Author: Zulfi Meerza
12 December 2022
4 min read
Zulfi Meerza of Rahman Ravelli details the issues in a test case that highlighted the challenges of detecting and disrupting sanctions evasion.
In February 2022, Petr Aven, the former head of Russia’s largest private bank, Alfa-Bank JSC, was accused of maintaining close links with Russian President Vladimir Putin and was sanctioned by the European Union. The United Kingdom quickly followed suit, imposing its own sanctions on Aven in March 2022 and branding him a “pro-Kremlin oligarch”.
In May 2022, in response to concerns raised by HSBC and Monzo Bank about possible sanctions breaches detected through transactions in two company accounts, the National Crime Agency (NCA) made a successful ex parte application to Reading Magistrates’ Court for nine account freezing orders (AFOs) on accounts owned by Lodge Security Team Limited (LST) and Ingliston Management Limited (IML). These held a combined £1.5 million. LST and IML are UK-registered companies responsible for managing Aven’s central London properties and Surrey estate.
IML and LST subsequently applied to Westminster Magistrates’ Court to have the AFOs set aside or varied. In July 2022, the District Judge refused to set the orders aside entirely but granted a variation permitting Aven and his family to use £600,000 a year from the frozen funds in order to cover the costs of their “basic needs”. The decision reflected the NCA’s admitted failure to inform the court in the original application that the Office of Financial Sanctions Implementation (OFSI) had granted a special licence allowing Aven to use the accounts of IML and LST for such expenditure. The variation, therefore, brought the orders in line with OFSI’s granting of a licence.
Despite the OFSI licence, the NCA contended that the funds in the accounts represented the proceeds of crime, having allegedly been moved to circumvent sanctions against Aven. The NCA detailed a list of suspected sanctions breaches which featured an “unusual pattern” of spending’’. This spending included transactions to fund a £200,000 payment to two car dealers and a £160,000 transaction in an alleged attempt to conceal the sale of a Bentley. Despite Aven having an estimated net worth of £4.6 billion, the NCA expressed serious concerns that the variation would result in the bulk of the frozen funds being dissipated by Aven.
The variation of the AFOs prompted the NCA to seek a judicial review of the Westminster Magistrates’ Court ruling. Both LST and IML took the opportunity to challenge again the lawfulness of the refusal to set the orders aside. In its ruling handed down on 19 October 2022, the High Court partly allowed the appeals by IML and LST and ordered Westminster Magistrates' Court to review its ruling.
In her judgment, Collins Rice J observed that, when deciding whether to make an AFO or set one aside under 303Z4 of POCA 2002, a court must consider the threshold test - whether it can be satisfied that there are reasonable grounds for suspecting that money held in the account is intended by any person for use in unlawful conduct - taking into account all the circumstances.
As such, the Judge agreed with the applicant companies that the District Judge made an error of law by using an analogy which was unsustainable and which read into POCA a restriction on the court's powers which did not exist, namely that a change of circumstances was a legal precondition to the power to set aside an AFO: “The Court did not apply the correct approach to the determination of the applications before it. Not only did it wrongly modify the threshold test for its power, it did not apply that test – as modified or at all – to the facts and evidence before it, make the necessary findings, go on to consider the set-aside application on its merits, and come to a properly reasoned conclusion. The decision to refuse the application must be set aside”.
The Judge also remarked on the District Judge’s failure to scrutinise whether the NCA still had reasonable grounds to suspect Aven of a crime in July 2022, when the application to vary was made:
“In any event, I consider the errors and omissions I have identified in the decision under challenge to be fundamental to the extent of making it wrong, unfair and excessively speculative to uphold it on any basis. The Court did not properly address itself to or undertake the task required of it at all. The application to set aside the AFOs needs to be considered afresh, and the decision taken properly.”
Collins Rice J also quashed the lower court's decision to vary the freezing order, observing that the question of variation "necessarily presupposes that there is something to vary." The AFO will, however, remain in place without the variation order, pending redetermination by the magistrates’ court.
The ruling was the first significant judicial decision arising from the huge number of sanctions imposed on Russian companies and individuals during the past year. It can also be viewed as a challenge to the NCA’s stated ambition of cracking down on oligarch enablers and enforcing the sanctions imposed on those with links to the Putin regime.
This case also highlights the challenges of detecting and disrupting sanctions evasion and underlines the legally fraught nature of sanctions enforcement - an area which the NCA will have to navigate more frequently as its new kleptocracy unit ramps up its efforts. It also raises questions about the robustness of OFSI’s licensing regime. Critics argue that letting a sanctioned Russian oligarch use the suspected proceeds of crime to pay exorbitant household expenses of at least £600,000 per annum sends a confused message about how tough the UK intends its sanctions regime to be.
Furthermore, the ruling reveals a lack of co-ordination between the NCA and OFSI. If the sanctions regime is to have any real bite, these teething problems need to be resolved quickly through close co-operation between government agencies. This, along with sanctions awareness in the private sector, will ensure the effective implementation and enforcement of sanctions. As the test case on sanctions enforcement, the High Court ruling is also likely to embolden those seeking to challenge AFOs by arguing that the low threshold of “reasonable grounds to suspect”, coupled with limited or ineffectual judicial oversight, means that such orders are being granted without the standard of scrutiny expected by the High Court.
Senior Associate Solicitor
Zulfi’s in-depth expertise in corporate crime investigations, serious regulatory matters and complex commercial litigation makes him a logical choice to represent corporates, board members, senior business figures and high net worth individuals.