- with readers working within the Securities & Investment industries
- within Strategy topic(s)
llateral damage caused to legitimate property rights (eg of family members).
2.15 Without the hypothetical control element of the control test, how would you or your organisation identify and respond to potential circumvention by DPs through complex or opaque arrangements intended to obscure a DP's influence?
The first condition and its interpretative schedules in practice cover a great deal of scenarios of indirect control (de jure or de facto). For instance, they provide that 'where a person controls a right, the right is to be treated as held by that person', and that the arrangements for such control (and for holding shares jointly) can include 'any scheme, agreement or understanding, whether or not it is legally enforceable'. This in practice covers many scenarios where a DP has sought to obscure their (current) influence, even before the second condition (let alone its hypothetical element) is engaged.
Taking the reference to 'circumvention' literally, if a counterparty suspects the company they are (potentially) dealing with, and/or its owner, of a circumvention offence under sanctions regulations (or an equivalent act overseas) then this has a potential impact under proceeds of crime laws, which may make it unlawful to transact without consent from the National Crime Agency (NCA). If an AML-regulated firm has reasonable grounds to suspect the same, it may also have an obligation to report these grounds to the NCA in a separate report. The hypothetical control test adds nothing to these provisions and arguably distracts from them.
2.16 What impact, whether positive or negative, does the assessment of hypothetical control have on legal risk and administrative burden?
For all the reasons already considered, the hypothetical control assessment is unlikely to have a substantial impact on the legal risks for someone subject to the jurisdiction of UK sanctions; the surrounding provisions will invariably be sufficient to determine the extent of the risk. For an individual or a business that seeks to be thorough, however, there may well be a significant additional administrative burden from having to spend time examining and seeking evidence or reassurances with respect to an issue that is likely to be impossible to resolve in practice.
3.8 Do you find that in practice, there is enough evidence to substantiate the hypothetical element - "P would (if P chose to) be able" - in the control test when dealing with hypothetical control? Why/why not?
What evidence or information is most/least persuasive in these cases?
The nature of the arrangements by which a person would retain the de facto option to control a company (in circumstances where there was no de jure option, at least via a right to appoint or dismiss a majority of its board of directors) is likely to mean that it is undocumented and/or clandestine, especially where the person is designated (or had been anticipating designation). It is hard to imagine a scenario where the company concerned would voluntarily provide evidence (in whatever form) to confirm such an arrangement, in circumstances where a (continued) business relationship depended on the opposite.
Conversely, the lack of existence of such an arrangement is impossible to prove definitively. A company can (in theory) provide substantial evidence to describe how it is currently owned or controlled; it may even be able to describe controls that would in practice prevent a DP from gaining control of it. But the fundamental absurdity of the task (to refute an inference or a supposition, absent any direct evidence) is obvious. Even the most extensive (and expensive) package of evidence aimed at proving the negative could not definitively do so, such as to reduce the risk to zero. In practice, some attempt to show the detail of how the company is run (and could be run, in hypothetical scenarios) will likely be preferable to a 'tick-box' approach that simply states (as some companies do) that the hypothetical control test is not met.
3.9 What are the main challenges when forming an assessment of whether a DP would be able to exercise control if they chose to? How do these challenges affect due diligence burdens, resource allocation, the risk of litigation against your assessment or inconsistent outcomes?
Companies subject to assessment may resist attempts to gather extensive evidence, in part because the exercise of proving the positive case (that the company is owned or controlled by others) is necessarily intrusive, and due diligence may sometimes be misconstrued as a straightforward 'tick-box' exercise. In the presence of grounds (even if weak) to suspect ownership and control by a DP, the 'burden of proof' is effectively on the companies suspected (or on those within the organisation pressing to commence or continue business).
3.10 Is it costly to investigate hypothetical control and to implement financial sanctions on this basis? If yes, please provide monetary estimates. Would removing the clause offer tangible savings on your implementation and/or compliance costs?
It is difficult to isolate the costs of this specific aspect of the control assessment. Arguably the biggest cost is in undermining the credibility of the due diligence exercise by including a question that is virtually impossible to answer.
3.11 Are there any best practices or internal procedures your organisation has developed for managing issues associated with the assessment of the hypothetical element? Conversely, are there any procedures that you disregarded as being ineffective?
BCL has not developed procedures specifically for the hypothetical element of the test. As above, while every case is different, there is usually little value in a simplistic 'box-ticking' exercise that simply states that the test is not met.
3.12 How, if at all, could [the government] better support firms in making an independent assessment of hypothetical control (without providing a determination)? For example, through access to additional public sources of information, the publication of control typologies, and/or facilitating dissemination of industry-produced best practice?
Guidance on best practice may be helpful but equally could serve to confuse by layering additional levels of ambiguous phrasing and case studies on top of an already difficult combination of legislation and case law. The government should consider a process for obtaining binding (though not necessarily final) determinations through an impartial (judicial) process.
4.8 Do you find that in practice, the way hypothetical control... presents in sanctions casework typically corresponds with 'potential future de facto control' or 'potential future de jure control' as given in Mr Justice Thompsell's control typology [from the Hellard case]?
It may be unhelpful to require too strict a demarcation between the four categories identified in the Hellard case. Notably, the case study provided in the Call for Evidence (figure 2A), as an example of (de jure) potential or hypothetical control, refers to a deed between the shareholders granting a DP the right to nominate and remove the majority of the directors. The existence of this right means the scenario is caught within the first condition rather than the second, which would nevertheless be considered (rightly, in most cases) to be concerned with actual (current) control.
As ever, where difficult legislative drafting has given rise to voluminous case law and guidance, the starting point must remain the wording of the law itself. Scenarios where 'it is reasonable to expect that [the DP] would, if [they] chose to, be able... to achieve' control of the company are caught. The real point about potential, future de facto control (as made clear in Hellard) is that the evidence for it will almost certainly be lacking.
4.9 Are there any examples from your casework that do not fit neatly in the four categories given in Mr Justice Thompsell's control typology, or which reveal gaps or ambiguities?
The typology in Hellard is logically comprehensive, insofar as it deals in two binary questions: is the nature of the control de facto or de jure; and does it exist currently, or could it exist in the future. There may be scenarios where the answers to the questions are unclear, but this does not mean an amended typology is needed.
4.10 Do you identify types of control in your sanctions casework when conducting assessments of control? Are there other typologies or conceptualisations of control not mentioned in this chapter that you consider practically relevant?
No. As above, in practice the assessment of whether to take the risk of dealing with a potentially sanctioned entity is taken based on various interacting factors, and the question of typology is secondary (if it is needed at all). Insofar as there is a category of ownership or to control that ought to be considered more relevant, it is the scenario where a company was formerly, but is no longer, owned or controlled by a DP. Arguably, the main impact of the ownership and control exercise is to ensure that this kind of asset is frozen in practice, notwithstanding that (as a matter of law) it should not be. This includes the hypothetical control test, but only as the most absurd example of a set of provisions that is far broader than it needs to be. It is this broader issue, rather than the narrow one of hypothetical control, that ought to be the subject of further consideration.
Footnotes
1 https://assets.publishing.service.gov.uk/media/6992f255ceeaa48d377f6ba7/Call_for_Evidence.pdf
2 https://www.bailii.org/ew/cases/EWHC/Ch/2024/1783.html
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
