Are We Serious About Sanctions?

The implementation of sanctions following Russia’s invasion of Ukraine in 2022 has widely been seen as ineffective, particularly as the Russian economy continues not to collapse. The resilience of the Russian economy shows that it has been able to partially work around the limitations imposed by sanctions, but perhaps worse than this are the failures on the part of Western countries, including the UK, to make sanctions as effective as possible. The failures on this front undermine the ability of sanctions to demonstrate resolve and to deter future bad actors – two of the three goals of sanctions set out in the UK’s new strategy (see above). These failures point to an inability throughout the British political establishment to come to terms with the necessary costs of opposing international aggression, and of the importance (and increased benefit) of acting sooner rather than later. The UK is one of few countries where support for Ukraine has near total political consensus, but nonetheless there are clear signs of the UK’s reluctance to enforce a strict sanctions regime both in theory and in practice. Though there has been no legal action taken on behalf of the government, the wrangling over sanctions applicability between private companies has undermined both the scope and the rhetorical strength of sanctions, while practically speaking the enforcement of sanctions has been weak to non-existent, with multiple recent reports of clear breaches taking place.  

Legal action on sanctions in the UK has thus far been based on disputes between private companies claiming sanctions as a reason to avoid paying each other, rather than any cases being brought by regulators. The issue of applicability of sanctions is obviously crucial to their effectiveness – excessively narrow application would allow even strongly enforced sanctions to be easily sidestepped (for instance the legal transfer of assets/shares to a spouse would allow a sanctioned individual to effectively exempt themselves). It is (presumably) for this reason that the UK Regulations underpinning the sanctions include provisions to include entities “owned or controlled” by individuals on the sanctions list, which are defined as entities which it is reasonable to expect that a sanctioned individual could (if they chose) ensure conducted their affairs in accordance with the individual’s wishes.  

This extremely broad applicability led to the conclusion in October last year in the Court of Appeal (Mints & Ors v PJSC National Bank & Anor) that as Putin was under sanction and “in a very real sense (and certainly in the sense of Regulation 7(4)), Mr Putin could be deemed to control everything in Russia”, every company in Russia was likely subject to the sanction. The judgement explained that “the absurd consequences arise not from giving the Regulation its clear and wide meaning but from the subsequent designation by the Government of Mr. Putin, without having thought through the consequences” and that “the remedy is not for the judge to put a gloss on the language to avoid that consequence, but for the executive and parliament to amend the wording of the Regulations to avoid such a consequence.” The FCDO quickly clarified that this was indeed not the intention behind the designation and that there was no presumption on their part that all private entities in Russia were under Putin’s control.  

There are two obvious solutions to this problem, both politically uncomfortable – the removal of Putin from the relevant sanctions list, or the acceptance that all Russian business is likely under sanction. Fortunately for the government this difficult decision was avoided, as a judgement in a different case slightly over a month later (Litasco SA v Der Mond Oil & Gas and another) reframed the definition as based on existing influence or de facto control, rather than potential ability to control.  

This politically (and commercially) convenient judgement is problematic on three grounds: one purely legal, one procedural, and one political.  
Firstly, the judgement in Litasco that the Regulation’s definition of control “is concerned with an existing influence of a designated person over a relevant affair of the company” seems irreconcilable with the Regulations’ explicit use of the conditional (“P would (if P chose to) be able, in most cases…”). Furthermore, there is no explicit link in the Regulation between control and the use of funds, as made in paragraph 68 of the Litasco judgement, further weakening the legal definition of control.  
Secondly, and following on from the first point, the failure of the government to understand their actions in designating Putin on the sanctions list does not justify rewriting the law from the bench, even if the government has indicated that it did not intend for the legislation to read the way it does. Since the Regulations in question are a statutory instrument rather than primary legislation amending them would not require an act of parliament, and would be relatively straightforward, but would require approval by parliament. Avoiding government embarrassment through judicial redefinition would not seem to be modelling the best democratic practices and insulates the government from the consequences of careless phrasing in under scrutinised statutory instruments.  
Perhaps most importantly, the entire affair undermines and weakens the UK’s sanctions regime. The new definition of control, as ‘demonstrably currently being exercised’ rather than ‘possible in most cases’, is much harder to prove, and will allow those under sanction much greater leeway to continue using their wealth and power against Ukraine by transferring assets to family members and other trusted 3rd parties who cannot be proven to be working at their behest (a practice we already know is common with Russian oligarchs). The UK establishment’s desperation to find a way to avoid cutting off all business with Russia also undermines the credibility of our claims to be willing to pay the price in standing up to aggression (see ‘Deter, Disrupt Demonstrate – the new UK sanctions strategy’ in this newsletter for more).  

Unfortunately these issues are almost more theoretical than practical, as even the legally accepted UK sanctions regime is not currently being strictly enforced. Relatively simple avoidance schemes, such as the transport of sanctioned luxury cars through Azerbaijan into Russia, have been highly successful (UK vehicle exports have increased by twenty times since the invasion) and despite increasing media attention on this issue no action has been taken to stop them – Tom Keatinge, the director of the Centre for Financial Crime and Security Studies is quoted in the Times as saying “There hasn’t been any meaningful example of sanctions enforcement from the Treasury and Department of Trade since Russia’s invasion of Ukraine”. 

While the new UK sanctions strategy is useful in its diagnosis of the logic underpinning sanctions and how they can be most effectively used to further British interests, this is of little use if the sanctions put in place are not implemented – though sanctions cannot be expected to win wars and solve conflicts by themselves, they are a useful tool, and the currently halfway house of big talk and small action leads to the opposite of the intended result – rather than demonstrating resolve, they seem to be showing that the UK is desperate to avoid paying the price required to prioritise security over business interests. Passing wide-ranging and powerful sanctions regulation only to reword or ignore its prescriptions is in a way worse than doing nothing at all.