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Experts cautioned that the UK's unique approach on share ownership by individuals and businesses subject to sanctions has created a loophole in the international system for enforcing sanctions against hostile states.
The UK regime may be weaker than those in the EU and the US as a result of the policy. Defenders of the laws as they stand, though, assert that they allow Britain more freedom to pursue hidden assets.
The UK does not automatically consider a company or property majority owned by two or more separate designated entities to be itself sanctioned, unless an additional hurdle is passed, proving the ownership is intentionally structured that way. The issue has arisen over cumulating the share ownerships of sanctioned oligarchs or state-linked companies.
In other words, even if the joint ownership exceeds 50% of share rights when taken together, the UK does not consider a corporation to be subject to sanctions if it is held by two separately designated people who do not have a joint arrangement of control.
"Consequently, if each of the designated person’s holdings falls below the 50% threshold in respect of share ownership and there is no evidence of a joint arrangement or that the shares are held jointly, the company would not be directly or indirectly owned by a designated person," according to the official guidelines from the British Office for Financial Sanctions Implementation.
"I would agree that the [UK] guidance adds complexity to the matter because OFSI does not aggregate stakes held by individual designated shareholders unless there is an ownership agreement between the shareholders."
The UK’s sanctions guidance also adds grey areas because it talks about ownership and control.
The UK’s sanctions guidance also adds grey areas because it talks about ownership and control.
"Third parties often don’t have access to corporate disclosures containing this kind of information, which poses serious challenges from a compliance perspective."
"Additionally, it would be very difficult to prove control technically, and therefore it is subject to legal challenge," Konecna continued.
In contrast to the two other major international authorities that implement sanctions, the UK has a discreet policy. James Birkett, director of research at Alaco intelligence, a London-based security and due diligence company, stated that this fact "has occasionally been lamented by various compliance contacts."
"I do not think there has been an occasion yet where this has led to a serious disagreement with regard to designations, but I suppose the potential is always there."
While it would be more challenging to do so under EU or US law, the UK grants itself the authority to freeze assets that are indirectly owned by entities that have been sanctioned.
Since the December arrest of Russian oligarch Mikhail Fridman in London on suspicion of money laundering, conspiracy to mislead the Home Office, and conspiracy to perjure, according to the National Crime Agency, which carried out the operation, the rule has come under increased public attention.
The information was eventually corroborated by numerous press sources quoting insiders of the investigation against the influential Russian tycoon, despite the fact that it did not specifically name him.
He has told the media that he denies the allegations. Together with his partner Petr Aven, a UK resident currently on trial for violating sanctions and co-founder of Alfa, the largest private bank in Russia, Fridman formed Alfa.
The two were simultaneously the largest shareholders in LetterOne, a Luxembourg-based private equity company that owns retail stores, phone companies, and energy companies throughout Europe.
Shortly after receiving sanctions as a result of Russia's full-scale invasion of Ukraine in February 2022, they both left the LetterOne board.
LetterOne is still not subject to penalties, as was most recently confirmed by the Financial Times, which put the company's value at $25 billion.
As co-founders of LetterOne, German Khan and Alexei Kuzmichev are also recognized oligarchs.
The sanctioned businessmen are still considered to be beneficial owners under the post-sanctions agreement Letter-One made for themselves, but they are no longer in charge of the company and will not be paid any further dividends.
Instead, LetterOne executives informed the FT that a large portion of the earnings would benefit charities and the Ukrainian opposition.
Gibson, Dunn & Crutcher lawyer Adam M. Smith asserted that "even if the loophole exists, it would be managed through the control aspect" of UK and EU legislation.
He defended it by adding, "it’s implemented by the private sector quite robustly because they would be afraid of falling foul of the regulator. If anything, there’s a risk of over-implementation."
Although "control is a very malleable concept and there can be difficulties with administrability," Smith, a senior advisor in the Obama administration's Office of Foreign Assets Control (OFAC) who dealt with sanctions policy, added that it could actually be tougher on sanctioned shareholders who "might control a company even if they own 1 percent of shares."
In contrast, the US system views any corporation as sanctioned if designated individuals or businesses possess 50% or more of it individually or collectively, regardless of any joint ventures.
Smith said, "There is something to be said for the control issue. The US encourages designated persons to sell shares to get under the 50 percent threshold."
"It’s important to avoid a global system that enables regulatory arbitrage," he said.
By fLEXI tEAM