I’ve been following the legal ups and downs of Russia’s sanctioned oligarchs and recently wrote about the EU Court’s decision to turn down the sanctions appeal of one of the most prominent targets: the Uzbek-Russian billionaire Alisher Usmanov.
Few may know that one of Usmanov’s sisters is also under EU sanctions and has been trying to get them lifted in the same court.
In the latest development of that case, the EU General Court this month dismissed the sanctions appeal of Gulbakhor Ismailova, leaving her on the list among a dozen or so other family members who were sanctioned over their ties to prominent Russian businessmen.
Having already spent some time studying Usmanov’s case, I decided to consult with legal experts on the main takeaways of the court’s decision on his sister – and what it tells us about EU sanctions policy more broadly.
The EU Council initially placed sanctions on Ismailova, a gynecologist who lives in Uzbekistan, on the basis of reports that she was the “beneficial owner” of assets linked to Usmanov through family trusts. Her lawyers have argued that she was never the owner of assets that the EU attributes to Usmanov, including several luxury villas in Italy and Germany and the highly publicized Dilbar mega yacht.
Based on the opinions of European attorneys who reviewed the Court’s ruling, the latest decision on Ismailova raises at least two legal concerns.
First, the Court took the unusual and potentially improper step of offering its own sanctions justification for Ismailova instead of making a firm ruling on the existing reasoning put forward by the EU Council. Ismailova’s defense had argued that, contrary to the Council’s reasoning, not only was Ismailova never a “beneficial owner” of assets held in trusts, but she was also automatically excluded as a beneficiary of the trusts as soon as she was hit with sanctions.
Rather than rule on this discrepancy, the Court instead offered its own reasoning to justify ongoing sanctions against Ismailova, which it does not technically have the authority to do. The judges said that it was irrelevant whether Usmanov’s sister was in fact a “beneficial owner” of the assets – it was enough for her to simply have been a beneficiary of a trust set up by her brother to justify placing sanctions against her. In so doing, the Court essentially let the Council off the hook for misinterpreting Ismailova’s legal status in the trusts and ruled that merely being part of a trust was enough to make an individual eligible for sanctions.
The distinction between a “beneficial owner” and a “beneficiary” is actually critical from the point of view of common law, one of the legal experts told me. While it may seem insignificant to practitioners from continental legal systems, the difference between ownership and the right to be considered for future potential benefits (i.e. beneficiary status) implies two completely different types of links between a person and an asset. By ignoring this difference, the Court disregarded the legal concept of common law trusts.
The Court ignored another aspect of common law trusts with its conclusion that the automatic “exclusion” of a beneficiary from a trust (which means that person no longer has the right to be considered for future benefits) should be treated as sanctions circumvention in cases when that beneficiary is a listed person. According to the legal experts, these types of exclusions are standard practice and are initiated by the professional trustees who oversee the trusts. These exclusions are also automatically triggered by certain changes in status (such as becoming a sanctioned person), meaning that a beneficiary like Ismailova has no power to influence the process. As a result, the Court’s interpretation of the exclusion clause is also at odds with common law practice and is detrimental to the trusteeship community as a whole.
That brings us to the second concern regarding the Court’s ruling: it potentially endangers the integrity of trusts as a widely established method of inheritance planning, protected under common law. As noted by one of the attorneys, it is standard practice for wealthy individuals, including many in Europe, to establish trusts in order to preserve their wealth for the benefit of their extended families and future generations.
Under common law, after an individual, called a settlor, places assets into a trust, these assets no longer belong to him and come under the ownership and control of the independent trustee who manages the trust. The Court in Ismailova’s case ignored the key difference between asset ownership and being the beneficiary of a trust that owns these assets. This potentially opens up thousands of individuals, who may be beneficiaries of trusts but have no legal ownership or control over the assets held in them, to undue legal scrutiny.
As of the date of the Court’s decision, Ismailova apparently no longer had beneficiary status in the family trusts and therefore could not receive any economic benefits from Usmanov through this connection. According to the legal experts, this means the original link with Usmanov that landed her on the sanctions list no longer exists, and she effectively remains sanctioned due to family ties.
In an earlier sanctions appeal brought by the son of an oligarch, Nikita Mazepin, the EU Court ruled that a family relationship alone was not enough to justify keeping someone on the sanctions list and overturned the sanctions against him.
Prior to the Court’s ruling, Ismailova also reportedly waived her right to receive any future benefits from the trusts even if sanctions against her were lifted. This means she would remain excluded from the trusts with or without the sanctions in place and has effectively renounced her family inheritance by permanently and irreversibly cutting her ties to the trusts.
The legal experts said this drastic step by Ismailova appears to have not been formally examined by the Court in its decision this month. But it could play a key role in future deliberations over whether or not to renew sanctions against her. The fact that Ismailova voluntarily renounced any benefits from the trusts may become a decisive factor in her sanctions appeal because following this move, the sanctions against her may have lost their basis.
It will be interesting to see how the EU responds to this change in circumstance, given its obligation to regularly review the status of sanctioned persons in order to avoid maintaining restrictions against those who no longer meet the original sanctions criteria. Until then, the Court’s latest decision on Ismailova sets a worrisome precedent of misinterpreting and even potentially criminalizing the use of trusts, which, despite some attempts to discredit them, are an age-old institution for preserving the integrity of family wealth.
