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In Angophora Holdings Ltd. v. Ovsyankin, 2022 ABKB 711, the Alberta Court of King’s Bench (the “Court”) denied an application to stay an Enforcement Order (“Order”) for a $59.5 million arbitral award issued by the London Court of International Arbitration (“LCIA”) with respect to a Russian commercial dispute. Mr. Ovsyankin, whose investment properties in Alberta were seized, argued that the stay of the enforcement proceedings should have been granted because Angophora Holdings Ltd. (“Angophora”) was controlled by Gazprombank, an entity designated under Canadian sanctions related to Russia.  

In its sanctions assessment, the Court interpreted the control test broadly as one of ownership or de facto control, including structural and functional criteria. Given the lack of any statutory definition or formal regulatory guidance, the Court reviewed the purposes and wording of the sanctions regulations, as well as the tests of ownership and control applicable in the U.S., EU and UK.  The Court found that based on the U.S. definition of control and certain “functional” factors, there was a prima facie case of  control by Gazprombank. Despite this finding, the Court held that the enforcement of the Order in favour of Angophora would not be in breach of the Russia Regulations, but any subsequent distribution of proceeds relating to enforcement of the Order might raise sanctions issues.

The case is exceptional because no Canadian court has interpreted the concepts of ownership and control of subsidiaries by designated persons. With no formal regulatory guidance from Global Affairs Canada, the principles set out in Ovsyankin are now law in Canada.  

To explain the significance and the impact of the Court’s decision in Ovsyankin, one must first understand the nature and application of Canadian sanctions to Russian assets and commercial interests in Canada and overseas. 

The Special Economic Measures Act, SC 1992, c. 17 (“SEMA”) allows the federal government to impose economic sanctions on foreign entities and individuals. In response to the Russian annexation of Crimea in 2014, the Special Economic Measures (Russia) Regulations, SOR/2014-58 (“Russia Regulations”) prohibited any dealing in the property of listed persons (Schedule 1), restricted certain categories of financing (Schedules 2 and 3), and introduced sectoral sanctions on Russian offshore, deep water and Arctic oil projects (Schedule 4). After the full-scale invasion of Ukraine in February 2022, the Russia Regulations were amended to include new sectoral sanctions and hundreds of new prohibited persons on Schedule 1, including Gazprombank. The breach of the Russia Regulations is a criminal offence punishable by significant fines or imprisonment under Section 8 of the SEMA. 

Section 3 of the Russia Regulations prohibits any person in Canada from dealing in any property, wherever situated, that is “owned, held or controlled by or on behalf of” a designated person listed in Schedule 1. A similar prohibition applies to any direct or indirect transactions related to such dealings, as well as any financial or other related services, or goods provided to designated persons. In other words, the property of designated persons listed on Schedule 1 is effectively blocked; Canadians cannot deal in it, enter into transactions, provide financial or related services, or make goods available. 

Unlike other parts of the Russia Regulations, Section 3 does not include any grandfathering or transition provisions as the primary goal is to block these Russian assets immediately and prevent any potential sanctions evasion. Furthermore, the SEMA was recently amended to allow the government to obtain forfeiture orders with respect to blocked assets of designated persons (Sections 5.3-5.6). The federal government has already applied to forfeit the Canadian assets of a Russian oligarch under the SEMA.[1]

Although Canadian sanctions closely follow the restrictions imposed by the U.S and to some extent the European Union, there are a few differences in terms of the listed persons, technical requirements, etc. Unlike the U.S. and EU, Canada has not issued any formal guidance or answers to Frequently Asked Questions with respect to the Russia Regulations.  In the last three decades, Canada’s sanctions enforcement under the SEMA did not result in a significant number of convictions.[2]  Outside of a few recent attempts to remove specific entities or individuals from the lists,[3] no Canadian courts have interpreted and applied the SEMA and the Russia Regulations in the context of civil proceedings. 

Facts of Ovsyankin

As a general rule, all Russian commercial interests in the energy industry are directly or indirectly tied to the Russian government or its state-owned energy companies, such as Gazprom or Rosneft. These dealings often involve offshore jurisdictions. Where litigation arises on commercial matters, it is common for those matters to be governed by English law and feature costly arbitration proceedings in London. 

Ovsyankin is no exception on these grounds. Mr. Ovsyankin is one of the owners of the Paker Group, a Russian oilfield service company, through Retemmy Finance Ltd. (“Retemmy”) and Grooks Global Ltd. (“Grooks”), registered in BVI and Cyprus respectively. Angophora is a private equity investor that is also incorporated in Cyprus and owned, through a Luxembourg investment fund, by an Italian bank and by Gazprombank, a financial institution affiliated with the Russian state-owned gas company, Gazprom. 

In 2012, Angophora purchased the shares of Grooks. As a result, Retemmy and Angophora entered into a shareholders agreement with respect to Grooks, where Mr. Ovsyankin personally guaranteed Retemmy’s obligations.  When the relationship fell apart, Angophora successfully obtained a $59 million LCIA award on the grounds that Retemmy and Mr. Ovsyankin fraudulently reduced the value of jointly owned Grooks. Angophora successfully enforced this award against Mr. Ovsyankin’s investment properties in Alberta and obtained the Order in September 2021.  Mr. Ovsyankin applied to stay the Order because Angophora was controlled by Gazprombank, an entity listed in Schedule 1 of the Russia Regulations after the Russian invasion of Ukraine in February 2022. 

Ownership and Control Test in Canada

A. Interpretation of the SEMA and Russia Regulations 

The Court in Ovsyankin had to deal with the issue of control of Angophora by Gazprombank. With no statutory definition of control or formal regulatory guidance, the Court determined that it was a “factual issue to be determined by the circumstances” (para. 25). In its statutory interpretation, the Court found that “the Russian Sanctions” were remedial legislation and had to be given “such fair, large and liberal construction and interpretation as best ensures the attainment of its objects” pursuant to Section 12 of the Interpretation Act, RSC 1985, c. I-21. 

Arguably, as a penal statute, the SEMA and its Russia Regulations, should have been constructed strictly with respect to the ambiguity regarding the definition of “control”, rather than broadly and liberally interpreted.  The Court’s “functional and practical” assessment of control was indeed factual and included a number of criteria that may not have been definitive of “control” from the corporate perspective. 

Canadian corporate, commercial and regulatory law is familiar with issues of corporate control and these well-established legal concepts could have been used to help define the factual boundaries of control under the SEMA and the Russia Regulations. For example, the corporate control tests under the Investment Canada Act are regularly applied and interpreted by Canada’s Investment Review Division, specifically with respect to various state-owned entities.  Both parties in Ovsyankin addressed these concepts in their briefs, but unfortunately the Court did not include this analysis in its decision.  Arguably, the corporate and commercial concepts that exist in common law also could have been applied in this context.  

B. Ownership in U.S., Structural and Functional Control in EU and UK

Having reviewed the purpose and wording of the Russia Regulations, the Court briefly discussed the U.S., EU and UK tests of ownership and control (paras. 31-35). 

First, the Court held that the 50% ownership rule applicable in the United States caught Gazprombank as a 50% owner of Angophora.

It is important to note that the U.S. regulator, the Department of the Treasury’s Office of Foreign Assets Controls (“OFAC”), has confirmed in its Frequently Asked Questions with respect to Ukraine/Russia, that control does notautomatically amount to ownership and OFAC may nevertheless choose to designate an entity that is being controlled (FAQ 398).  In designing its sanctions against Russia, the U.S. government preferred a more structured legal test of ownership over a factual determination of control.  Any discretion on when and how control might play into a sanctions assessment was left with the regulator (where it likely belongs). Unfortunately, the Court in Ovsyankin did not explore these regulatory nuances and there was no suggestion that these matters could have been left to Global Affairs Canada to determine by way of designation, permit or otherwise. 

Similarly to Canada, the European Union offered limited guidance with respect to its de facto control test.  

The United Kingdom was more helpful as it relied on the test of 50% plus ownership or de facto control with a focus on corporate decision-making and authority, i.e. whether the sanctioned person, in most cases or in significant respects, by whatever means and whether directly or indirectly, could ensure that affairs of the entity in question are conducted in accordance with sanctioned entity’s wishes. The UK’s focus on corporate decision-making and actual corporate authority over key decisions, or in the words of the Ovsyankin Court, “structural control”, is consistent with the Canadian Investment Review Division’s interpretation of control under the Investment Canada Act

Based on its broad view of what may constitute control, the Court carefully reviewed what it called “the structural factors” with respect to Angophora and Gazprombank, including the composition of the corporate bodies, appointments, decision-making capacity and process, etc. (para. 37). It concluded that Gazprombank did not have “structural control” of Angophora because it “cannot unilaterally act to direct the investments” of the holding entity or Angophora. However, Gazprombank could still block any unilateral action of its Italian partners. 

Next, the Court reviewed the factors that may have indicated that Angophora was “functionally and practically” controlled by Gazprombank (para. 40), including the test of ownership, who conducted negotiations, provided investment oversight, appointed senior management, swore affidavits and even appeared as witnesses on behalf of Angophora. The answer in all cases was Gazprombank.  

For some reason the Court repeatedly emphasized that it was not required to make a finding with respect to the issue of control and that its finding was not final. However, it ultimately used the U.S. definition of “control” and Ovsyankin’s “functional” factors listed above to establish a prima facie case of control. 

The problem with this determination is twofold. First, the U.S. test is that of ownership, not control, and it does not apply under the SEMA and Russia Regulations because the U.S. test was developed and interpreted by OFAC for an entirely different statutory and regulatory framework of U.S. Executive Orders and Directives. Second, the “functional” factors are not consistent with the well-established concept of corporate control over decision-making and actual corporate authority of the entities in question. Angophora and Gazprombank are sophisticated corporate and commercial entities involved in complex international financing arrangements.  The structural analysis demonstrated that there was no control. 

From the “functional and practical” perspective, Angophora was free to choose who would provide its investment oversight, testify as witnesses in arbitration or swear affidavits in support of the enforcement proceedings in Canada (it likely makes sense that a Russian shareholder, not the Italian bank, would look after any investments in the Russian entities).  To tie these so-called “factual” factors into a definition of “control” under the SEMA and Russia Regulations could result in an interpretation that is too broad and inconsistent with the statutory framework as a whole. The factual assessment needs to take place within the corporate and commercial boundaries of “control” that have been developed in Canada and can be applied in various regulatory contexts, including the SEMA and the Russia Regulations, the Investment Canada Act and other similar legislation. 

Breach of Section 3 of the Russia Regulations

Based on the finding of a prima facie case of control, the Court had to next determine whether a stay was required and whether the enforcement of the Order was contrary to the Russia Regulations. The answer was “no” on both counts. 

The Court allowed the enforcement of the Order through the sale of the seized properties, even though it was controlled by a designated person listed in Schedule 1, because of the “scope of the REO [Order]” and the fact that proceedings under it were pursued in good faith by the civil enforcement agency. The Court also noted that any future distribution of proceeds may raise sanctions issues and any person in Canada “may wish to be satisfied that they are not in breach of the Russian Sanctions by further action. That, of course, is their decision” (para. 50).

As stated above, Section 3 of the Russia Regulations does not include a grandfathering mechanism or any exemption that would allow civil enforcement agencies to deal with the property of designated persons, such as Angophora (as controlled by Gazprombank). The “scope of the REO [Order]” is similarly not a factor that is relevant or material under the Russia Regulations. In any event, it is not entirely clear what the Court meant by referring to the “scope” of the Order in this context. 

In terms of the Regulations, Section 3 either applies or it does not.  Simply put, if there is a property owned or controlled by a designated person (in this case, the investment properties of Mr. Ovsyankin seized in favour of Angophora), no person in Canada may deal in these properties, enter into transactions, or provide financial or related services. The distinction between the continued enforcement and sale of the seized properties and the subsequent distribution of proceed therefrom is not explicitly recognized under the Russia Regulations. The only difference between these two is that any distribution of proceeds by financial institutions or other similar entities may trigger an additional “duty to determine” (Section 6) and, if required, block these funds under the Russia Regulations. 

Once the prima facie control was established, the Court had to interpret the Russia Regulations and determine whether the continued enforcement of the Order (as a single process, including the distribution proceeds, because without distribution any enforcement is meaningless) by any person in Canada is consistent with Section 3 of the Russia Regulations. Instead, the Court chose an approach that amounts to selective grandfathering based on considerations that are not part of the Russia Regulations. It also raised a number of concerns, likely in obiter, regarding the distribution of proceeds, which was not technically before the Court in the stay application.  

Given the potential criminal liability for any offences under the SEMA and Russia Regulations, these statements could put all of the Canadian parties involved, including the bailiffs, Land Titles Registry and financial institutions, in a position where they would likely have to seek a permit from Global Affairs Canada to proceed with any further enforcement in favour of Angophora as an entity controlled by Gazprombank. 

Sanctions and Commercial Implications of Ovsyankin

The decision in Ovsyankin has made it clear that Canadian courts are prepared to play a significant role in interpreting the SEMA and its regulations in the absence of any formal guidance from Global Affairs Canada. The regulatory vacuum created by Global Affairs Canada’s decision not to issue any sanctions guidance is now in the hands of the courts.  From the public interest perspective, any such case law would likely make Canadian sanctions more effective and result in more vigorous enforcement, both in Canada and overseas. It could also help the Canadian government obtain more forfeiture orders under the SEMA. 

On the other hand, there are many tangential interface points between sanctions laws, commercial dealings and commercial disputes. Given the broad interpretation of control under the SEMA and Russia Regulations, the “structural” and “functional” factors set out in Ovsyankin will require commercial parties to conduct further due diligence, both in Canada and overseas (specifically with respect to the markets that have been known to help Russia evade sanctions), to ensure they are not dealing with any prohibited Russian parties hidden behind a complex web of agents, service providers and multiple end users.  Such overseas due diligence may be difficult, if not entirely impossible, given that the Russian government, its commercial parties and their allies have become even more secretive and less transparent in their attempts to evade international sanctions. 

*The short version of this Article was originally published in CBA Alberta’s Law Matters in May 2023

[1] On December 19, 2022, Canada started its first process to seize and pursue the forfeiture of US $26 million from Granite Capital Holdings Ltd., a company owned by Roman Abramovich, a Russian oligarch sanctioned under the Russia Regulations. 

[2] See the 2014 conviction of Lee Specialties for prohibited export of controlled goods to Iran and the 2020 acquittal of Nader Mohamad Kalai on charges of prohibited investment in Syria (see R. v. Kalai, 2020 NSSC 351).

[3] See, for instance, Portnov v. Canada (Attorney General), 2019 FC 1648; Gomez v. Canada (Attorney General), 2021 FC1300.