Guidance on "reasonable cause to suspect"

What’s this about?

On 3 May 2024, the High Court handed down judgment in Vneshprombank LLC v Bedzhamov [1]. The case provided guidance upon sanctions legislation, in particular Regulation 11 of the Russia (Sanctions)(EU Exit) Regulations 2019 SI209/855 (the Russia Regulations) and the interpretation of “establishing reasonable cause to suspect funds are held or controlled by a designated person”.

Our Head of Economic Compliance, Ben Cooper says...

“This judgment provides helpful clarity upon the interpretation of “reasonable cause to suspect” in the context of sanctions offences. It is reassuring to know that for a person to commit an offence by dealing with funds under the Russia Regulations, those funds must in fact be owned or controlled by a designated person and that reasonable cause to suspect on its own will not be sufficient.”

The points not to miss...

• This case concerned an application by Bedzhamov (B) for a declaration as to whether Vneshprombank’s litigation funder (A1) is owned or controlled by a designated person within the meaning of Regulations 5 and 6 of the Russia Regulations. Prior to March 2022, A1 was owned by a Luxembourg company with 95% of its shares held by three shareholders. On 15 March 2022, those three shareholders became designated persons. Around the same time transactions took place whereby the sanctioned shareholders transferred their interests to a third party, who was not a designated person, for a low price.

• B argued that anyone who had reasonable cause to suspect that funds were being owned, held or controlled by a designated person should not deal with such funds and instead freeze the funds until they obtained satisfactory evidence, or the matter goes before a court or arbitrator.

• The issues before the court were therefore:
  • Whether the Russia Regulations apply where there is reasonable ground to suspect an entity is owned or controlled by a sanctioned person or whether the question of suspicion is irrelevant until it is proved that in fact the entity is owned or controlled by designated persons?
  • Whether in fact there were reasonable grounds to suspect that A1 remained in the control of the former owners (who were designated individuals)?• In her judgment, Mrs Justice Cockerill gave a useful summary of the applicable regulations, the applicable OFSI guidance and applicable caselaw on the exercise of statutory construction, including the test of “reasonable cause to suspect”.
• The court disagreed with B’s interpretation on the basis that Regulation 11 is worded as follows:

“(1) A person ("P") must not deal with funds or economic resources owned, held or controlled by a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources owned, held or controlled by a designated person.”

The court considered that the insertion of the wording “owned, held or controlled by a designated person” (underlined above), twice in the regulation was international on the part of those drafting the legislation and required the resources to be owned, held or controlled by the designated person in fact, before the concept of reasonable cause to suspect became relevant.

• The court concluded that for liability under Regulation 11 to be engaged, there must in fact be ownership or control by a designated person, before an offence can be committed by dealing with their funds or making funds available to them. Reasonable cause to suspect that the funds are owned or controlled by a sanctioned person will not be enough on its own to establish criminal liability.

• In reaching this conclusion, the court considered that B’s interpretation would considerably extend the potential liability under the Regulation if “reasonable cause to suspect” was the sole trigger for the offence (and not actual ownership or control of the assets by a designated person).

• Looking at the second point, the court concluded that based on the evidence provided, there were reasonable grounds to believe that A1 was controlled by the former owners. However, the court did not make a finding upon whether A1 continued to be owned or controlled by those designated persons as this had not been requested in B’s application and because there had been no order within the litigation to make a payment to A1.