ARTICLE 2: EXCEPTIONS AND LICENSING
Since Russia’s military incursion in Ukraine began on 24 February 2022, the UK has introduced an extensive package of economic sanctions against Russia. By the end of August 2022, over 1,270 persons had been designated and by the end of October 2022, approximately £18 billion of Russian assets had been reported as frozen.
The sanctions regime is intended to encourage Russia to cease actions destabilising, undermining or threatening the territorial integrity, sovereignty or independence of Ukraine, predominately by imposing financial penalties. The primary objective of the sanctions is to “coerce” Russia, or individuals within/connected to Russia, into “changing their behaviour by increasing the cost on them to such an extent that they decide to cease the offending behaviour”.
Whilst the sanctions regime is not (explicitly) confiscatory in nature, it has (at times) arguably come close to trespassing beyond its scope. That is particularly the case in the context of legal proceedings which involve sanctioned Russian parties. The practical effect of the sanctions regime has severely impaired the ability of sanctioned Russian parties to enforce their legal rights.
In this series of articles, BVI litigation associate Charles Goldblatt will consider the effect of the sanctions regime on civil proceedings in the BVI Courts involving sanctioned Russian parties and, in particular, the practical difficulties of pursuing and/or defending such claims.
The first article of the series considered (a) the legislative framework of the sanctions regime in effect in the British Virgin Islands (BVI), (b) the prohibitions in effect under the legislation and (c) the application of the sanctions regime beyond the Consolidated List of designated individuals and entities. This second article considers various exceptions to the prohibitions and licensing grounds. In the third acticle we will consider some recent decisions on sanctions from the English and BVI courts.
NB: The following is intended as a brief overview/summary of the relevant regimes. Specialist advice on this complex and highly fact-specific area of law is essential.
Exceptions and Licensing
In the first article of this series, we considered the legislative framework of the UK Sanctions Regime as extended to the BVI. In this article, we will consider the various exceptions and licensing powers which can allow otherwise prohibited transactions and activity to take place, and those which may apply in the context of contentious proceedings which involve sanctioned Russian parties.
Exceptions apply automatically in certain circumstances and do not require a licence. Examples of exceptions to an asset-freeze include:
- A transfer of funds to a relevant institution for crediting a frozen account where funds are transferred in discharge (or partial discharge) of obligations that were concluded or arose before the date of designation;
- A relevant institution crediting a frozen account with interest or other earnings due on the frozen account, provided those funds are frozen immediately;
- A relevant institution crediting a frozen account with payments from a third party, provided those funds are frozen and the transaction is reported without delay.
A licence is a written permission from the Office of Financial Sanctions Implementation in the UK (“OFSI”) or the Governor of the Virgin Islands (“GVI”) in the BVI, which allows a specific transaction or activity, which would otherwise breach the prohibitions imposed by financial sanctions, to take place.
Licence applications must be incredibly detailed, and must also be made under appropriate licensing grounds. OFSI/GVI can only issue a licence where the transaction or activity in question falls within one of the specific and relevant licensing grounds. The available grounds include:
- Basic Needs: (i) to enable the basic needs of a designated person or (in the case of an individual) any financially dependent family member of a designated person to be met and (ii) to enable the basic needs of an entity (i.e. expenses strictly necessary to ensure the continued existence of the designated entity) to be met;
- Fees for the provision of legal services: to enable the payment of reasonable legal fees and disbursements in relation to legal services provided to a designated person;
- Routine maintenance of frozen funds and economic resources: to enable the payment of reasonable fees or service charges resulting in the routine holding or maintenance of frozen funds or economic resources;
- Extraordinary Expenses: to enable the payment of extraordinary (meaning unexpected, unavoidable and not recurring) expenses;
- Pre-existing judicial decisions: to enable the use of frozen funds or economic resources to implement or satisfy (in whole or in part) a pre-existing judicial decision or lien which was established before the date of designation, is enforceable in the UK and is not for the direct or indirect benefit of a designated person;
- Extraordinary situations: to enable anything to be done (which may not necessarily involve an expense) to deal with an extraordinary (meaning unexpected, unavoidable and not recurring) situation
- Prior obligations: to enable the satisfaction of an obligation which arose prior to the date of designation, provided the obligation does not relate to any of the prohibited trade provisions or result in funds or economic resources being made available (directly or indirectly) to a designated person.
OFSI have also issued a number of general licences, which allow multiple parties to undertake (subject to certain requirements) specified activities otherwise prohibited by sanctions legislation, without the need for a specific licence. However, OFSI does not accept applications for general licences and they are issued under such conditions as the UK Government considers appropriate and where doing so will support the Government’s policies. Notably:
- On 17 October 2022, OFSI issued a general licence for cases administered by the London Court of International Arbitration (“LCIA”) pursuant to the LCIA Arbitration Rules. The general licence covers payments to the LCIA by designated persons, companies owned and controlled by designated persons or their legal representatives and extends to registration fees, deposits, arbitrator fees and expenses and LCIA charges, as well as fees and expenses of tribunal secretaries and experts appointed by the tribunal, pursuant to the LCIA Schedule of Arbitration Costs.
- On 28 October 2022, OFSI issued a general licence to permit the payment of legal fees owed by designated individuals and entities. In practice, the general licence relating to legal fees means that a UK legal firm or UK Counsel who has provided legal advice to a designated person will not have to apply for a specific licence before they can receive payment from that designated person, provided that the terms of the general licence are met.
However, GVI has confirmed that the general licence granted by OFSI relating to legal fees does not (yet) extend to the BVI. As such, BVI legal practitioners who act for sanctioned Russian parties must still apply for a licence to receive payment for their services.
Whilst neither the UK nor the BVI Sanctions Regimes prohibit the provision of legal advice to designated persons1, or restrict court proceedings by or against individuals or entities who are subject to sanctions, the overall effect of the regimes presents numerous practical difficulties for parties to such proceedings and their legal representatives, notwithstanding any licensing grounds which may apply.
In particular, the regimes restrict the ability of sanctioned persons and entities (i) to pay for legal advice and (ii) to satisfy obligations which may arise during the course of proceedings, including court fees and amounts payable under court orders, without a licence.
By the end of 2022, OFSI had received 1031 specific licence applications under the Russia regime and issued 82 licences. Given the substantial delays faced by applicants for specific licences (neither OFSI nor GVI provide a timeframe for considering applications and appear to be taking several (6-9+) months to render decisions), an unintended consequence has been significant delay and uncertainty for legal representatives and parties to proceedings which involve sanctioned Russian parties.
In relation to compliance with court orders, there is a specific licensing ground for pre-existing judicial decisions. However, there is no such ground for judicial decisions made after the date of designation. Whether obligations under judicial decisions made after the date of designation are capable of being licensed will depend on the specific circumstances of the case. If no licensing ground applies, OFSI / GVI have no jurisdiction to grant a licence.
Finally, a further and possibly unintended consequence of the sanctions is the inability of BVI incorporated and subsisting companies subject to the sanctions regimes to retain the services of their registered agents without a licence. Many registered agents acting for BVI companies ultimately owned or controlled by designated persons have resigned, leaving those entities liable to strike off and (ultimately) dissolution if a replacement cannot be appointed.
In the next and final article of this series, we will consider some recent decisions from the English and BVI Courts where the judiciary have sought to navigate the issues caused by the imposition of sanctions.
1On 30 September 2022, the UK Government announced an intended prohibition on the provision of “transactional legal advisory services” by UK law firms to Russian clients. However, as at the date of this article, no such prohibition has been introduced.