Can a sanctioned person successfully sue? The curious case of Boris Mints
On 30 January 2023 Mrs Justice Cockerill handed down the judgment in PJSC National Bank Trust (“NBT”) and PJSC Bank Otkritie Financial Corporation (“Bank Otkritie”) v Boris Mints and others in the Commercial Court. The judgment is one of the first in the English Courts to offer a comprehensive overview of the Russia-related financial sanctions regime and their impact on a sanctioned party’s ability to pursue litigation.
The proceedings were brought by the two banks, claiming $850m from the Defendants on the basis that the Defendants conspired with representatives of the banks to enter into fraudulent transactions with companies connected to the Defendants by which loans were replaced with worthless or near worthless bonds. In response, the Claimants obtained freezing orders against the Defendants and the litigation was advancing to trial at the time of Russia’s invasion of Ukraine and the subsequent wave of sanctions against Russian persons.
The judgment rules on the applications made by the Defendants to stay the proceedings and release them from the undertakings which they have given the Court in connection with freezing orders against them. The Defendants argued that the Claimant entities - being sanctioned entities under the Russia (Sanctions) (EU Exit) Regulations 2019 (“Russia Regulations”) - could not therefore legally pay an adverse costs order, satisfy an order for security for costs or pay damages that may be awarded in respect of their cross-undertakings. Bank Otkritie is a designated person in its own right, whereas the NBT, the defendants argue, is a designated person by virtue of being owned or controlled by “at least two designated persons, Mr Vladimir Putin and Ms Elvira Nabiulina, the governor of the Central Bank of Russia, of which NBT is a 99% owned subsidiary”.
Cockerill J decided that:
- Contrary to the Defendants’ argument that entering a judgment would constitute “dealing with an underlying cause of action”, the Court can properly enter a judgment on the sanctioned Claimant’s claim, and a licence is not required. While a judgment can be seen as being an “economic resource” belonging to a sanctioned claimant and can create “funds” via the judgment debt, there is nothing in relevant legislation and guidance indicating that entering into a judgment would amount to “dealing” with such frozen funds of a sanctioned claimant.
- In relation to the ability of a sanctioned claimant to (i) pay an adverse costs order, (ii) satisfy an order for security for costs and (iii) pay damages awarded in respect of cross-undertakings in damages, these are all licensable activities and a sanctioned claimant can apply to OFSI for a licence to conduct such activities in connection with the litigation. While the relevant licensing ground for the adverse costs and security for costs order was considered to be paragraph 3 of Schedule 5 of the Russia Regulations (reasonable professional fees for the provision of legal services or reasonable expenses associated with the provision of legal services), for the cross-undertaking in damages the position differed slightly and the relevant ground was deemed to be paragraph 5 of Schedule 5 of the Russia Regulations (to enable an extraordinary expense of a designated person to be met).
- The second Claimant, NBT, was not owned or controlled by Mr Vladimir Putin and Mrs Elvira Nabiulina, despite being 99% owned by the Central Bank of Russia. The questioned turned on the interpretation of Regulation 7(4) of the Russia Regulations and whether a designated person can be deemed to control a company through their office, rather than personally; Cockerill J states that determining control through “political office” was unlikely to be the intent of the regulations, and determines that NBT is not a sanctioned entity. The judge made some further interesting comments which will have an impact on the ambiguous question of “ownership or control” in the context of designated entities, noting that “the [OFSI Guidance]… indicates that it is not the intent for complex investigations to have to be made or evidence gathered – because the list [of designated persons] should generally set out the persons targeted”.
The case therefore contains significant commentary on the expanding area of sanctions litigation and its interaction with the ownership and control regime. Defendants in proceedings against sanctioned claimants must be aware that the Courts will seek for those claims to proceed.
Claimants, on the other hand, should take a proactive approach in applying to OFSI for licences required in connection with their litigation.
On the much-contested question of ownership and control, Cockerill J’s comment regarding due diligence is notable in that it appears to suggest that counterparties are not expected to carry out complex investigations into entities which are not on the sanctions list. This has been a point of contention due to the introduction of strict liability through the Economic Crime (Transparency and Enforcement) Act 2022, which has created considerable caution amongst companies when applying the vague test of “control” to their counterparties. It will be interesting to see if OFSI will now offer further guidance on this point, which is surely in need of clarity.