The Russian invasion of Ukraine has triggered a swift international response. The US, EU, UK, Canada, Australia and others have imposed a series of sanctions (many joint and coordinated) against Russia.
The US authorities adopt the approach that designations extend to any entity owned or controlled by designated persons. Similarly, EU regulations apply to funds and resources "controlled by" listed persons and prohibit making funds available to such persons "directly or indirectly”.
We have summarised cases on an issue-by-issue basis below, reflecting how leading common law jurisdictions have approached the imposition of Russian sanctions.[i] We have approached by case, rather than by jurisdiction, and have summarised the relevant legislative framework in England and Wales and the UK’s overseas territories (OTs).
Legislative Framework: England & Wales And The Overseas Territories
While sanctions can be imposed domestically in the UK’s OTs, in practice OT sanctions essentially replicate those in force in the UK. This has mainly been achieved via the extension of the UK’s domestic sanctions measures to the OTs, with certain modifications.
The Foreign, Commonwealth & Development Office publishes the UK sanctions list. The list provides details of those individuals, entities and ships designated under sanctions regimes set up using the powers in the Sanctions and Anti-Money Laundering Act, 2018 (SAMLA) – including designations made under the UN regimes – for the different types of sanctions measures (e.g. financial, immigration, trade, and transport).
On 31 December 2020, the UK brought into force the Russia (Sanctions) (EU) Exit Regulations 2019 (S.I. 2019/855) (the 2019 Russia-UK Regulations). These regulations were extended to most of the OTs including, in the Caribbean, the BVI, the Cayman Islands, Anguilla, Montserrat and the Turks and Caicos Islands, by the Russia (Sanctions) (Overseas Territories) Order 2020 (the OT-Russia Order). Bermuda was not included as it implements its own sanctions regime, but this typically follows the UK’s regime.
The 2019 Russia-UK Regulations were made under SAMLA and provide for the freezing of funds and economic resources of certain persons, entities or bodies involved in destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine, or obtaining a benefit from or supporting the Government of Russia.
Additionally, under the 2019 Russia-UK Regulations, a “relevant firm” is required to inform (giving particulars) the competent authority of the relevant Territory if it becomes aware, or has reasonable cause to suspect, that a person is a designated person or has carried out a relevant offence and the information or other matter on which the knowledge or cause for suspicion is based came to it in the course of carrying on its business.
A “relevant firm” includes:
a) a relevant institution (i.e. a regulated entity)
b) an undertaking that by way of business (i) operates a currency exchange office, (ii) transmits money (or any representation of monetary value) by any means, or (iii) cashes cheques that are made payable to customers
c) a firm or sole practitioner that provides to other persons, by way of business (i) accountancy services, (ii) advice about tax affairs, (iii) auditing services, (iv) legal or notarial services, or (v) trust or company services
d) a firm or sole practitioner that carries out, or whose employees carry out, estate agency work
e) the holder of a licence to operate a casino in the Territory
f) a person engaged in the business of making, supplying, selling (including selling by auction) or exchanging (i) articles made from gold, silver, platinum or palladium, or (ii) precious stones or pearls.
After a report is made, the relevant firm may need to apply to the competent authority for a sanctions licence, which authorises a person to take steps that would otherwise infringe the 2019 Russia-UK Regulations.
BVI – Application To “Come Off The Record”
- In JSC VTB Bank (VTB) v Taruta and Arrowcrest Ltd, BVIHC Com 2014/0062, dated 22 March 2022, Justice Jack, sitting in the BVI High Court (Commercial Division) (the BVI Court), refused an application by a BVI law firm to withdraw from representing VTB – known as “coming off the record” – on the basis that its client was the subject of sanctions.
In refusing the application the Judge observed (at paragraph 12) that:
“ … In particular, the sanctions regime is exclusively aimed at freezing assets. No provision is made for the confiscation of assets. 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. VTB’s right to litigate against Mr. Taruta has not been curtailed.”
The Judge also observed that once the law firm had accepted the client’s engagement, unless disinstructed, it was obliged to continue to represent VTB to the best of its skill and ability until the BVI Court permitted it to come off the record. The Judge also held that the issues of fee payment (which may have been affected by the sanctions) and reputational damage did not outweigh the opposing considerations, including the law firm’s duties as officers of the Court to maintain the rule of law by ensuring access to justice for the proper determination of VTB’s rights and obligations.
- In his judgment dated 23 June 2022 in AO Alfa-Bank v Kipford Ventures Ltd BVIHC (COM) 2022/0007, Justice Jack refused an application by another law firm for permission to come off the record as acting for its sanctioned client.
The law firm argued that it was unable to continue to act for the bank without breaching, or risking committing a breach of, the sanctions regime, as its application for a licence was yet to be approved. Justice Jack held inter alia that the provision of and billing for legal services did not amount to the giving of credit, within the meaning of the legislation, whether or not the client subsequently pays for that work. He also held that the sanctions regime did not displace a sanctioned person's constitutional rights; and a fair hearing could only be achieved if the sanctioned person has access to counsel.
BVI And England & Wales – Interaction Between Insolvency Regimes And Sanction Packages
- In JSC VTB Bank (VTB) v Taruta (referred to above) the BVI Court also had to consider the impact of sanctions on receivers appointed over a BVI company for the benefit of VTB Bank, which was seeking to enforce its US$30 million judgment against a Ukrainian businessman and politician.
The Court held that the receivership could not be discharged without a licence being obtained, because the receivership was a “financial benefit” to VTB within the sanctions legislation. Furthermore, the Court held that the receivers were required to obtain a licence before taking any further action in the receivership.
- In the Matter of the Application of Wesley Arthur Edwards, a Licensed Insolvency Practitioner Claim No. BVIHC (COM) 2022/0122, the Applicant sought a block transfer of a large number of companies to which he had been appointed either a liquidator or receiver, to another insolvency practitioner.
The case raised two issues: (1) whether the BVI Court had the power to approve a block transfer (which it answered in the affirmative) and (2) whether a licence was required from the Governor of the BVI in order to permit the transfer of the receiverships over assets that were frozen pursuant to Russian sanctions.
In relation to the second issue, the Applicant had been appointed as the receiver over shares in six companies in support of the execution of judgment debts that were obtained by certain designated persons (i.e. sanctioned entities or individuals). The Court had to consider whether the transfer of appointment was “dealing” with funds or economic resources, which would be a breach of the OT-Russia Order.
Having considered the “substance of the dealings”, the Judge held that there was no commercial dealing where one receiver is merely replaced by another. Accordingly, in his judgment there was no breach of the OT-Russia Order in such a case and no need for the receiver to obtain a licence from the Governor.
England & Wales
On 6 April 2022, in what was described as “an unusual case in all sorts of ways”,[ii] the English High Court considered an application from the majority of the directors of VTB Capital (owned by VTB Bank and also the subject of sanctions) to appoint Teneo Financial Advisory Ltd as the administrators of the company.
Prior to the introduction of the sanctions, the bank had already commenced a winding down of its UK business since 2014. The bank was balance sheet solvent as a result of the wind down process, but the imposition of sanctions had caused it to become cashflow insolvent. Among other issues that the Court had to determine was whether the proposed administrators could provide ‘insolvency services’ in such circumstances without a licence from the authorities.
The Court granted the application but it could not make an order for the appointment of the proposed administrators until the US sanctions authority, the Office of Foreign Assets Control (OFAC), granted VTB UK a licence that would permit the insolvency practitioners to manage and distribute the estate. Accordingly, the Court confirmed that it was minded to make an order on the terms sought, but that the order would be held in draft form pending the granting of the OFAC licence, at which point the administration appointment would be ordered.
England & Wales – Contractual Issues: Force Majeure Clauses
In a recent decision of the English Commercial Court in MUR Shipping BV v RTI Ltd  EWHC 467 (Comm), it was held that the particular wording of the force majeure clause contained in a contract of affreightment covered sanctions because it included the wording “any rules or regulations of governments or any interference or acts of governments” and “restrictions on monetary transfers and exchanges”.
In that case the party could not pay in US dollars as required under the contract. The force majeure clause was subject to the requirement that the affected party had to use reasonable endeavours to overcome the issue, but the Court held that this did not extend to requiring the seller to accept payments in another currency which would mean a variation of non-performance of the contract. Whether sanctions will be covered by a force majeure will turn on the particular wording of the clause, but as this case demonstrates, a broadly worded clause is capable of doing so.
Australia – Challenging Inclusion On A Sanctions List
Russian billionaire Alexander Abramov recently launched proceedings in the Federal Court of Australia against Australia’s minister for foreign affairs, suing for reputational harm caused by his inclusion in Australia’s Russian sanctions list and seeking an order removing him from the list.[iii] The case is pending.
Canada – Challenging An Exemption To Sanctions
The Ukrainian World Congress recently filed an application for judicial review with the Federal Court of Canada for a declaration that the Canadian government’s decision to provide an export permit to Siemens Energy was not reasonable, transparent, or properly authorised and asks for an order quashing the permit.[iv] The sanctions exemption will enable the return of a Siemens’ turbine to Russia’s Nord Stream, making possible the import and re-export of a further five turbines to the project.[v]
Sanctions against Russia present a major dilemma for implicated commercial entities. Likewise for the courts that adjudicate the complex matrix of commercial relations connecting Russia with the West.
In response to this dilemma, common law courts have adopted a measured approach. Where principled justifications lie for limiting the scope of sanctions, as with cases requiring law firms to continue representing sanctioned clients, courts do not unduly expand the scope of sanctions.
By contrast, where cases raise issues that go to the heart of the sanctions regime (e.g. interrupting financial benefits to designated entities), common law courts tend broadly to construe the scope of sanctions. It remains to be seen whether the courts’ current measured approach survives the continued progress of the conflict.
[i] We have focused on English common law jurisdictions.
Martin is Managing Partner of Martin Kenney & Co (MKS), a specialist investigative and asset recovery practice based in the BVI, focused on multi-jurisdictional fraud and grand corruption cases. In 2014 Martin was the recipient of the Association of Certified Fraud Examiners (ACFE) highest honour: the Cressey Award for life-time achievement in the detection and deterrence of fraud. Ranked by both Chambers and Partners and Legal500, for the past several years he has been chosen as a global elite “Thought Leader” of the legal profession by Who’s Who Legal. http://martinkenney.com/
Jamie is a barrister for Martin Kenney & Co (MKS), asset recovery legal specialists based in the BVI. He joined MKS in March 2009 and has since worked on numerous international fraud-related insolvency matters, including complex discovery applications in jurisdictions including the Cayman Islands, Belize as well as the BVI.