Recent EU and UK Sanctions Developments

On 14 November 2023, a proposal for a 12^th package of sanctions measures targeting Russia was submitted to the European Council for consideration. The package, which has not yet been finalised or published in final form, is understood to include new measures such as the removal of an existing exemption allowing the provision of restricted business services to subsidiaries of EU companies, new export sanctions, an import ban in relation to Russian diamonds and new asset-freezing designations. We understand the EU intends that the package will be agreed and published before the end of 2023. Certain of these measures — including in particular the diamond import ban — are also likely to be implemented in the UK.

In relation to the UK sanctions, the UK Government has published guidance responding to two recent decisions in the UK courts that addressed the ownership and control test for purposes of UK sanctions. The UK authorities have also issued guidance regarding circumvention risks with respect to the export of goods used by Russia on the battlefield, and highlighted in particular the need for the UK financial sector to remain vigilant with respect to such risks.

On 14 November 2023, the EU High Representative and the European Commission submitted a proposal for the 12th package of Russia sanctions to the Council of the European Union (the “Proposal”). The Proposal is currently being debated among the 27 EU Member States and its adoption requires a unanimous decision by the Member States. We understand that the Commission’s proposal includes the following measures:

• Professional services restrictions: the Proposal makes significant changes to the existing prohibitions in Article 5n of Council Regulation (EU) No 833/2014 (the “Regulation”) against the provision of certain professional services to Russian entities. The current exemption in Article 5n of the Regulation for the provision of the restricted professional services for the exclusive use of subsidiaries of EU companies (and companies established in certain other allied jurisdictions) would be wound down under the current proposal, as of three months following the implementation of the new regulation. After that, EU companies providing any restricted professional services under Article 5n will need specific licensing from a competent EU Member State authority (the Proposal includes a new licensing provision to this effect). Professional services captured by Article 5n include: business and management consulting, accounting, auditing, including statutory audit, bookkeeping or tax consulting services, legal advisory services and IT consultancy services.
  
  The Proposal introduces a new prohibition into the Regulation on the provision of certain software for the “management of enterprises and software for industrial design and manufacture”, including software for “supply chain management” (“SCM”) or “enterprise resource planning” (“ERM”). This could capture a broad range of software products ordinarily used in the business context.
  
  A new prohibition also will be included in the professional services prohibitions in Article 5n of the Regulation on the provision of technical assistance, brokering services or other services with regards to the restricted professional services as well as a prohibition on the provision of related financial assistance.
• Export restrictions: Existing export restrictions will be expanded to include additional items used across different industry sectors, including additional types of pipes, tubes and different types of machine tools. Furthermore, EU operators that export restricted items to any country will be required to seek contractual assurances from their counterparties that the restricted item will not be re-exported to Russia.
• Import ban on Russian diamonds: The Proposal also includes a prohibition on the direct or indirect import, purchase or transfer of diamonds from Russia. This prohibition applies to diamonds originating in Russia, diamonds exported from Russia, diamonds transiting Russia and Russian diamonds processed (i.e. cut and/or polished) in third countries.
• Oil price cap: The Proposal includes new attestation requirements in connection with the oil price cap sanctions and introduces a new restriction on the sale of tankers suitable for the transport of restricted oil and petroleum products.
• New asset-freezing designations: The Proposal includes additional designations of Russian companies and individuals to the EU’s asset-freezing list.

Whether the final regulation will include all of the measures included in the Proposal is currently unclear. Based on press reporting, a number of the foregoing measures are being debated among the EU Member States. Initially, the EU had intended to pass the new sanctions package before the end of the year. Whether the EU Member States will be able to agree on the final regulation within this timeline is currently unclear.

On 17 November 2023, the UK Foreign, Commonwealth & Development Office (“FCDO”) and HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) published new guidance concerning the application of the concepts of ownership and control with respect to entities that might be associated with designated public officials (the “Guidance”). 

The Guidance follows the recent decision of the Court of Appeal in the case of Mints & Ors v PJSC National Bank Trust & Anor [2023] EWCA in which the Court held (in non-binding obiter dicta comments) that Vladimir Putin could be deemed to control for UK financial sanctions purposes all Russian entities on the basis that Russia is a “command economy”. The Mints judgment was followed last week by the subsequent High Court case of Litasco SA v Der Mond Oil and Gas Africa SA & Anor [2023] EWHC 2866, which further considered the ownership and control test in the context of the question of Putin’s possible control over Russian entities and arrived at a different conclusion to Mints as to whether Putin might exercise control over Russian entities. 

The Guidance confirms that Mints has not materially altered the position regarding the ownership and control test from the point of view of the two UK Government agencies responsible for UK financial sanctions policy, implementation and enforcement.

The Guidance clarifies the position with respect to designated public officials and possible control of public bodies for UK financial sanctions purposes as follows:

• The Government “does not generally consider designated public officials to exercise control over a public body in which they hold a leadership function.” There is no presumption, for example, that a public body led by a minister designated for UK sanctions purposes would also automatically be subject to sanctions merely by virtue of the minister’s designation.
• The Government does not intend for sanctions measures targeting public officials to prohibit routine transactions with public bodies, such as the payment of taxes, fees, import duties, fees relating to the purchase or receipt of permits, licences or public utility services, or any other ordinary and incidental payments.
• If the Government considers a public official to be exercising control over a public body for UK sanctions purposes, it will look to designate the public body where possible when designating the relevant public official.
• Notwithstanding the foregoing, consideration should be given to whether there is particular evidence that a designated person is in a position to ensure that the affairs of a public body are directed in accordance with the will of the designated person. The Guidance states that a relevant consideration in this regard might be whether the designated person derives a “significant personal benefit from payments to the public body, such that they amount to payments to that person rather than the public body.”

With respect to the possible control by designated public officials of private bodies the Guidance states:

• The Government does not presume that a private entity is “subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which that public official has a leading role in economic policy or decision-making,” and further specific evidence would be required to demonstrate such control.
• The Government specifically “does not consider that President Putin exercises indirect or de facto control over all entities in the Russian economy merely by virtue of his occupation of the Russian Presidency.” 
• A designated person should only be considered to exercise control over a private entity for purposes of UK financial sanctions where this is supported by sufficient specific evidence on a case-by-case basis.

The Guidance also reiterates OFSI’s approach to the question of ownership and control more generally and restates the criteria set forth in OFSI’s UK financial sanctions general guidance, which provides indicative examples of scenarios in which a sanctioned person might be able to ensure the affairs of an entity are conducted in accordance with the person’s wishes (such that the sanctioned person controls the entity). These include scenarios where the sanctioned person: has the power to appoint a majority of the board members of the entity; controls a majority of the voting rights in the entity; has the right, or is otherwise able, to exercise a dominant influence over the entity; or, otherwise has the ability to direct the entity in accordance with their wishes, for example, by controlling the use of the entity’s bank accounts. The Guidance also cites OFSI’s Enforcement and Monetary Penalties guidance, stating that OFSI does not prescribe the level or type of due diligence that should be undertaken to ensure compliance with UK financial sanctions.

As such, the Guidance effectively endorses conventional understandings of the UK asset-freezing sanctions held by the Government and practitioners that prevailed prior to the Mints judgment, in which the Court of Appeal observed that “in a very real sense (and certainly in the sense of Regulation 7(4)), Mr Putin could be deemed to control everything in Russia.” 

The Mints judgment relates to an appeal brought by the Mints family (the defendants) against a High Court decision not to grant a stay in proceedings between the defendants and the Russian bank, Bank Okritie, and the Russian National Bank Trust (“NBT”). Bank Okritie is a designated party for UK sanctions purposes and NBT is a majority owned subsidiary of the Central Bank of Russia, which the defendants had claimed was controlled by designated persons: Vladimir Putin and the governor of the Central Bank of Russia, Elena Nabiullina. The defendants had sought a stay (among other reasons) on the basis that NBT was subject to UK asset-freezing sanctions by virtue of being controlled by designated parties. 

The primary issue for the Court to determine was whether UK sanctions regulations prevent a Court from entering a money judgment in favour of a sanctioned party — it was held that they do not — and, as such, the Court’s comments regarding the question of Putin’s control over the Russian economy (or Putin’s or Nabiullina’s control over Russian government agencies) were not necessary to reach the Court’s judgment. As such, the comments are obiter dicta, and not legally binding. 

Nonetheless, the Mints judgment caused some uncertainty as to the English courts’ application and interpretation of the control test under UK financial sanctions legislation. Indeed, following the judgment, OFSI and the FCDO responded by publishing a joint e-alert that noted there was: “no presumption on the part of the Government 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.” The e-alert had referred to the Government “exploring the options” for further clarification of the position, and it appears that the Guidance has been published in that context.

Separately, on 15 November 2023 (two days prior to the publication of the Guidance), the Litasco judgment was published. This case concerned an application for summary judgment by Litasco, a subsidiary of Lukoil (a designated Russian oil company) with respect to the failure of Der Mond (Lukoil’s counterparty) and its parent company, Locafrique, to pay monies due under contract, where the defendants claimed fraudulent representation and breach of a warranty, and also made further arguments based on force majeure, frustration and illegality in relation to UK sanctions — including, as had been held in Mints, on the basis that Litasco was “controlled” by Vladimir Putin. 

On the question of Putin’s control over Litasco, Mr. Justice Foxton set forth an alternative interpretation of the control test to that which was expressed in the obiter comments in Mints, stating that the relevant provision of the UK-Russia sanctions regulations “is concerned with an existing influence of a designated person over a relevant affair of the company […], not a state of affairs which a designated person is in a position to bring about.” Foxton J stated that if this were not the position then it could be argued that Putin is in control for UK sanctions purposes of “companies of whose existence he was wholly ignorant, and whose affairs were conducted on a routine basis without any thought of him.” In any event, the High Court held that UK sanctions regulations did not prevent a money judgment being entered in Litasco’s favour even were it found to be sanctioned, per the ratio of the Mints judgment, but the application of the control test expressed in Litasco is notably closer to the Government position as set forth in the Guidance.

The current UK position on Ownership and Control

The Guidance indicates that the UK Government regards the position with respect to the ownership and control test to be unchanged by the English court judgments in the cases of Mints and Litasco and as such the UK’s sanctions authorities will continue to apply the test in the manner that is set out consistently across various guidance documents, as reiterated in the Guidance. In that sense, the Guidance helpfully clarifies the regulatory standards that will be applied as to possible control by designated parties.

On 6 December 2023, the UK National Economic Crime Centre (“NECC”), which is a multi-agency body linked to the UK National Crime Agency (“NCA”), OFSI and the FCDO published a “Red Alert” on Exporting High Risk Items (the “Alert”), which aims to promote awareness and bring about preventative action with respect to “common techniques suspected to be in use to evade sanctions on the export of high-risk goods, which Russia is using on the battlefield in Ukraine.”

The Alert notes that Russia is “exerting significant effort to procure sanctioned goods from other countries, including goods in the UK” and highlights specifically the “critical role” that the financial sector plays in the procurement cycle and the importance of the sector being “vigilant” with respect to attempts to circumvent trade sanctions.The Alert highlights fourteen illustrative examples of the kinds of transactions that might present red flags with respect to possible sanctions evasion, such as: transactions where the end user remains unclear or transactions involving entities located at known transhipment locations or involving atypical shipping routes than would normally be required to reach a particular destination. The Alert follows, and is broadly consistent with, similar guidance published by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) in May 2023 and the EU in September 2023.

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Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, Brussels, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with the emerging Russia sanctions.

Our trade controls lawyers also work closely with Covington's Global Public Policy team which consists of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia. Many of the members of the Public Policy team have had substantial government experience in sanctions and export controls matters, and regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders. 

Covington is therefore exceptionally well-positioned to assist clients in navigating their most complex challenges, drawing on our trade and public policy teams as well as our additional multidisciplinary teams in areas including international arbitration and disputes, cybersecurity, anti-money laundering, corporate restructuring, finance, and insurance.

As the Ukraine crisis evolves, we will continue to monitor developments including regarding U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments.

Our team would be happy to address any questions you may have.