Russia sanctions – “reasonable cause to suspect” not correct test for triggering asset freeze provisions

08/05/24

In an important judgment in a long-running fraud case involving several Russian interests, Cockerill J has held that the asset freeze provisions in the Russia (Sanctions) (EU Exit) Regulations 2019 as amended [the “Regulations”] were not triggered if there was a reasonable cause to suspect that an entity was owned or controlled by a sanctioned person or entity.  Rather, the provisions were not triggered until and unless it was proved that there was as a matter of fact such ownership or control. 

VPB is a Russian bank that went into liquidation in 2016.  Following the liquidator’s appointment, large scale fraud was discovered, amounting to some £1.34 billion.  It is alleged that Georgy Bedzhamov, the brother of the president of VPB prior to its liquidation, was involved in that fraud.  Mr. Bedzhamov was indicted in Russia but fled the jurisdiction following his sister’s trial and subsequent imprisonment.

Proceedings were commenced against Mr. Bedzhamov in this jurisdiction and a worldwide freezing order was secured against him and his assets.  Prior to those proceedings being brought, bankruptcy proceedings were brought in Russia and culminated in a trustee being appointed to realise and liquidate Mr. Bedzhamov’s assets.  The trustee applied for and was granted common law recognition in this jurisdiction. 

As part of the ‘foothill’ skirmishes preceding the main fraud trial, Mr. Bedzhamov alleged that there was reasonable cause to suspect that the litigation funder of VPB and the trustee – A1 LLC – was owned or controlled by a designated person or persons within the meaning of Regulation 5 and 6 of the Regulations.  A declaration to that effect was sought.  Had the declaration been granted, that would have impacted substantially on the funding of the litigation and therefore on the progress of the litigation itself.

Following a three day trial, the application was dismissed.  Although the Court found that had the relevant test been “reasonable cause to suspect”, it would have been met, the Court concluded that was not the test and it was not willing to find as a matter of fact that the funder was indeed owned or controlled by a designated person or persons.

The Court’s conclusion on the relevant test was predicated on a detailed statutory construction of Regulation 11, one of the asset freeze provisions in play.  Following a review of its wording, the Court had “no hesitation” in finding against Mr. Bedzhamov’s submissions.  The most telling point against his case was that if his approach were correct, the relevant provisions in the Regulations would prohibit dealing with funds or economic resources held by a person in respect of whom there are reasonable grounds to suspect is, but who is in fact not, a designated person (or owned or controlled by a designated person); and that a person who did so would, under Regulation 19, be liable for conviction on indictment – a conviction punishable by up to seven years’ imprisonment.  As VPB and the trustee asserted and as the Court accepted, that would represent a “monumental extension of criminal liability” and would self-evidently offend against the principle of strict interpretation of penal legislation.

In coming to this conclusion, the Court struck a different stance to that set out in the guidance issued by OFSI.  The Court referred to its previous statement on the same guidance in Mints and confirmed that it was not the type of guidance that analysed the provisions themselves, but rather was ex post facto and would appear to have been based on an earlier draft version of the provisions, different from those eventually enacted.

The judgment is here.