UK Government Permits Acquisition of Shares by Company Owned by Sanctioned Oligarchs

Please find detailed alert attached.

On 4 September 2024, LetterOne announced the completion of a transaction by which the company acquired 14.87% shareholding in Harbour Energy, a London-listed oil and gas company, for a purchase price of US$11.2 billion. LetterOne is not a sanctioned entity but is part-owned by sanctioned Russian oligarchs Petr Aven and Mikhail Fridman, who are reported to jointly own less than 50% of the company. Harbour Energy is a large UK oil and gas company with interests in Norway, South East Asia, North Africa and Argentina.

The shares comprise of non-voting, non-listed convertible ordinary shares with preferential rights (also known as preference shares). Under the terms of the deal, LetterOne will have no voting rights in Harbour Energy but will receive a share of Harbour’s profits paid as dividends. In its annual review for 2023, LetterOne stated that its sanctioned shareholders were “not involved in any way, directly or indirectly, in the management, administration or supervision” of the company or any of its subsidiaries.

In December 2022, under the UK’s National Security and Investment Act, the British government ordered LetterOne to sell regional broadband provider Upp Corporation on the basis that its ownership posed a national security risk as the ultimate owners of LetterOne were vulnerable to influence by the Russian State. The Act, which came into force in January 2022, allows the government to scrutinize and block acquisitions and investment in sensitive sectors or locations which pose a risk to national security. Notably, both Petr Aven and Mikhail Fridman had at the time resigned from the company’s board.

LetterOne has since challenged this decision before the High Court in London on the ground that it was forced to divest its investment at a low price. The High Court will consider whether the decision was justified under national security grounds or if less draconian measures and ongoing monitoring would have been sufficient to alleviate those concerns.

Amendments and Clarifications to the Scope of Regulations 54D and 60DB

On 5 September 2024, the UK amended the scope of the restrictions imposed on the provision of certain legal advisory services to non-UK persons under the Russia (Sanctions) (EU Exit) Regulations 2019 (“Russia Regulations”) via Amendment No. 4 (the “Amending Regulation”). Regulation 54D(4) previously provided that it was a defence to show that a person “did not know and had no reasonable cause to suspect” that the provision of the relevant legal advisory services was caught by the Russia Regulations. The Amending Regulation has now been amended such that Regulation 54D(1) only applies where a person knows that the purpose or effect of the legal advisory service provided is to enable or facilitate activity which would be prohibited under the Russia Regulations.

In order to amount to an offence, it must now be demonstrated that a person had actual knowledge and not, merely a reasonable cause to suspect, that the relevant activity is contrary to the sanctions regime. The scope of the restriction has also been narrowed to the extent that it applies only to legal advisory services that “enable or facilitate” activities that would be in breach of the Russia Regulations if carried out by UK persons or in UK territory. Previously, the restriction applied to any legal advisory services which were provided “in relation to or in connection with” such activity.

Prior to the introduction of the Amending Regulation, Regulation 60DB did not include an exception that allowed UK persons to provide advice relating to other UK sanctions regimes, non-UK sanctions advice or other compliance laws. As at 6 September 2024, Regulation 60DB permits the provision of legal advisory services relating to compliance with UK and non-UK sanctions regimes.^[2] The Amending Regulation included an amendment to the definition of “legal advisory service” in Schedule 3J of the Russia Regulations, to confirm that the restriction on providing legal advice does not prohibit (i) proceedings before administrative agencies, courts or other duly constituted official tribunals in any jurisdiction and, (ii) legal advice or other services in connection with the management of claims under a contract of insurance or reinsurance.

As a result of the introduction of the Amending Regulation, the General Trade Licence dated 11 August 2023, has been revoked.

OTSI (Office of Trade Sanctions Implementation) is here

On 12 September 2024, the UK published the Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (the “TASSCE Regulations”) which came into force on 10 October 2024. The TASSCE Regulations set out the powers of the Office of Trade Sanctions Implementation (“OTSI”), the body responsible for the civil enforcement of most of the UK’s trade sanctions. HM Revenue and Customs (“HMRC”) will remain the body responsible for criminal enforcement of all trade sanction measures while OTSI will be responsible for supporting businesses with trade sanctions compliance and civil enforcement of certain trade sanctions covering (i) provision or procurement of sanctioned services (such as IT consultancy), (ii) moving, making available, or acquiring sanctioned goods outside the UK, (iii) transferring, making available or acquiring sanctioned technology outside the UK, (v) providing ancillary services to the movement, making available or acquisition of sanctioned goods outside the UK and; (iv) providing ancillary services to the transfer, making available or acquisition of sanctioned technology outside the UK.

The TASSCE Regulations empower OTSI to investigate and enforce breaches related to these activities, including the circumvention of sanctions and failure to comply with information requests, reporting obligations and recordkeeping requirements. OTSI can impose a civil monetary penalty where it is satisfied that, on the balance of probabilities a person has either (i) carried out an activity that is prohibited by the UK’s sanction regime or (ii) failed to comply with an obligation as required under the UK’s sanctions regime. The maximum penalty OTSI can impose is the greater of £1 million or 50% of the estimated value of the breach or failure to comply.

Section 6 of the TASSCE Regulations provides that penalties may be imposed on a strict liability basis such that the defence that a person was not aware of or had no reasonable cause to suspect that an offence had been committed under the Russia Regulations, is to be ignored. By section 17, OTSI is further empowered to request that a person provide information from those they believe may be able to provide it and, where such information may be required for the purpose of (i) the exercise of functions under the TASSCE Regulations, (ii) monitoring compliance with, or detecting evasion of, sanctions regulations or (iii) investigating a suspected breach of a prohibition or failure to comply with an obligation imposed by the Russia Regulations. Finally, like OFSI, OTSI may issue warning and publish information about breaches of the Russia Regulation whether a monetary penalty is imposed or not.

OFSI Issues Monetary Penalty Linked to Russia's Invasion of Ukraine

On 27 September 2024, OFSI issued a monetary penalty of £15,000 against Integral Concierge Services Limited (“ICSL”) – the first monetary penalty for breaches of the Russian Regulations. According to OFSI’s penalty report, between 2022 and 2023, ICSL made or received 26 payments amounting to £15,487.30, in relation to property management services provided in respect of a residential property owned by a UK Designated Person. ICSL had also failed to comply with reporting requirements under two OFSI licences related to various payments to water and utility companies. This case brings to light key compliance issues, namely, that firms of all sizes and specialities must comply with the sanctions regime and carefully assess their exposure to risk when dealing with high risk clients and, that voluntary disclosure is an important factor to be considered by those who deal with persons or entities impacted by the sanctions regime.

Notice to Exporters 2024/26

On 27 September 2024, OFSI issued a monetary penalty of £15,000 against Integral Concierge Services Limited (“ICSL”) – the first monetary penalty for breaches of the Russian Regulations. According to OFSI’s penalty report, between 2022 and 2023, ICSL made or received 26 payments amounting to £15,487.30, in relation to property management services provided in respect of a residential property owned by a UK Designated Person. ICSL had also failed to comply with reporting requirements under two OFSI licences related to various payments to water and utility companies. This case brings to light key compliance issues, namely, that firms of all sizes and specialities must comply with the sanctions regime and carefully assess their exposure to risk when dealing with high risk clients and, that voluntary disclosure is an important factor to be considered by those who deal with persons or entities impacted by the sanctions regime.

Note that, despite this prohibition, a UK company may still apply for a licence to provide prohibited services to its Russian subsidiary provided it can demonstrate that the provision of such services aligns with the overarching purpose of the sanctions regime as set out in Regulation 4 of the Russia Regulations. Under Regulation 65 of the Russia Regulations, the Secretary of State maintains the discretion to grant licences where no licensing consideration exists. Any licensing applications submitted before 31 October 2024 will not be affected by this update.

OFSI provides further clarity on the meaning of “located” and “ordinarily resident” in Russia

In the FAQ’s published on 1 October 2024, OFSI was asked to provide further clarity on the meaning of the terms “located” and “ordinarily resident” in Russia as outlined in Regulation 19A(2) of the Russia Regulations. In response, OFSI noted that, the trust services sanctions target the provision of trust services, by UK persons in relation to the conduct of all UK persons wherever they are in the world or within the territory of the UK (i) to or for the benefit of persons connected with Russia (ii) and persons designated under the trust services sanctions. On (i), “UK persons” as defined under section 21(3) of the Sanctions and Anti-Money Laundering Act 2018 includes UK nationals and all bodies incorporated or constituted under the law of any part of the UK. As such, the sanctions regime apply to UK nationals and branches of UK companies operating overseas. On (ii) when seeking to determine who falls within the meaning of “connected with” Russia, OFSI advised that it is important to consider individual circumstances of each case and, that appropriate due diligence is conducted. The second trust services sanctions blog published by OFSI in May 2023, states that the definition of persons connected with Russia set out at section 19A(2) “…would not normally apply to individuals who only occasionally travel to Russia while normally being resident or located in the UK. The definition also does not include Russian nationals who are not ordinarily resident or located in Russia.”

NTE 2024/29: Compound settlement for breaches of Russian sanctions

HMRC has issued a compound settlement offer to a UK exporter for over £58,000. HMRC is empowered to enforce export controls and trade sanctions in the UK. Since the introduction of the Russia Regulations in February 2022, HMRC has issued six compound settlements against UK companies for breaches of the sanctions regime totalling over £1.3 million. The settlements made by UK companies include payments for breaches of licence conditions in relation to the export of military goods, unlicenced export of military goods and the unlicenced export of dual use goods under The Export Control Order 2008 and the Retained Regulation 428/2009 respectively.

Legal Services General Licence INT/2024/5334756

On 29 October 2024, a new Legal Services General Licence INT/2024/5334756 (“General Licence”) came into effect under Regulation 64 of the Russia Regulations and Regulation 32 of the Republic of Belarus (Sanctions) (EU Exit) Regulations 2019 following the expiry of Legal Services General Licence INT/2024/4671884 on 28 October 2024. The key changes include: (i) the fee and expenses caps have increased such that any professional legal fees and any Counsel’s fees paid in relation to a Designated Person must not exceed £2,000,000 for the duration of this licence (as compared with £500,000 inc. VAT) and, the expenses caps have also been revised increasing to £400,000 (as compared with £50,000 inc. VAT), (ii) OFSI has introduced a restricted permission to allow payment into non-UK bank accounts provided this satisfies other conditions of the General Licence (i.e. payment is in relation to Legal Services provided to a Designated Person) and, (iii) the fee caps in the General Licence apply to all in-house lawyers employed by a Designated Person as if they were a Law Firm and to Counsel instructed directly (per Counsel).

The Solicitor’s Regulation Authority issues the Anti-Money Laundering Annual Report 2023-24

The Solicitor’s Regulation Authority for England and Wales (“SRA”) has issued its Annual Report for Money Laundering covering 2023/2024. The SRA inspected 55 firms who had declared that they had dealt with a Designated Person in the AML Survey of 2022 or the Sanctions Survey of 2023. The SRA assessed the controls the firms has in place to mitigate their sanctions risk and, whether the firms where in compliance with the sanctions regime and the reporting and licensing requirements set out by OFSI. The SRA found that nine of the firms were not complaint with the sanctions regime and were thus referred for investigation. Of these, eight referrals related to a breach of a licence. The firms identified were referred for investigation because (i) they delayed reporting on the use of a general licence and/or (ii) they received payment from a Designated Person without first obtaining a licence.

UK adopts new rounds of sanctions against Russia

On 7 November 2024, the UK announced 56 new designations across a number of UK regimes targeting Russian’s military industrial complex. The new designations, aimed at restricting the supply of vital military equipment, mark the largest designations package against Russia since May 2023. The designations encompass a number of existing sanctions regimes including: the Russia Regulations, the Central African Republic (Sanctions) (EU Exit) Regulations 2019, the Libya (Sanctions) (EU Exit) Regulations 2020, the Mali (Sanctions) (EU Exit) Regulations 2020 and the Chemical Weapons (Sanctions) (EU Exit) Regulations 2019 and, target entities based in China, Turkey and Central Asia involved in the supply and production of goods including machine tools, microelectronics and components of drones.

The 56 designations include the following: 28 suppliers of machine tools, microelectronics, components for drones, ball bearings and other goods used for the benefit of the Russian military-industrial complex, four individuals who have benefited since the invasion in key sectors for the Russian State, five individuals who have supported the supply of goods to the Russian military industrial complex, one entity connected to Russia’s financial system, seven individuals connected to private mercenary groups with links to the Kremlin, three individuals connected to private mercenary groups with links to the Kremlin made under the Central African Republic Regulations 2019, one individual and one private group connected to private mercenary groups with links to the Kremlin made under the Libya Regulations 2020, two private mercenary groups with links to the Kremlin, three private companies with links to the Wagner Group and one individual under the Chemical Weapons Regulations.