Key takeaways
Ministers have wide sanctions powers
The Supreme Court confirmed ministers can impose sanctions without needing direct evidence of misconduct.
Sanctions must be legally proportionate
The Supreme Court confirmed that sanctions must be fair and justified, aligning with broader policy goals.
Security goals may limit personal freedoms
Even severe restrictions were upheld where they served the UK’s foreign policy and security objectives.
These conjoined appeals raised important questions about the operation of the UK Russian sanctions regime. They highlight the extensive powers conferred on Ministers under that regime to target individuals and businesses falling within broadly defined classes. As noted by the Supreme Court, these powers allow the relevant Ministers to impose sanctions on persons who are not alleged to have committed any criminal offences or to have otherwise engaged in any wrongdoing as part of the UK Government’s wider policy strategy of putting pressure on the Russian Government with regard to the war in Ukraine.
Here, the appellants had been made subject to UK sanctions, which they challenged, among other things, on the grounds that they were disproportionate and interfered with their rights under the European Convention on Human Rights (Convention). The lower courts had found against the appellants.
The Supreme Court has now dismissed the appeals, finding that the actions taken against the appellants were both proportionate and lawful. In the case of the detention of the yacht MY Phi, the decision was unanimous. In the appeal brought by Mr Schvidler, it was a majority decision 4:1.
The Supreme Court stressed that, in this context, the relevant Ministers have special constitutional responsibilities, by contrast with those of a court, in relation to steps taken in an effort to respond to, and contain, Russia’s invasion of Ukraine. In the Supreme Court’s view, they also have superior institutional competence to make the relevant assessment whether the sanctions imposed in these cases may serve some useful purpose in responding to and containing Russia’s actions.
The relevant legislation
SAMLA
The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) confers on the Secretary of State and HM Treasury a power to make sanctions regulations where the relevant Minister considers that it is appropriate to do so, either to comply with an international obligation or for any one of nine purposes listed in SAMLA for which sanctions regulations may be made. The two purposes relevant to these appeals are where it would be in the interests of international peace and security and where it would further a foreign policy objective of the UK Government.
Pursuant to s.38 of SAMLA, a designated person may seek a review of the relevant Ministerial decision by the Court.
Russia (Sanctions) (EU Exit) Regulations 2019
The 2019 Regulations were adopted after Brexit and were substantially amended by the Russia (Sanctions) (EU Exit) (Amendment) (No 4) Regulations 2022 (SI 2022/203) (the 2022 Amendment Regulations). The Amendment Regulations introduced into the 2019 Regulations the sanction powers under which the measure against the yacht, Phi, was taken in the Dalston Projects case. The new maritime measures were designed to cause significant short-term disruption to Russian shipping, thereby restricting Russia’s economic interests and further holding the Russian Government to account.
Ministerial reports
Pursuant to a Ministerial Report to Parliament in 2019 prior to the 2019 Regulations being enacted, it was stated that sanctions were not an end in themselves. Rather, they were one element of a broader strategy to achieve the UK’s foreign policy goals to change the Russian Government’s attitude towards Ukraine.
A subsequent report to Parliament accompanying the 2022 Amendment Regulations explained that the ability to enforce sanctions regulations and measures through criminal proceedings would provide an effective deterrent.
The regulations relevant to the appellants
As regarded Mr Schvidler, the relevant 2019 Regulations were those dealing with asset freezes, including making funds or economic resourced directly or indirectly available to designated persons or dealing with such funds, whether directly or indirectly.
The shipping sanctions provisions relevant to the Dalston Projects appeal are found in regulations 57A to 57I of the 2019 Regulations (inserted by the 2022 Amendment Regulations effective as from 1 March 2022).
Regulation 57C(1)(b) empowers the Secretary of State to give a “movement direction” to the master of a ship owned, controlled, chartered or operated by persons connected with Russia. It is an offence for a person to whom a direction is given to fail to comply with the direction: regulation 57C(3).
Regulation 57D(3)(b) similarly empowers the Secretary of State to give a “detention direction” requiring the detention of a ship at a port or anchorage in the UK if the ship is owned, controlled, chartered or operated by persons connected with Russia. Regulation 57D(5)(c) requires that a detention direction “must state the grounds on which the ship is detained”.
A movement direction or detention direction can be of indefinite duration or a defined duration: regulation 57H. Regulation 57I(5)(a) defines the circumstances in which a person is regarded as “connected with Russia” for the purpose of the shipping sanctions. These include where the person is an individual ordinarily resident in Russia, or if the person is domiciled in Russia.
The proportionality test
It is unlawful for a public authority to act in a way that is incompatible with a Convention right. The appellants argued that the Ministers acted unlawfully because the measures they imposed interfered disproportionately with their Convention rights.
In Bank Mellat -v- HM Treasury [2013] UKSC 39, the Supreme Court set out a four-stage test for determining the proportionality of sanctions imposed:
whether the measure’s objective is sufficiently important to justify the limitation of a fundamental right;
whether the measure is rationally connected to the objective;
whether a less intrusive measure could have been used; and
whether, having regard to these matters and to the severity of the consequences, a fair balance has been struck between the rights of the individual and the interests of the community.
The background facts
Dalston Projects/The Phi
Mr Naumenko is a Russian businessman residing in Russia and the beneficial owner of the Phi. Mr Naumenko holds no political or administrative position in Russia, nor has he ever engaged in any sort of political activity. Nor is there any evidence that he has ever had any connection with President Putin or his circle. He has not been designated under the 2019 Regulations. The FCDO specifically considered and rejected a designation in his case.
Dalston Projects is a special purpose vehicle registered in St Kitts and Nevis that owns the legal title to the yacht. The Phi has been moored at a London dock since December 2021. She was due to leave London on 28 March 2022 for Malta.
Pursuant to a direction made by the then Transport Secretary, Grant Schapps, on 28 March 2022, the Phi was detained at the dock where it was moored with a movement direction that it must remain there. This was the first maritime detention in the UK under the 2019 Regulations.
Mr Schapps subsequently decided to maintain the direction in accordance with recommendations from his officials. The subsequent Transport Secretary, Mark Harper, expressly considered the proportionality of the continued detention and the possibility of making a movement direction to Southampton for repairs and continued detention there. In January 2023, the detention was continued but no movement direction was granted although licences had been issued for repair works.
Dalston Projects applied for the detention to be set aside. Among other things, it was argued that the power to detain had been used for an improper purpose because the power could only be used against ships involved in the transport of goods and personnel for the purposes of trading with Russia. The Phi had never been and would never be involved in Russian trade.
The lower court decisions
The High Court rejected this argument, holding that the power was not limited to disrupting Russian maritime trade and so not limited to vessels involved in the transport of goods and personnel to and from Russia. The Court added that it was reasonable to infer from Mr Naumenko’s wealth and economic activities that he was involved in significant economic activity in Russia which would be beneficial to the regime. It was not necessary to demonstrate that each individual detention decision contributed by itself to the achievement of the aims of the sanctions. It was enough if there was a rational connection between the sanctions measure and the aim.
The Court of Appeal dismissed the appeal from that decision. It rejected the argument that detaining the ship of one wealthy Russian individual who had no association with Russian politics had no rational connection to the legitimate aim. Furthermore, there were weighty public interest factors involved that outweighed the interference with the claimants’ property rights. The claimants were not suffering public hardship; they had had their luxury superyacht detained.
Mr Schvidler
Mr Schvidler is a naturalised British citizen, who left the USSR before the Russian Federation was formed and has never been a citizen of that state. He has been a long-term friend of the Russian businessman Roman Abramovich who was designated in March 2022.
Mr Schvidler has business connections with a number of Russian entities, partly due to the connection with Mr Abramovich. He used to be on the board of Evraz Ltd, a UK listed company engaged in mining and steel manufacturing and with many overseas subsidiaries, including in Russia. His involvement with Evraz appeared to be as nominee for a company wholly controlled by Mr Abramovich. Mr Schvidler resigned from his position as non-executive director of Evraz after Mr Abramovich was designated.
In March 2022, Mr Schvidler was designated under the 2019 Regulations and made subject to asset freezes and specific transport restrictions. His designation was stated to be, firstly, due to his personal and business connections with Mr Abramovich, who was considered to be contributing to Ukraine’s instability and also profiting from his connections with the Russian Government, as well as supporting that Government. Secondly, the previous connection with Evraz, which was in the extractive sector and, therefore, of strategic importance to Russia. On that basis, the Foreign Secretary considered Mr Schvidler to be an “involved person” for the purpose of the Regulations.
The lower court proceedings
Mr Schvidler argued that his designation was discriminatory and disproportionate. The High Court and Court of Appeal both disagreed. They rejected the argument that there were less intrusive measures that could have been taken that would have achieved the Government’s aim. The Government’s decisions were not self-evidently irrational or outside the range of reasonable responses. The Secretary of State had not failed to strike a fair balance between Mr Schvidler’s rights and the interests of the community. The Court of Appeal emphasised that if sanctions were to be effective, a serious price had to be paid by those who were within the definition of people to be designated under the 2019 Regulations.
The Supreme Court decision
The Supreme Court acknowledged that the Court has to make its own assessment whether a measure is proportionate to a legitimate aim or whether it is incompatible with the relevant Convention right. However, the Court will accord appropriate respect and weight to the views of the executive or the legislature as to how the balance between the interests of the individual and the general community should be struck, depending on the nature of those interests.
The sanctions were imposed in a context involving important issues of national security, which are central to the Government’s constitutional responsibilities. Therefore, the relevant Ministers should be accorded a wide margin of appreciation in deciding whether the measures they took were the appropriate ones and whether they achieved a fair balance between individual rights and the public interest.
Legitimate aim
As to legitimate aim, the aim of limiting and deterring Russian aggression in Ukraine was one of the most vital aims that the UK Government had been called upon to pursue in recent years.
Rational connection
As to rational connection between the detention of the Phi and putting pressure on Russia, the economic link was straightforward. Mr Naumenko could earn considerable income chartering out the yacht and that income could make its way back to Russia and could be used to contribute to the Russian economy. There was evidence that the effect of the package of sanctions imposed since February 2022 may have contributed to the contraction of the Russian economy.
As to the political link, the informed assessment made by experienced officials for Mr Schapps was that the Phi Direction would contribute to pressure on the regime in Russia, even if that pressure was exerted in subtle and invisible ways. Given the nature of the regime and the support on which it relied, that was a plausible assessment. It was also an assessment for which a court was wholly unqualified in constitutional terms and on grounds of relative expertise to substitute its own view.
As to Mr Schvidler, the rational connection was established. Regarding his involvement with Evraz, the designation would discourage prominent businesspeople from doing business in sectors of strategic importance to the Russian Government. Regarding his connection to Mr Abramovich, Mr Schvidler’s designation would encourage others to distance themselves from those close to President Putin.
Less intrusive means
On the evidence, there were no less intrusive measures which could have been used which would not have compromised the achievement of the objective of the measures taken.
Fair balance
The Phi Direction struck a fair balance between the individual rights of the owners and the limited impact of the detention on them as compared to the general interest of the community. It was argued that the yacht’s prolonged detention put it in need of maintenance and put its owners to expense, as well as reducing its chartering value. However, Mr Naumenko could absorb the expense with ease. These matters did not affect the fair balance struck by the Direction in any significant way.
Furthermore, the Transport Secretary had indicated he would be willing to grant permission for the yacht to be moved to Southampton for repairs so long as adequate security arrangements were put in place for the transfer. The parties had simply not yet reached agreement on the relevant arrangements. There was also a separate judicial review regime if the appellants wished to argue that their rights had been breached with regard to taking steps to maintain the yacht.
The designation of Mr Schvidler also struck a fair balance notwithstanding that the worldwide freezing of his assets was drastic and the effect on his family was substantial. As noted in the lower courts, sanctions often had to be severe and open-ended if they were to be effective. Furthermore, it was possible to apply under the OFSI licensing regime for permission to use the frozen assets for the family’s core needs.
The Supreme Court also dismissed the argument that Mr Schvidler’s designation was arbitrary, and therefore unlawful, because others who fell within the same designation criteria had not been designated. The Government made careful judgements whether to designate individuals on a case-by-case basis, having regard to their individual circumstances which would inevitably vary widely. In the Court of Appeal’s view, this was a marker of a proportionate and tailored response, not the opposite.
The Supreme Court went on to reject the argument that the Phi Direction did not satisfy regulatory requirements because it did not give sufficient reason for the detention. The regulations were drafted in broad terms and the Court would not imply a duty to give more detailed grounds in order to allow owners of detained vessels to exercise their statutory rights to challenge the detention.
Finally, the Supreme Court dismissed the claim that the yacht had been converted and that its owners were entitled to damages for the tort of conversion. As the detention of the Phi was held to be lawful, these issues did not arise.
In conclusion, the designation in both cases was held to be lawful and proportionate.
Dissenting judgment
Lord Leggatt dissented in the Schvidler appeal. His judgment is detailed and is worth reading by those dealing with similar issues. In essence, however, Lord Leggatt took the view that the Government had not given sufficiently good reasons for making it a criminal offence for an individual who had done nothing unlawful to deal with any of his own assets without the Government’s permission and imposing this sanction without any temporal or geographical limit. His Lordship considered this to be a serious invasion of liberty.
Comment
The Supreme Court has made it clear that the overriding public policy objectives of the UK sanctions regime will take priority over individual rights unless it can be said that a governmental decision is irrational or illegitimate. Ministers have a broad discretion in the way they exercise their statutory powers in such cases. It is clear that the regulations were drafted in broad terms to support these aims.
What might be more difficult to reconcile, are designations that do not involve high-profile or wealthy business people seen to be able to withstand sanctions (and who have the means to seek legal redress), or designations that are made in the context of permissible Russian trade, such as price-cap compliant Russian oil.
