Russian Court Rejects Claim for Funds Frozen Under UK Sanctions, Highlighting the Importance of an OFSI Licence

The dispute concerned a payment instruction issued in July 2022 by Damir Garifullin, who asked Ural Bank for Reconstruction and Development (UBRiR), a Russian bank, to transfer US$1,345 from his Russian account to an account held with Trustbank in Tashkent, Uzbekistan.

To execute the payment, UBRiR routed the funds through its US dollar correspondent account at The Bank of New York Mellon (BNY Mellon). BNY Mellon subsequently transferred the money to Standard Chartered Bank in the United Kingdom, which acted as Trustbank’s US dollar correspondent. In November 2022, Standard Chartered froze the funds to comply with UK financial sanctions, preventing the transfer from reaching its intended destination.

Garifullin subsequently requested that UBRiR recover or return the money. When the funds remained frozen, he brought a claim against the Russian bank under Article 393 of the Russian Civil Code, arguing that it had improperly executed his payment instruction in breach of its contractual obligations. He sought compensation equivalent to the frozen amount.

The case, Damir Irekovich Garifullin v Ural Bank for Reconstruction and Development (Case No. A60-42276/2025), was heard by the Arbitrazh Court of the Sverdlovsk Region. The court rejected the claim, finding that the claimant had failed to establish the legal requirements necessary to obtain contractual damages.

Under Articles 865 and 866 of the Russian Civil Code, banks must execute payment orders through legally recognised methods and may be liable for damages where they fail to fulfil their obligations. However, a claimant seeking compensation must demonstrate that the bank breached its obligations, was at fault and caused damage through that breach. The damage must also amount to permanent financial loss.

The court found that UBRiR had not breached its payment obligations. Article 865 permits a bank to execute a payment instruction by transferring funds through an intermediary bank. UBRiR had followed this permitted method by sending the money through BNY Mellon, and the subsequent transfer to Standard Chartered formed part of the correspondent banking chain required to complete the payment.

The court also considered that BNY Mellon was UBRiR’s only US dollar correspondent bank. Consequently, the Russian bank had no practical alternative route through which to process the payment in the requested currency. Even if the chosen transfer method had not fallen within the methods expressly contemplated by Article 865, the court considered that UBRiR would not have been at fault for using it in the circumstances.

A further and particularly important aspect of the judgment concerned the requirement to demonstrate permanent financial loss. The court distinguished between funds that have been frozen under foreign sanctions and funds that have been permanently lost. It held that a sanctions-related freeze does not, by itself, establish permanent financial damage for the purposes of the Russian Civil Code.

According to the court, a claimant seeking to establish permanent loss in these circumstances must first apply to the relevant foreign sanctions authority for a licence allowing the funds to be released. If that application is refused, the refusal may provide evidence that the funds cannot be recovered. Garifullin had not provided evidence that he had applied to the UK Office of Financial Sanctions Implementation (OFSI) for a licence to release or return the money.

The absence of such an application was therefore central to the court’s conclusion that permanent financial loss had not been demonstrated. Although the funds had remained frozen since November 2022, the claimant had not established that the relevant sanctions authority had refused to authorise their release.

The judgment illustrates the interaction between domestic contractual liability and foreign financial sanctions. A payment may be initiated and processed in accordance with a bank’s contractual obligations, yet subsequently become blocked by a correspondent institution required to comply with sanctions imposed in another jurisdiction. The resulting delay or inability to complete the transfer does not automatically make the originating bank liable for the value of the funds.

The decision also highlights the practical importance of sanctions licensing procedures. Where funds are frozen by a financial institution to comply with UK sanctions, an application to OFSI may be necessary to establish whether their release is legally permissible. The availability of a licensing route does not guarantee approval, but the court's reasoning indicates that a claimant cannot simply assume that frozen funds have been permanently lost without first attempting to obtain the necessary authorisation.

For banks and financial institutions handling cross-border payments, the case reinforces the importance of maintaining clear records of payment instructions, correspondent banking arrangements and the reasons for any interruption to a transaction. It also demonstrates why institutions should distinguish between their own contractual obligations and restrictions imposed on intermediary banks under foreign sanctions regimes.

For individuals and businesses whose international transfers are blocked, the ruling provides a reminder that pursuing contractual compensation against the originating bank may not be sufficient. The relevant sanctions authority's licensing process can form an important part of establishing whether funds remain recoverable or whether a permanent financial loss has occurred.

The decision does not establish that all funds frozen under foreign sanctions can necessarily be recovered, nor does it create a general exemption from sanctions restrictions. It addresses the specific requirements for a damages claim under Russian civil law. Nevertheless, it demonstrates how courts may consider the availability of foreign sanctions licences when determining whether a frozen payment constitutes permanent financial loss.

By fLEXI tEAM