Sanctions relating to Russia and the use of Court-Appointed Receivers
The UK sanctions regime in relation to Russia comprises: (1) The Sanctions and Anti-Money Laundering Act 2018 (‘the Sanctions Act’), the enabling legislation under which Regulations in relation to specific sanctions targets may be made, also providing criminal penalties for their breach; (2) The Russia (Sanctions) (EU Exit) Regulations 2019 (‘the Sanctions Regulations’), made under the Sanctions Act imposing the restrictions, and by which the Secretary of State may designate persons as subject to those restrictions. The Sanctions Regulations were amended by the Russia (Sanctions) (EU exit) (Amendment) Regulations 2022 published on 10 February, amending the designation criteria set out in the Sanctions Regulations applying them more widely to sectors of strategic significance; (3) The UK Sanctions List, made by the Secretary of State under regulation 5 of the Sanctions Regulations and amended over time as required1; (4) The Economic Crime (Transparency and Enforcement) Act 2022 (‘the Economic Crime Act’) which received royal assent on 15 March 2022. It includes provisions2 for the disclosure of beneficial ownership of overseas entities owning land and new civil penalties for breach of the Sanctions Regulations, for which there is to be strict liability.
Application to UK Overseas Territories and Crown Dependencies
- The UK sanctions regime applies to UK Overseas Territories and Crown Dependencies as follows:
- The Russia (Sanctions) (Overseas Territories) Order 2020 applies the UK sanctions regime against Russia (as amended by later Regulations) to the Overseas Territories including Anguilla, British Virgin Islands, Cayman Islands, Montserrat, and Turks & Caicos.
https://www.gov.uk/government/publications/the-uk-sanctions-list
Not yet in force.
- Gibraltar and Bermuda both pass their own legislation enforcing the UK sanctions
- The UK sanctions regime applies to the Crown Dependencies (the Isle of Man, Jersey and Guernsey) by Orders in Council.
Criteria for designation
- The criteria for designation under regulation 5 of the Sanction Regulations are set out in regulation 6, and as well as individuals include an entity which is “owned or controlled directly or indirectly by a person who is or has been” involved in destabilising Ukraine or “obtaining a benefit from or supporting the government of Russia.”
- The words “owned or controlled directly or indirectly” is defined in regulation 7, and makes suitable for designation any person with legal or de facto control, as either:
- holding 50% or more of the shares or voting rights, or having the power to appoint or remove a majority of the board of directors, or in the alternative being a person; or
- being “able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of the entity are conducted in accordance with that person’s wishes.”
The prohibitions
- The prohibitions in regulations 11 to 15 apply to dealing with a person designated under regulation 5, and provide in summary:
- That a person must not deal with funds or economic resources owned, held or controlled by a designated person if the person knows, or has reasonable cause to suspect, that he or she is dealing the funds or economic resources of a designated person (regulation 11). “Dealing with” funds is defined very broadly and includes, in regulation 11(5), where a person “exchanges the economic resources [of the designated person] for funds, goods or services”.
- That a person must not make funds available directly or indirectly to a designated person if the person knows, or has reasonable cause to suspect, that he or she is dealing with the funds of economic resources of a designated person (regulation 12).
- That a person must not make funds available to any person for the benefit of designated person if he or she knows, or has reasonable cause to suspect, that he or she is making funds available for the benefit of a designated person (regulation 13).
- That a person must not make economic resources available directly or indirectly to a designated person if he or she knows, or has reasonable cause to suspect, that he or she is making the economic resources available to a designated person and that the designated person would be likely to exchange the economic resource for, or use them in exchange for, funds, goods or services (regulation 14).
- That a person must not make economic resources available to any person for the benefit of a designated person if he or she knows, or has reasonable cause to suspect, that he or she is making the economic resources available for the benefit of a designated person (regulation 15).
- Regulations 16 to 18 contain prohibitions on dealing with transferable security, or money-making to specific entities designated in Schedule 2, or more generally after 1 March 2022, a prohibition on making loans, entering into correspondent banking relationships, making investments in Crimea and providing financial services to specific Russian government entities in relation for the purpose of foreign exchange reserve and asset management.
Criminal penalty for circumvention
Regulation 19 provides that circumvention of the above prohibitions is a criminal offence:
“A person must not intentionally participate in activities knowing that the object or effect of them is (whether directly or indirectly)—
- to circumvent any of the prohibitions in regulation 11 to 18, or
- to enable or facilitate the contravention of such prohibitions”
Exceptions
- Crediting interest to or receiving funds into a frozen account is not a contravention of the prohibitions, nor is a transfer of funds to an FSA regulated institution in discharge of an obligation incurred before the designated person was designated (regulation 58).
- In addition the Office of Financial Sanctions Implementation (‘OFSI’) may issue a licence in respect of anything done that would otherwise be in contravention of the
prohibitions (regulation 59). Such licences may be issued in respect of single transactions, or for a period of time covering defined activities.
- Neither the Sanction Act nor the Sanctions Regulations provide for a mechanism whereby the Court can grant permission to deal with assets subject to the sanctions regime. Such permission can only be granted by OFSI (subject to a right of appeal). An application for the appointment of a receiver would therefore have to be preceded by an application to OFSI, before the Court could act.
- As regards financial investments, OFSI’s approach to the grant of a licence is explained in its “General guidance for financial sanctions under the Sanctions and Anti-Money Laundering Act 2018”3 as follows:
“Generally you cannot invest your frozen funds, the profits from frozen funds, or move frozen funds from one account to another.
The exceptions or existing licensing grounds found in UK regulations are unlikely to allow such activity to be permitted but OFSI will consider each application on a case-by-case basis.
Applications for licences in relation to asset freezes imposed by UK law will need to demonstrate that such activity is in line with the licensing policy for that regime.
OFSI’s view is that, in a small number of circumstances, some asset management may be permitted, under the ‘basic needs’ licensing ground, to ensure that the existence of the business or the frozen assets is not imperilled. When considering licensing requests for asset management, OFSI will consider the nature and state of the assets at the time of any relevant designation. It is highly unlikely that requests for new or expanded activity will be permitted but OFSI deals with every application on a case-by-case basis.”
- The General Guidance therefore suggests that a licence will only be granted for the purpose of preserving frozen assets, and will be unlikely to be granted for the strategic investment of such assets for profit.
Reporting obligations on certain firms
A “relevant firm” must inform the Treasury “as soon as practicable” if it knows or has reason to suspect that a person is a designated person, or has reason to believe it is a person who has committed an offence under the Sanctions Regulations, and the information had come to it in the course of its business (regulation 70). A “relevant firm” for these purposes is defined widely, including for example: FSA regulated persons, “an undertaking that transmits money… by any means”, and professionals including those providing “accountancy services, legal or notarial services, advice about tax affairs, or trust or company services within the meaning of paragraph (2)”.
Penalties for offences
- Breach of the financial prohibitions is a criminal offence, carrying a conviction on indictment of imprisonment for a term of up to 7 years and a fine.
- Section 54 of the Economic Crime Act will effect an amendment of section 146 of the Policing and Crime Act 2017 (monetary penalties for breaching financial sanctions), on a date to be The imposition of civil financial penalties will thereafter be on a strict liability basis, with a penalty of up to £1,000,000 or 50% of the value of the funds or economic resources, whichever is the greater. Subsection (1A) will also provide (when it comes into force) that “any requirement imposed by or under that legislation for the person to have known, suspected or believed any matter is to be ignored” with the effect that a breach of the prohibitions in the Sanction Regulations does not require actual or constructive knowledge.
Summary of key features of sanctions regime
- The sanctions regime has the following key features:
- The prohibitions create an asset freeze and prevent dealing with the assets of any designated person.
- A breach of the prohibitions is strict (i.e. actual or constructive knowledge need not be shown). With penalties of 50% of the value of the funds or economic resources in question, the financial consequences of a breach could be catastrophic (for instance, in dealing with the assets of a company subject to sanctions).
- Unlike freezing injunctions (for instance) there is no jurisdiction for the Court to grant permission to deal with the Instead such permission must be obtained by a request for a licence directed to OFSI.
- This means that if a receiver is to be appointed to deal with assets subject to sanctions a court order is not on its own enough, permission from OFSI is also required.
- A licence is unlikely to be granted for these purposes unless it is required to preserve frozen assets, as opposed to managing them for greater profit if that amounts to “new or expanded activity” (OFSI General Guidance, paragraph 6.3).
Appointment of receivers where person subject to sanctions
- The jurisdiction of the English Court to appoint a Receiver is set out in section 37(1) Senior Courts Act 1981:
“The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.”
- While the power to appoint a receiver is undoubtedly broad and capable of applying in a wide variety of circumstances, its use is not unfettered and must be in support of some legal This point was made recently by the Court of Appeal in Kireeva v Bedzhamov [2022] EWCA Civ 35, and earlier in Masri v Consolidated Contractors International (UK) Ltd and others (No 2) [2009] Q.B. 450.
- Perhaps because of the relative novelty of the sanctions regime, and its limited impact to date (although this is likely to change), there is no reported precedent for the appointment of a receiver in these Although the appointment of a receiver to aid in the operation of a freezing injunction has some parallels with the position of the freeze imposed by sanctions, this analogy would appear of limited use where the receiver is to be used not to preserve assets subject to a freeze, but to enter into transactions that would otherwise be prohibited. Of greater potential use in demonstrating the court’s power to appoint a receiver are those cases where a receiver has been appointed where the company is incapable of managing its own affairs by reason of the absence of a properly constituted board or deadlock on the board of directors.
- In accordance with the OFSI General Guidance an application to appoint a receiver might be made (where a licence has already been granted) where it is required to manage a business subject to sanctions in order to preserve their Such an application might be made by a shareholder or partner who is subject to sanctions themselves, or is shareholder or partner in a business with another individual who is subject to sanctions. Equally applications may be made by individuals in respect of assets held in their own name which will be imperilled by the application of sanctions.
- The following are examples of situations in which the appointment of a receiver might be appropriate:
- Most obviously, where the appointment of a receiver is required to enable dealings with assets to preserve their value, where such dealings cannot take place without infringing sanctions;
- Where the shareholders in a company (which include a sanctioned person) are party to shareholders’ agreements or articles which prevent decisions from being taken without the sanctioned person’s consent, for example as to payment of dividends, appointment of directors, approval of directors remuneration, agreement to borrow money and sale of the business etc;
- Where one of the partners in partnership is subject to sanctions, and his/her/its agreement is required, or where a company is deadlocked without the votes of a sanctioned person.
There are therefore circumstances where the application for the appointment of a receiver may be made by non-sanctioned individuals, as well as those directly affected by the imposition of sanctions.
- In any of these cases, the applicant’s interest in the company, partnership or assets is likely to provide a sufficient basis for the Court to appoint a receiver where that interest is in a future realisation once no longer subject to sanctions (a situation not dissimilar to the future debts in respect of which a receiver was appointed in Masri). Providing that the receiver simply preserves the asset and does not pay out to a sanctioned individual there should be no question of breach of the sanctions regime.
- This approach is consistent with that adopted in the recent judgment of Jack J of 22 March 2022 in the BVI in JSC VTB Bank v Taruta BVIHC (Com) 2014/00624, where he continued the appointment of receivers over shares (in respect of a sanctioned judgment creditor) while recognising that the receivers could neither get assets in nor distribute them without a licence to do so. In doing so Jack J emphasised at [12] that,
“Save that their assets are frozen, sanctioned entities retain all their civic rights, including full access to the Courts and an entitlement to have their rights and obligations determined by this Court.”
