There has been a great deal of anxiety across the ‘collective West’ about Russian sanctions evasion. Insofar as trade is concerned, the mechanics are very simple. Goods are first exported to a neighbouring country and then moved on to their ultimate destination in Moscow, Saint Petersburg or elsewhere. Hence plenty of charts about the spectacular growth of, say, UK car exports to Azerbaijan, Kazakhstan and other locales in the Caucasus and Central Asia.
This raises some interesting — and difficult! — questions about the legal responsibilities of Western vendors. This is where the remarkable Australian case of Alumina and Bauxite Company Ltd v Queensland Alumina Ltd [2024] FCAFC 142 comes in. It involves an appeal before the Full Court (a three-judge panel) of the Federal Court from a previous single-judge judgment (Alumina & Bauxite Co Ltd v QAL [2024] FCA 43).
The facts can be summarised briefly. Queensland Alumina Ltd (QAL) is a joint venture between Rio Tinto and Rusal, a Russian conglomerate founded by the oligarch Oleg Deripaska. Deripaska happens to be under Australian sanctions, as is Viktor Vekselberg, another of Rusal’s shareholders. QAL’s role is to supply alumina to one of Rusal’s subsidiaries, in which Deripaska holds 25.58% and Vekselberg, 12.58%.
Designated Person Sanctions
In the first instance judgment, O’Bryan J held that it would be contrary to Australian sanctions laws for QAL to continue supplying alumina to Rusal’s subsidiary. This is because, among other things, doing so would amount to making resources available ‘for the financial benefit of [the Rusal subsidiary’s] direct and indirect shareholders, including Messrs Deripaska and Vekselberg.’
This finding highlights the uncertainty about how much of a stake a sanctioned person must have in a company for that company itself to become effectively sanctioned. O’Bryen’s judgment suggests that a shareholding of far less than 50% would suffice, but gives no indication of any de minimis threshold that might apply. What about a 1% shareholding by a sanctioned person?
The question is all the more intriguing because international approaches diverge dramatically. The US applies the threshold of 50% ownership (as opposed to other forms of control), which enabled Rusal to get off US sanctions once Deripaska dropped his shareholding below 50%. The UK uses the test of control, whose precise meaning remains obscure. (In Mints & Ors v PJSC National Bank Trust & Anor [2023] EWCA Civ 1132, a unanimous Court of Appeal suggested — obiter — that all Russian companies were controlled by a sanctioned person, i.e. Vladimir Putin. The notion was politely dismissed in two subsequent High Court cases — Litasco SA v Der Mond Oil and Gas Africa SA & Anor [2023] EWHC 2866 (Comm) and Hellard & Ors v OJSC Rossiysky Kredit Bank & Ors [2024] EWHC 1783 (Ch) — and Mints is under appeal to the UK Supreme Court.)
Export Sanctions
Fascinating though the issues of control are (as everyone would no doubt agree!), more interesting still is the discussion of Export Sanctions, i.e. the prohibition on ‘supplying, selling or transferring alumina to a person where, as a direct or indirect result, the alumina is transferred to Russia, for use in Russia or for the benefit of Russia’.
This can evidently capture situations where goods are first exported to a non-sanctioned country but then transhipped in breach of sanctions (here, to Russia) — including without the vendor’s knowledge. Here is what O’Bryen J had to say:
222. (…) This raises the possibility that a person may supply, sell or transfer export sanctioned goods in a manner that, initially, does not constitute a sanctioned supply, but which subsequently becomes a sanctioned supply because, as a direct or indirect result, the goods are subsequently transferred to the country that is the subject of the sanction.
223 The possibility that a person may engage in a transaction that initially is not a sanctioned supply, but which subsequently becomes a sanctioned supply (and thereby an offence), appears to be unjust. (…)
224 The respondents submitted, and I accept, that the potentially unjust effects of reg 12(1) are mitigated in a number of ways. First, while an offence against s 16(5) is an offence of strict liability, s 6.1 of the Criminal Code stipulates that a defence of mistake of fact under s 9.2 of the Criminal Code is available to offences of strict liability. Second, if the offence is committed by a body corporate, s 16(7) creates a defence if the body corporate proves that it took reasonable precautions, and exercised due diligence, to avoid contravening s 16(5).
So, on this interpretation, anyone supplying goods that end up in Russia in breach of Australian sanctions is potentially on the hook unless they can make out a defence (most likely, that of reasonable precautions and due diligence). The Full Court endorsed this conclusion and the reasoning behind it.
But the judges did not stop there. They also considered what it would take for alumina to be transferred ‘for the benefit’ of Russia. O’Bryen J’s principal conclusion was that the alumina in question would end up in Russia, but even if it were sold elsewhere (China being the most obvious destination), that too would benefit Russia:
[E]ven if it were to be accepted that, following the imposition of the Export Sanction, UC Rusal and/or ABC would have successfully taken steps to prevent alumina delivered to ABC from the Gladstone Plant being physically transferred to Russia, a direct or indirect result of the delivery to ABC would have been that the alumina would be transferred for the benefit of Russia. The benefit arises from the fact that UC Rusal would be able to direct the transfer of the Gladstone alumina to China which would increase the availability of other alumina in China to be purchased by UC Rusal. Mr Clark’s evidence, which I accept, is that in 2022 China’s market was already in oversupply, and any additional alumina would need to be “pushed” into China rather than “pulled”, meaning it would need to be offered into the Chinese market on more attractive terms than the current market price. This would place downward pressure on alumina prices in China. Pushing more alumina into China would increase the likelihood that Chinese companies would seek to find export opportunities, including to Russia. Accordingly, the supply of alumina to third parties in China would increase the likelihood that surplus alumina in China would be exported to Russia.
What is remarkable about this finding is that, on the face of it, even if sanctioned goods never make it to the sanctioned country, the transaction can violate Australian sanctions because of its broader economic effects. Suppose I do not export microchips to Russia, which would be contrary to Australian sanctions, but I do export them to China. This, in turn, makes it more likely that Chinese companies will export their microchips to Russia rather than supplying Chinese internal market. On the Federal Court’s interpretation, that too could amount to me violating Australian sanctions.
To my mind, the Full Court’s reasoning on this point is somewhat hasty. It rests on pointing out that ‘benefit’ meant simply ‘anything that is for the good of a person or thing’ or ‘advantage, profit, good’, such that broad economic benefits from the supplies of sanctioned goods could be covered. That is defensible, but at some point the connection between a supply of goods to a non-sanctioned country and second-order benefits for a sanctioned country must become too remote.
In the first-instance judgment, O’Bryen J went further still by holding that such second-order benefits ‘include direct and indirect employment in Russia generated by the industry as well as the payment of taxation’. The Full Court decided it was unnecessary to rule on this specific point, which I suspect was calculated to relieve it of the need to consider how close the connection between the conduct and the benefit has to be.
Two points come to mind. First, as far as I am aware, such broad interpretations are unparalleled in sanctions laws of other comparable countries, such as the UK or the US. As a matter of sanctions policy, I happen to think this all-encompassing approach is precisely what is needed. But it is interesting to see it arrived at through judicial interpretation of sanctions regulations. Second, I wonder how the defence of reasonable precautions and due diligence would apply in cases involving sanctions breaches of the nature described above.
What the Future Holds
It is useful to bear in mind that the case involved a civil dispute between parties to a contractual arrangement, rather than a criminal sanctions enforcement action. It would be interesting to see how the broad interpretations put forward in ABC v QAL would play out in a criminal prosecution. So far, Australia’s track record of sanctions enforcement has been very modest — I am aware of two historical prosecutions involving Iran and North Korea sanctions — but, if and when that changes, the implications of this very remarkable case will become clearer.
Economic Crime Law 