or any of their colleagues in Arnold & Porter's Trade Sanctions practice group.
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