Recent legal developments for insurers in sanctions against Russia

Post-Brexit, a new sanctions framework in the UK was required. Therefore, the Sanctions and Money Laundering Act 2018 was enacted under which the Russia (Sanctions) (EU Exit) Regulations 2019 were introduced. These brought into UK law the existing EU sanctions against Russia following the annexation of Crimea in or around 2014. These sanctions were substantially expanded following Russia's invasion of Ukraine in 2022.

The sanctions regulations are broadly split into three categories.

1. Financial sanctions. These target specific individuals or companies. For example, a person is prohibited from making funds or economic resources available to a designated person. Designated persons include VTB, Rosneft and Gazprom NEFT. President Putin is also a designated person. Funds includes insurance claims payments and premium refunds. Economic resources likely includes insurance policies.

2. Trade sanctions. These target particular sectors or asset classes. The activities that are precluded vary depending on the sector or asset class. For example, a person must not directly or indirectly provide funds or financial services pursuant to or in connection with an arrangement where the object of that arrangement is the importation or acquisition or supply to a third country of iron and steel products which originate in or are located in Russia. There are similar restrictions in relation to oil and oil products, gold, coal and coal related products and "restricted goods" (which includes things like military goods and aviation and space related goods).

3. Immigration restrictions.

As an exception to the sanctions in place, it may in some circumstances be possible to obtain a government licence to make a payment or provide financial support.

Through 2023, the sanctions regime against Russia was expanded. For example, with effect from 15 December 2023 new prohibitions included the following.

1. The direct or indirect provision of financial services or funds in pursuance of or in connection with the export or direct or indirect supply or delivery of luxury goods into Russia or to a person connected with Russia.

"Luxury Goods" are defined in the regulations and include things like pure-bred animals, certain alcoholic drinks, clothes, appliances, perfumes, jewellery, sporting goods and vehicle and vehicle parts.

2. The import or acquisition of "metals" that originate or are located in Russia, or the supply or delivery of metals into Russia. It should be noted that there is no specific sanction that precludes the provision of financial services or funds in relation to metals. "Metals" are defined to include copper, zinc, aluminium, nickel and tin, amongst other things.

3. The processing of payments that were previously processed by a designated bank or that are intended for payment to a designated bank, in each case whether directly or indirectly received from or to be paid to that designated bank.

This is important both in terms of the developments themselves and as a reminder that sanctions are a moving feast. This means ongoing monitoring of sanctions is crucial. A payment that may be made today may be precluded by new sanctions tomorrow.

The nuances of some of the regulations are highlighted by the way in which the maritime transportation of oil and oil products emanating from Russia has been dealt with. Rather than an outright ban, the Government has precluded activities relating to the maritime transportation of oil and oil products from Russia, including the provision of (re)insurance and payment of claims under existing insurance, unless the oil has been purchased or sold at or below a "price cap" agreed between a coalition of the G7 and EU countries and Australia. This was with the stated aim of ensuring the continued flow of oil and oil products into the global market whilst restricting Russia's ability to fund the war against the Ukraine.

The restrictions on what can, and can't, be (re)insured have been catered for in standard policy wordings. For example new endorsements LMA 5612 and LMA 5613 were introduced for the political risks and credit markets respectively in April 2023. This followed on the back of standard wording being introduced into the cargo and hull markets (such as LMA 5610 for cargo and LMA 5611 for hull).

On 11 December 2023, the UK Government announced the creation of OTSI, the Office of Trade Sanctions Implementation. Its currently anticipated remit is to ensure civil enforcement of trade sanctions, to monitor and investigate potential breaches and to provide business engagement and guidance on trade sanctions. This roughly equates to the financial sanction equivalent (OFSI) which was established in 2016. It is currently expected that OTSI’s legal powers will be established, and it will be up and running, in the course of 2024.

Slightly amended LMA  standard sanctions clauses were introduced alongside the existing standard clause LMA 3100 in October 2023. These provide additional options for insurers. The new standard LMA 3100A is in the same terms as LMA 3100 save that it is called a "Sanctions Limitation Clause" rather than a "Sanctions Limitation and Exclusion Clause". It continues to read:

"No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America."

The standard sanctions clauses was interpreted by the courts in Mamancochet v Aegis & Others [2018] in the context of sanctions imposed in relation to Iran. In that case, the court concluded that: (a) the sanctions clause is suspensory (not exclusionary); and (b) an insurer must show on the balance of probabilities that making payment of a claim would be a breach of an applicable sanction.

LMA 3200 is targeted specifically at ensuring the correct interpretation before the French Courts, and is intended to provide an alternative to LMA 3100/3100A where the policy is not governed by English or US law.

The Courts in the last couple of years have, not surprisingly, been faced with a number of (non-insurance) cases dealing with Russian related sanctions issues. A general theme of the judgments has been that where, broadly, performance under a contract is possible without a sanctions breach, the court will expect the parties to discharge their obligations. For example:

1. In Mur Shipping BV v RTI Ltd [2022], the contract stipulated payment in USD which was precluded by sanctions. However, payment could be made in EUR. The contract contained a force majeure clause which excused a party from performance but only where the state of affairs that created the force majeure event could not be "overcome by reasonable endeavours of the party affected". The court concluded that reasonable endeavours to overcome the force majeure event would include accepting payment in EURs.

2. The courts have held on a couple of occasions that where payment can be made into court to satisfy an obligation, payment should be made even if the assets are then frozen whilst sanctions applied: see for example Gravelor Shipping Ltd v GTLK Asia M5 Ltd & Another [2023] and Fortenova Grupa DD v LLC Shushary & Others [2023].

The Court of Appeal judgment in the Boris Mints case (PJSC National Bank Trust & Another v Boris Mints & Others [2023]) created uncertainty and concern when handed down in October 2023. The decision itself was not particularly controversial. The argument had been run that judgment could not be entered in favour of a sanctioned party because the entering of the judgment itself was dealing with a fund or economic resource. That was rejected. Judgment could be entered albeit that the proceeds under that judgment would be frozen under applicable financial sanctions.

Towards the end of the judgment, the Court determined that it was appropriate to provide some guidance on the meaning of the ownership and control test. This guidance is non-binding, but was and remains the highest judicial commentary on the meaning of the test. In summary, the test has a "clear and wide meaning" which the Court summarised as requiring a designated person who is capable of "calling the shots”. See our full article here.

The Court went on to commented that if the result of this interpretation was that it could be the case that all Russian bodies and companies are effectively under the control of Putin in his capacity as President of Russia – which the Court considered “may well be the case” – then this was a matter for Parliament. If that were correct, since financial sanctions have been issued against Putin, it would effectively mean that any Russian company is sanctioned. That would seem to run contrary to what has been a very targeted set of specific financial and trade sanctions.

The Courts subsequently rowed back a little from this non-binding comment. In Litasco SA v Der Mond & Another [2023], handed down on 15 November 2023, the court concluded that there was no evidence that the claimant (a company wholly owned by Lukoil, a Russian company) was under the de facto control of Putin or that Putin could control the use of funds paid by the defendant in that case. The fact that Putin could put Litasco and/or its assets under his control if he chose to do so was different from that being the existing state of affairs.

In addition, OFSI and the FCDO clarified (on 17 November 2023) their guidance on what constitutes ownership and control by public officials for the purposes of sanctions. In short, they say:

1. An entity is owned or controlled directly or indirectly by another person in the following circumstances:

   • a. the person holds (directly or indirectly) more than 50% of the shares or voting rights in an entity;
   • b. the person has the right (directly or indirectly) to appoint or remove a majority of the board of directors of the entity; or
   • c. it is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person's wishes

2. This is relevant because financial sanctions (which are directed at identified people or companies) will typically apply to designated persons and those entities owned or controlled by designated persons.

3. The FCDO does not generally consider designated public officials to exercise control over a public body in which they hold a leadership function, such that the affairs of that public body should be considered to be conducted in accordance with the wishes of that individuals. If the view was taken that the designated person controlled that public body, the usual approach would be to designate the public body. But whether there is sufficient control to bring the public body into the scope of the sanctions against the designated person is fact specific. Relevant factors would include things like whether the designated individual derives personal benefit from any payments made to the public body.

4. The guidance on private companies is even clearer:

"There is no presumption on the part of the UK government that a private entity is subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which that official has a leading role in economic policy or decision-making. Further evidence is required to demonstrate that the relevant official exercises control over that entity under UK sanctions regulations...
... Specifically for the purposes of regulation 7(4) of the Russia (Sanctions) (EU Exist) Regulations 2019, the UK government does not consider that President Putin exercises indirect or de facto control over all entities in the Russian economy merely by virtue of his occupation of the Russian Presidency. A person should only be considered to exercise control over certain private entities where this can be supported by sufficient evidence on a case-by-case basis..."

There are a number of practical steps an insurer/reinsurer or insured/reinsured can take to minimise the risks relating to sanctions.

1. The first is to gather full information at every stage to ensure that there is maximum visibility of the parties in the chain, the nature of the underlying transaction or asset class and purpose for which the payment is made.

2. Secondly, it is important to understand the sanctions regime and which sanctions preclude a payment being made. This enhances the chance the correct answer on sanctions is reached, and makes any explanation as to why a payment should, or should not, be made more compelling.

3. Where a sanctions issue emerges, the impacted party should gather appropriate evidence to support its position. It will not be sufficient simply to assert vague concerns about possible sanctions issues if that party cannot show on the balance of probabilities that a payment or other performance is precluded because of sanctions.

4. Parties are expected to find ways of meeting their obligations provided that does not thereby put them in breach of sanctions. Therefore if there is a legal way of meeting a policy obligation, the starting point is likely to be: have the parties taken reasonable steps to adopt that permitted approach?

5. Where a licence would be required, steps should be taken early on to obtain that licence. It can be difficult to obtain licences on a very expedited basis especially where multiple regulators (HMT/OFSI and OFAC for example) must be engaged.

6. Where a sanctions issue is raised, the parties should in any difficult cases, obtain expert advice to guide them on the correct stance to adopt.