On October 6, 2023, the UK Court of Appeal issued an important sanctions decision concerning the impact of the UK Russia sanctions regime on active litigation involving sanctioned persons. The Court of Appeal upheld the determination that designated persons with a valid cause of action lawfully have access the UK legal system and that judgments can be entered for or against designated persons by virtue of OFSI’s licensing power. The Court of Appeal also overturned a lower court ruling regarding the designation of one of the central parties in the case, holding that the lower court incorrectly found that a state-owned financial institution in Russia was not designated within the meaning of Regulation 7 of the Russia (Sanctions) (EU Exit) Regulation 2019 (“the Regulations). The Court of Appeal held instead that, while the Russian bank was not actually listed as a designated entity, the bank was a designated person under Regulation 7 whose assets should be frozen in accordance with the Regulations.
The case before the court was a $850 million fraud dispute that was filed in commercial court by two Russian financial institutions, PJSC National Bank and Trust (“NBT”) and PJSC Bank Otkritie Financial Corporation (“Bank Otkritie”). The claimants had reportedly obtained undertakings similar to freezing orders against certain defendants in the case, and the case had been progressing towards trial when Russia’s invasion of Ukraine occurred. Within days of the invasion, Bank Otkritie, a state-owned institution, was designated under the Regulations for “supporting and obtaining a benefit from the Government of Russia” and, as a result, its assets were frozen and all dealings with them prohibited. While NBT was not actually listed in the UK as a designated person, certain defendants were concerned that NBT was subject to the same asset freezes as Bank Otkritie because it was an institution that was arguably “owned or controlled” by at least two designated persons, President of Russia Vladimir Putin and Elvira Nabiullina, the governor of the Central Bank of Russia, of which NBT is a 99 percent owned subsidiary. This led two defendants, in particular, to request a stay of proceedings and a release from their undertakings claiming, among other things, that NBT was a designated party under the Regulations and, because the claimants were both designated persons, a judgment could not lawfully be entered for or against them by the UK court system. Two additional defendants further claimed that, because the claimants were designated persons, the Office of Financial Sanctions Implementation could not lawfully grant licenses to permit crucial litigation-related activities in the case, including the payment of an adverse cost order, the satisfaction of an order for security costs, and the payment of damages that might be awarded in the suit.
The lower court denied their request, dismissed their application and found substantially in favor of the claimants on all grounds, ultimately ruling that sanctioned claimants had the right sue for damages in UK courts and that a judgment could lawfully be entered in their favor with appropriate licensure from OFSI – licenses that, according to the court, OFSI has the power to grant. While the court was not required to address the designation claim after ruling for the claimants on two of the three claims, it provided a non-binding ruling on NTB’s designation status. The lower court concluded that NTB was not designated under the Regulations because the entity was not controlled by Putin or Nabiullina within the meaning of Regulation 7, after finding that control of an entity by virtue of political office was beyond the scope of the Regulations.
The Court of Appeal affirmed two of the lower court’s rulings and agreed that designated persons have the right to access the UK court system and OFSI has the power to grant licenses for all of the litigation-related activities proposed by the appellants. However, the Court of Appeal disagreed with the lower court on the issue NBT’s sanctions designation. While the ruling was non-binding, the court determined that Regulation 7 does not contain a political office carve-out and held that NBT was a sanctioned entity that was “owned or controlled” by Putin through his political office. While the Court of Appeal accepted that “Mr. Putin is at the apex of a command economy” and “could be deemed to control everything in Russia,” the court acknowledged that this conclusion created “absurd consequences” under Regulation 7 that could potentially cause every company in Russia to be considered a sanctioned person. However, the court reasoned that, while such consequences were unforeseen and extreme, it was likely the result of the Government’s decision to designate Mr. Putin without a thorough understanding of the consequences of that action. The Court of Appeal concluded that, while it would have found for the appellants on the designation issue, it had to dismiss the appeal because the appellants lost on the first two issues.