knowledge 12 October 2022 |

EU Sanctions Targeting Russia: Authorisations seeking release of Frozen Funds or Economic Resources are the Preserve of the Central Bank

Introduction

As discussed in our previous briefings¹, the EU, in response to the invasion of Ukraine, has introduced significant further restrictive measures in respect of Russia. These new measures build upon the existing sanctions framework introduced in 2014 following Russia’s annexation of Crimea and expand its scope substantially.

The Irish High Court recently had cause to consider Council Regulation EU No. 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine (‘the sanctions regulation’) in the case of Pola Logistics² and three similar and related sets of proceedings³. The proceedings were issued during the Courts’ long vacation in a bid to beat the United States’ Department of the Treasury September deadline regarding dealings with sanctioned entities and a later EU deadline.

An initial step in the proceedings involved applications for summary judgment and while the applications were ultimately determined on contract law principles, it is worth noting the Court’s commentary in the Pola judgment regarding the sanctions regulation. In particular, the Court confirmed that under the sanctions regulation any authorisation for a derogation in respect of frozen funds is for the Central Bank of Ireland (the ‘Central Bank’), and not for the Irish Courts, to make. 

The Pola Logistics proceedings 

In this highly unusual summary judgment application, the plaintiff Cypriot shipping company sought specific performance in relation to the purchase of leased vessels from the defendants, a Maltese leasing company and its Irish parent, which are subject to sanctions. 

The plaintiff had named the Central Bank as a defendant in the proceedings and initially also sought various orders in the case against the Central Bank pursuant to Article 5(1) of the sanctions regulation. Article 5(1) permits a competent authority to authorise the release of frozen funds if certain conditions are met. The judgment records that the plaintiffs did not pursue the orders originally sought against the Central Bank as they acknowledged that Article 5 of the sanctions regulation envisages an application to the Central Bank for an authorisation to release frozen funds, rather than requesting the courts to make orders compelling the exercise of that jurisdiction or orders which would have the same effect.  

Despite the plaintiff not pursuing the reliefs sought against the Central Bank, Mr Justice Sanfey took the opportunity to review the sanctions regulation and the position of the Central Bank and the Irish Courts in respect thereto. 

Effect of designation 

The effect of the designation under Article 2(2) of the sanctions regulation is that all funds and economic resources belonging to or controlled by parties listed in Annex 1 of the Regulation must be frozen. Furthermore, no funds or economic resources may be made available, directly or indirectly (for example through companies owned or controlled by them), to or for their benefit, unless authorised or exempt.   

As the defendants’ ultimate beneficial owner, was a listed entity in Annex 1, the defendants were designated entities and/or related entities for the purpose of the sanctions regulation. 

Derogation from, and exemption to, the asset freeze

Article 5 of the sanctions regulation permits a competent authority of a member state, in Ireland’s case the Central Bank, to authorise the release of certain frozen funds or economic resources (in this case the vessels) if four cumulative conditions are met.

1. The funds must be “subject to” an arbitral decision pre-dating the imposition of the sanctions on the relevant entity, or “of a” judicial decision rendered in the EU or enforceable in the relevant member state (whether or not pre-dating the sanctions);
2. The funds must be used exclusively to satisfy claims secured by such a decision or recognised as valid in such a decision;
3. The decision must not be for the benefit of a sanctioned entity; and
4. The recognition of the decision must not be contrary to public policy in the member state concerned.

A key plank of seeking to rely on Article 5 of the Regulation is the existence of a court or arbitral decision and the other conditions relate to the nature of the Court decision and its effect. It is clear from the wording of the sanctions regulation that once such a decision of the court or arbitral tribunal exists it is for the competent authority to decide whether the above conditions are met. 

Mr Justice Sanfey confirmed this in Pola, where he observed that if the Court were to make the orders sought by the plaintiff to exercise the purchase options, it would then be for the plaintiff to apply to the competent authority to authorise the use of frozen funds pursuant to Article 5 to meet the stated commercial objectives. 

The Court also confirmed that Article 7 (2) of the sanctions regulation provides an exemption to Article 2 (2) whereby funds may be credited to a frozen account, provided such funds are frozen on receipt and remain frozen. This was important in the context of payments that would flow to frozen accounts if orders for specific performance were made in relation to the purchase of the vessels as envisaged in the proceedings. Mr Justice Sanfey confirmed that no application to the Central Bank for an authorisation permitting payments into frozen accounts is required if such conditions are met. 

Outcome

The Court ultimately granted the relief of summary judgment for specific performance of the purchase options and made similar orders in the three sets of related proceedings. Generally it is very rare for a Court to grant summary judgment in plenary proceedings however the Court found that it was appropriate in circumstances where no appearance was made by the defendant companies and the Court was informed that they were not opposing the sale and purchase of the vessels, and prices for the vessels had been agreed.   

Conclusion

This is the first time the Irish Courts have had the opportunity to consider the sanctions regulation and the judgment provides welcome guidance on the respective roles of both the Central Bank as competent authority and the Irish Courts.  It is clear that it is for the Central Bank, as Ireland’s competent authority, to grant or refuse an authorisation for a derogation in respect of frozen funds and the Courts will not usurp this statutory jurisdiction.

Also contributed by Louise Mitchell