The policy intention of the UK government’s approach to ownership and control in UK sanctions regulations is to ensure that sanctions cannot be easily circumvented.
This guidance is applicable to all sanctions regimes, including the Russia (Sanctions) (EU Exit) Regulations 2019.
If a person (which includes an entity) is designated, or a ship is specified, under regulations made under the Sanctions and Anti-Money Laundering Act 2018, their name will be recorded on the UK Sanctions List. An entity for these purposes includes a body of persons corporate or unincorporated, or any organisation, or association or combination of persons. An asset freeze and some financial services restrictions will apply to entities that are owned or controlled, directly or indirectly, by a designated person. Those entities might not be designated in their own right, so their names might not appear on the Consolidated List. However, those entities are similarly subject to financial sanctions.
As set out in UK financial sanctions general guidance, an entity is owned or controlled directly or indirectly by another person in any of the following circumstances:
- the person holds (directly or indirectly) more than 50% of the shares or voting rights in an entity
- the person has the right (directly or indirectly) to appoint or remove a majority of the board of directors of the entity, or
- it is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person’s wishes
This could, for example, include:
- appointing, solely by exercising one’s voting rights, a majority of the members of the administrative, management or supervisory bodies of an entity, who have held office during the present and previous financial year
- controlling alone, pursuant to an agreement with other shareholders in or members of an entity, a majority of shareholders’ or members’ voting rights in that entity
- 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
If any of the above criteria are met, and the person who owns or controls the entity is also a designated person, then financial sanctions will also apply to that entity in its entirety (meaning these assets should also be frozen).
The prohibitions on making funds or economic resources available directly or indirectly to a designated person, also prohibit making them available to an entity who is owned or controlled, directly or indirectly, by the designated person. The UK government will look to designate owned or controlled entities/individuals in their own right where possible.
The Office of Financial Sanctions Implementation (OFSI) expects firms and individuals to fully consider the risks of an entity being owned or controlled. This could include conducting your own research, requesting further information from the entity, and taking legal advice if unsure about your obligations.
As set out in its Enforcement and Monetary Penalties guidance, OFSI does not prescribe the level or type of due diligence that should be undertaken to ensure compliance with financial sanctions. OFSI recognises that there is no one-size fits all approach.
In the circumstances of a breach, OFSI continues to consider every case individually on its merits based on the evidence, with a range of mitigating and aggravating factors considered including a company’s approach to their due diligence. A decision to impose a penalty is never taken lightly.
2. Public officials and control of public bodies
The Foreign, Commonwealth and Development Office (FCDO) does not generally consider designated public officials to exercise control over a public body in which they hold a leadership function, such that the affairs of that public body should be considered to be conducted in accordance with the wishes of that individual. For the purposes of regulation 7(4) of, for example, the Russia (Sanctions) (EU Exit) Regulations 2019.
FCDO does not intend for sanctions measures targeting public officials to prohibit routine transactions with public bodies, including (but not limited to):
- import duties
- the purchase or receipt of
- or public utility services, or
- any other ordinary and incidental payments
If FCDO considered that a public official was exercising control over the public body under UK sanctions regulations, FCDO would look to designate the public body where possible when designating the relevant public official.
For example, regarding government ministries, if a designated individual were a high-ranking public official serving as a government minister, the public body in which they held a leadership position would not be automatically subject to sanctions just because the minister is designated.
However, if there was sufficient evidence to demonstrate that the designated individual exercises control over the public body within the meaning of the relevant regulations, then the relevant legal test under UK sanctions regulations may be met (see regulation 7(4) of, for example, the Russia (Sanctions) (EU Exit) Regulations 2019). Whether it would be reasonable to expect that the affairs of the public body could in fact be conducted in accordance with the designated person’s wishes if the designated person so chose will depend on the circumstances. A relevant consideration could be, for example, whether the designated person derives a significant personal benefit from payments to the public body, such that they amount to payments to that person rather than the public body.
3. Public officials and control of private entities
There is no presumption on the part of the UK government that a private entity is subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which that official has a leading role in economic policy or decision-making. Further evidence is required to demonstrate that the relevant official exercises control over that entity under UK sanctions regulations.
For example, if a designated individual was a high-ranking public official, private entity X would not be considered by the UK government to be controlled within the meaning of regulation 7(4) just because it is based in or incorporated in the same country. If there was sufficient evidence to demonstrate that the designated public official exercises control in regulation 7(4) terms over private entity X specifically, then the relevant legal test under UK sanctions regulations can be met.
Specifically, for the purposes of regulation 7(4) of the Russia (Sanctions) (EU Exit) Regulations 2019, the UK government does not consider that President Putin exercises indirect or de facto control over all entities in the Russian economy merely by virtue of his occupation of the Russian Presidency. A person should only be considered to exercise control over certain private entities where this can be supported by sufficient evidence on a case-by-case basis.
For further guidance on ownership and control, see chapter 4 of OFSI’s general guidance.