Non-Designated Persons and asset freeze

First Condition
On the face of it, the “First Condition” gives clear factual markers for determining ‘ownership or control’ (i.e., it should be possible to determine this by checking the relevant company constitutional documents with respect to shareholding and voting rights, etc.).

However, particularly in relation to “indirect” ownership/control, Schedule 1 of the Regulations further expands the scope of what may constitute the “indirectly” holding of “a right” or “a share”.

For example, Para 9 of Schedule 1 states that a person holds a share “ indirectly” when that person has a “majority stake” in another person who holds the right or holds the share. The concept of “majority stake” is defined at para 9(3)(c) as including a situation where A “has a right to exercise, or actually exercises, dominant influence or control over B”.

This appears to widen the scope of what would constitute ownership by a Designated Person quite significantly. For example, according to the Regulations, as written, “Entity A”, which is not included on the OFSI’s sanctions list, will nevertheless have its assets and funds frozen if it is determined that a Designated Person can exercise a dominant influence (i.e., has a majority stake) over a person or entity who holds more than 50% (in aggregate) of the shares in Entity A.

Accordingly, the test to see whether Entity A is owned or controlled by a Designated Person under the

First Condition requires (1) a check of Entity A’s shareholding (and voting rights) but also (2) a check of whether any Designated Person has a majority stake in any non-designated shareholder or non-designated rights holder with more than 50% of the shares/rights in Entity A. There is therefore a ‘once removed’ element to the check: First, you look at Entity A’s shareholding/voting rights, then you look, once removed, at the majority stake of any non-designated majority shareholder / rights holder

Second Condition
In August 2022, the OFSI released the ‘UK financial sanctions: general guidance’, which included some examples of circumstances in which it is reasonable to expect that a Designated Person would be able to ensure the affairs of an entity are conducted in accordance with the person’s wishes. These included:

• Having the right to exercise a dominant influence over an entity, pursuant to an agreement entered into with that entity, or to a provision in its Memorandum or Articles of Association, where the law governing that entity permits its being subject to such agreement or provision;
• Having the right to exercise a dominant influence referred to in the point above, without being the holder of that right (including by means of a front company);
• Having the ability to direct another entity in accordance with one’s wishes. This can be through any means, directly or indirectly (For example, it is possible that a designated person may have control or use of another person’s bank accounts or economic resources and may be using them to circumvent financial sanctions).

  However, in a recent case, PJSC National Bank Trust v Mints [2023] EWHC 118 (Comm) (the “PJSC NBT Case”), Mrs Justice Cockerill, when handing down her judgment, called into question the legality and enforceability of this particular aspect of the Regulations, in obiter dicta.

  This case dealt with whether the entry of a judgment by an English court in favour of two Russian banks (the “Claimants”), one of which was subsequently listed on the OFSI’s list of Designated Persons and the other which was argued to also be subject to the asset freeze by virtue of it falling within the “ownership or control” of a Designated Person, would in fact be unlawful and whether allowing proceedings to continue in a separate case involving these banks while sanctions remain in force would cause serious prejudice to the defendants (the “Defendants”) on the basis that the Claimants cannot lawfully satisfy adverse costs orders, provide security for costs or pay any damages that may be awarded on their cross- undertaking.

  The ownership and control element was only dealt with in obiter dicta in the judgment as Mrs Justice Cockerill had already ruled that the Defendants’ main case (i.e. that it would be unlawful to enter a judgment in favour of the Claimants in the underlying case because they were sanctioned, etc.) had failed and so there was no need to consider whether the 2nd Claimant, who was not specifically listed on the OFSI list, would also fall within the scope of the asset freeze sanctions by reason of their ‘ownership or control’ by a Designated Person. Accordingly, the judge stated that in respect of this element she would only “express a conclusion briefly and somewhat tentatively”.

  In determining whether the second Claimant was owned or controlled by a Designated Person, it was accepted by the parties that factually the control test would be satisfied in that, at least pursuant to the Second Condition of the Regulations, relevant Designated Person(s) (Vladimir Putin and the Governor of the bank of Russia) were able to, in significant respects achieve the result that affairs of the Claimants be conducted in accordance with the Designated Persons wishes, (irrespective of whether they have in fact done so in the past).

  But when considering the question “is it the intention of the Regulation to catch such control?”, Mrs Justice Cockerill stated that she was inclined “to the view that that is not the intention”.

  There were a number of reasons for this. First, Mrs Justice Cockerill stated that although the wording in Regulation 7(4) (Second Condition) is wide, it must be looked at in full context – which means having regard to the rest of Regulation 7. “Regulation 7(2)… is essentially about ownership, direct or through a chain of companies or via a nominee…” she stated, “It [therefore] lends force to the submission that 7(4) is essentially “backstopping” any form of ownership and control which falls slightly outside 7(2)” .

  Second, the Judge considered arguments relating to Article 7 of the ECHR and to the common law presumption against doubtful penalisation. In respect of the latter, Simon Brown LJ in Ricketts v Ad Valorem Factors Ltd [2004] BCC 164 at [30] gave the following summary:

  “…the court should strive to avoid adopting a construction which penalises someone where the legislator’s intention to do so is doubtful, or penalises him in a way which is not made clear.”

  Mrs Justice Cockerill stated that “there are powerful “real world” reasons why this is a case for (if necessary) resolving the question by reference to the principle against doubtful penalisation. This is legislation which imposes not insignificant criminal sanctions… commercial people also need to know if a particular company (say, Gazprom or NBT) is sanctioned.”

  Third, the Judge stated that it “seems implausible that it was intended that such major entities as banks (or other major entities such as Gazprom)… were intended to be sanctioned by a sidewind, in circumstances where they would have no notice of the sanction and be unable themselves to challenge the designation…”.

  Fourth, Mrs Justice Cockerill considered the general guidance published by the OFSI in August 2022, in particular the section quoted earlier in this Article, concluding that “…The UK Government will look to designate owned or controlled entities/individuals in their own right where possible”. Mrs Justice Cockerill interpreted this wording in the guidance as indicating that “it is not the intent for complex investigations to have to be made or evidence gathered — because the list should generally set out the persons targeted.”

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