JCOA -focusing on sanctions risk, with a focus on indirect sanctions, an area of complexity [Comsure notes]

THE JCOA  welcome two exceptional speakers:

• Nabi Abdullaev,
• Partner at Control Risks, who brings extensive experience in sanctions risk assessment and intelligence-led approaches.
• tests for sanction UBO control and case studies
• Collingwood Thompson KC,
• a leading UK barrister with first-hand expertise advising on complex and sensitive indirect sanctions matters. 
• The title of Collingwood's talk will be “Legal Issues in Control- Between a Rock and a Hard Place”

Each speaker provided a presentation – covering, for example, case studies,  exploring real-world scenarios, to explain evolving regulatory expectations, and share insights to help you strengthen your organisation’s sanctions framework and provide valuable insights that could assist you with tricky client matters.

NOTES FROM THE EVENT

The following our mathew Beale’s notes from this JCOA event

• Disclaimer - These are MATHEW BEALE’S personal, informal notes from the sanctions workshop. They may contain mistakes or incomplete information. Nothing here is legal advice.
• Sanctions regulations are complex and change frequently. Always seek advice from a qualified lawyer or compliance expert before taking any action based on these notes.

An extended warning is at the end of this post

NOTES

 Collingwood Thompson KC - “Legal Issues in Control- Between a Rock and a Hard Place”

COLIN FOCUSED ON

• Sanctions Framework: Missteps in sanctions laws can lead to severe penalties, including up to seven years imprisonment and fines.
• Control Definitions: Legal definitions of control extend beyond ownership; hypothetical influence also plays a significant role.
• Trust Assets Impact: Recent EU opinions suggest settlors may control trust assets, raising compliance risks for trust users.
• Due Diligence: Thorough documentation and investigation are essential to defend against sanctions breaches and regulatory scrutiny.
• OFSI Consultation: OFSI is reviewing control provisions, with potential updates expected in about a year to clarify compliance challenges.
• Sanctions Landscape: The evolving geopolitical context and broad sanctions scope necessitate increased vigilance and adaptive compliance strategies.

ACTION ITEMS FOR THE AUDIENCE

• Monitor updates and outcomes from OFSI consultation on statutory control provisions and prepare to adapt compliance frameworks accordingly  
• Ensure thorough client due diligence processes are documented, reflecting rationale and investigation outcomes related to control and sanctions exposure risks  
• Review current client trust structures for settlor control provisions that may present sanctions risks and advise caution accordingly  
• Stay informed on EU Court rulings related to settlor control and sanctions interpretations, especially regarding discretionary trusts and indirect control  
• Develop training or guidance materials emphasising the importance of assessing both direct and indirect/hypothetical control in sanctions compliance

SOME DETAIL

Sanctions Control Legal Framework

The legal framework around sanctions control is complex, with serious consequences for missteps, making understanding control central to compliance.

• Sanctions laws criminalise improper control of designated persons' assets with harsh penalties, including up to seven years imprisonment and fines for contraventions 
  • Control offences focus on whether funds or economic resources are owned, held, or controlled by designated persons
  • The law’s broad wording means proof of direct causal effect on Russia is not required
  • The UK sanctions regime closely mirrors EU law, lending EU court interpretations persuasive power
  • Discretionary trusts and indirect control pose significant legal complexities, as control can be exercised through agents or nominees

• Control tests extend beyond formal ownership to de facto and hypothetical influence
  • Control can arise if a person holds over 50% of shares or voting rights, or can appoint/remove a majority of the board.
  • The law uniquely includes hypothetical control—whether a person could exert control if they chose to, even if not currently exercised.
  • This wide scope creates challenges for compliance officers assessing control in corporate and trust structures
  • The UK’s Office of Financial Sanctions Implementation (OFSI) is consulting on refining these control provisions

• Indirect control includes influence through employees, agents, or nominees acting on behalf of designated persons
  • Control includes indirect relationships where it is reasonable to believe the individual will act according to the designated person’s directions
  • This applies particularly in trust structures where trustees own holding companies controlling subsidiaries
  • The layered nature of such structures complicates determining who effectively controls assets

Trust Structures and Sanctions Implications

Recent EU legal opinions signal significant changes in how settlors’ control over trust assets is viewed under sanctions law, increasing risk for trust users.

• The EU Advocate General opined that settlors with retained powers over trusts may be deemed to control or own trust assets despite traditional trust law views 
  • The opinion arose from litigation involving Mr Melachenko and a Bermuda discretionary trust with complex beneficiary and protector arrangements
  • Powers retained included appointing trustees and protectors, revoking the trust, and directing commercial decisions of underlying companies
  • The opinion challenges the standard trust law that settlors lack legal or equitable interest in trust assets
  •  It reflects concerns that trusts may be used to evade sanctions
• The EU court is expected to rule on this issue, with broad implications for trust users and service providers
  • If upheld, many trusts allowing settlor control could fall under sanctions restrictions
  • This could undermine the attractiveness of trusts in jurisdictions offering settlor management flexibility, such as the BVI
  • The English commercial court has already applied similar reasoning in a related Eurocam case
  • Trust companies and clients may need to reconsider trust structures to avoid unintended sanctions exposure
• The practical consequence is expected to be a more cautious approach by clients and lawyers on control issues
  • Lawyers anticipate advising clients to adopt overly cautious stances due to the risk of sanctions breaches
  • This caution may strain client relationships when funds are frozen or reported to authorities
  • Careful, documented due diligence is emphasised as key to managing sanctions risk in trust contexts

Sanctions Offences and Reasonable Suspicion

Sanctions offences can be triggered by reasonable cause to suspect control or benefit, and courts emphasise factual investigation over speculation.

• Offences can be committed without intent if there is reasonable cause to suspect dealings with designated persons' funds
  • The test relies on a reasonable person’s view based on available information, not mere speculation.
  • A UK case involving a litigation funding company showed suspicion arose from unusual asset sales and missing balance sheet items.
  • The court accepted that red flags like sudden business sales for low consideration can justify suspicion of retained control.
  • Investigations can dispel suspicions, as illustrated by a compliance officer’s CCTV check that revealed innocent behaviour  

• The scope of “making funds available” offences is broad, including indirect benefit to designated persons (26:58)
  • An Advocate General opinion on a case involving Yemeni oil contracts clarified that courts must consider whether funds might be passed on to designated persons
  • Lack of formal evidence of control does not preclude application of sanctions if a reasonable risk exists that funds benefit designated persons 
  • This broad interpretation increases compliance complexity for financial and commercial counterparties

• Documentation of due diligence and decision rationale is crucial to defend against enforcement scrutiny:
  • Regulators expect firms to record reasons for decisions regarding sanctions controls
  • Proper documentation can mitigate criticism even if conclusions turn out incorrect
  • This practice supports a transparent compliance culture and protects from regulatory actions

OFSI Consultation and Future Legal Developments

The UK sanctions regulator is actively reconsidering control provisions, reflecting the difficulties practitioners face.

• OFSI has completed a consultation on statutory control provisions to clarify and improve the law
  • The consultation aims to address uncertainties and practical challenges compliance officers face.
  • Results are expected within about a year, potentially leading to updated guidance or legislative changes.
  • This signals government recognition of the complexity and importance of clearer control definitions.
  • Practitioners should monitor this evolving regulatory landscape closely.

• Future guidance and legal developments will likely require closer factual examination beyond formal documents
  • Regulators and courts stress the need to assess real-world relationships and influence, not just legal titles
  • This approach aligns with the EU court’s direction and supports sanctions effectiveness
  • Firms must enhance investigative capabilities and compliance frameworks accordingly

• The evolving legal landscape increases the importance of robust client due diligence and risk management
  • Firms will need to balance compliance demands with client relationship management
  • Enhanced monitoring, documentation, and risk assessment processes are anticipated as standard practice
  • Early engagement with legal and compliance experts is advisable to navigate changes effectively

Key Lessons and Compliance Best Practices

The meeting emphasised practical steps to manage sanctions risks amid legal uncertainty and evolving standards.

• Reasonable cause to suspect requires a balanced judgment based on multiple factual indicators
  • No single factor suffices, but a pattern of red flags informs suspicion
  • Suspicion can trigger an investigation, but it should be documented and actively pursued to confirm or dispel concerns
  • Compliance officers must remain vigilant but avoid premature conclusions to balance risk and client service

• Due diligence and detailed record-keeping are critical defences against sanctions breaches
  • Firms should document all investigations, decision points, and rationale clearly in writing
  • This transparency reduces regulatory risk and supports internal accountability
  • Recording reasons helps in responding to client disputes when sanction actions strain relationships

• Understanding control requires a holistic view of legal structure, actual influence, and potential hypothetical control
  • Compliance frameworks must integrate legal review with operational and behavioural analysis
  • Training and resources should emphasise complex control scenarios in trusts and corporate groups
  • Close cooperation with legal counsel is essential to interpret evolving case law and regulatory guidance

• Client communications must address the heightened sanctions risks and possible relationship impacts
  • Transparency about cautious approaches helps manage expectations and mitigate conflicts.
  • Firms should prepare for increased client queries and potential terminations linked to sanctions compliance.
  • Proactive engagement can preserve business where possible while ensuring legal compliance.

Sanctions Market and Political Context

The sanctions regime’s broad scope and political backdrop shape the compliance landscape and enforcement philosophy.

• Sanctions aim to exert financial pressure on Russia to cease operations in Ukraine, broadening their reach
  • The legal framework intentionally does not require direct proof of sanctions' impact on Russia
  • President Putin’s characterisation of sanctions as a form of financial war underscores political tensions
  • The 2014 Crimea sanctions were more limited; the 2022 invasion sanctions expanded dramatically, increasing compliance demands  

• Sanctions laws have evolved from EU origins, with the UK adopting similar but occasionally stricter provisions
  • EU court decisions strongly influence UK interpretations despite Brexit
  • The UK’s inclusion of hypothetical control provisions marks a divergence from EU law, increasing compliance complexity  

• The political sensitivity and evolving sanctions landscape require ongoing vigilance and adaptive compliance
  • Firms must stay updated on regulatory changes, court decisions, and geopolitical developments
  • Sanctions enforcement is expected to remain a high priority for regulators globally
  • This environment drives demand for sophisticated legal and compliance expertise in affected sectors

If after all this you want some additional training, all you need to do is call Mathew@comsuregroup.com or 00447797747490

Important Disclaimer / Warning

These notes are my [MATHEW BEALE] personal record from the workshop on sanctions. They are informal, written in real-time, and may contain errors, omissions, or misunderstandings.

• Nothing in this post constitutes official advice, legal opinion, or professional guidance.
• Sanctions rules are complex, frequently updated, and highly dependent on specific circumstances and jurisdictions.
• I am not a lawyer, nor am I qualified to give sanctions compliance advice.
• Any statements, interpretations, or summaries I have recorded are my own understanding at the time of the workshop and may not be accurate or complete.
• For any real-world decisions involving sanctions, always consult a qualified legal professional or your organization’s sanctions compliance officer.

I am sharing these notes only for informational and educational purposes, to help others who attended (or missed) the workshop get a general overview of the discussions.

If you spot any inaccuracies, please let me know in the comments so I can correct them.