Sanctions: all things equal – analysis of XTX Markets Technologies Ltd v Mazars LLP

Background

XTX Markets Technologies Limited ("XTX"), part of the global financial technology trading firm XTX Group, brought a claim against Mazars LLP ("Mazars"), a provider of international tax and accountancy services (now known as Forvis Mazars LLP). XTX's ultimate beneficial owner is Dr Alexander Gerko, a Russian citizen who holds British nationality. Neither XTX nor Dr Gerko are sanctioned persons; in fact, Dr Gerrko renounced his Russian citizenship following Russia's invasion of Ukraine.

In January 2022, XTX contacted Mazars regarding its desire to outsource its global payroll services. Following initial contact and introductory discussions, Mazars carried out checks on XTX, which came back with "no threat identified". Mazars provided a proposal for payroll services in France, India, Singapore, the UK and the USA.

In February 2022, following the Russian invasion of Ukraine, Mazars implemented an internal policy not to accept new Russian clients where there was direct engagement with a Russian entity or a Russian individual in Russia; where there was a Russian individual based elsewhere, the decision whether to take on that client would be subject to consultation. Mazars Group sent a message to all its locations that approvals for non-sanctioned Russian clients should go through the "Group Independence and Acceptance Committee" but that they did not recommend taking on new Russian clients at that point in time.

In April 2022, XTX indicated that as a first step it wanted to transition its US and French payrolls over to Mazars, and then would look to outsource its other locations, including the UK. There were discussions between XTX and Mazars of signing master terms in relation to the UK, but only if they were happy with the first stage involving the US and French payroll. By the end of April 2022, XTX and Mazars agreed to sign only local contracts as entered into by the Paris and US entities. At this juncture, XTX provided ownership structures for XTX France and USA which showed that the ultimate beneficial owner of both was Dr Gerko, who ultimately held 75% of the voting shares in both entities. It was not stated who held the remaining 25% voting share and Mazars did not request clarification of the ownership structure. Dr Gerko's shareholding was held through a number of intermediate companies registered in the Cayman Islands.

In May 2022, following consideration by Mazars' onboarding committee, particularly by the sanctions sub-group, XTX was told that services could not be provided to the XTX companies due to Dr Gerko's nationality. XTX attempted to challenge this by explaining that Dr Gerko was a British national with no ties or links to Russia and asked Mazars to reassess its position. Eventually, XTX was told that "Mazars group policy is that it will not accept any new clients who are owned by a Russian citizen" regardless of the company's lack of connection to Russia.

The Claim

XTX brought a claim pursuant to the Equality Act seeking a declaration that Mazars had discriminated against it by refusing to provide services because of the nationality of Dr Gerko. XTX had to prove to the Court that:

1. Mazars UK was caught by section 29 of the Equality Act, which makes it illegal for service providers such as Mazars to discriminate against people requiring a service by not providing that service; and
2. Mazars' services were refused on grounds of direct discrimination under section 13 of the Equality Act, specifically because of Dr Gerko's nationality.

Ultimately, the claim was unsuccessful due to the first of the two limbs above. Mazars had refused to provide payroll services to XTX's French and US entities only, as XTX was only seeking services for these two entities in the first instance, and not its UK entity. Had XTX pursued services in the UK, any refusal based on nationality would have satisfied the requirement under section 29 of the Equality Act.

Regardless of this technicality, the judge went further and considered whether section 13 of the Equality Act would have applied. In other words…

Had XTX been discriminated on grounds of nationality?

The short answer is, yes. The judge indicated that had XTX sought services in the UK in May 2022 and were it to have been refused those services on the basis of Dr Gerko's nationality, that would have amounted to direct discrimination.

Mazars' position

Direct discrimination is defined by the Equality Act as when person A treats person B less favourably than they would treat others because of a protected characteristic; one such characteristic being nationality. Mazars expressly stated that XTX had been refused services due to its UBO's nationality. Often such prejudices are not broadcasted, but in this case it seems the reason was explicitly stated to be due to Dr Gerko's Russian nationality.

At trial, Mazars tried to argue that:

1. The refusal was necessary to comply with legal obligations under sanctions law, specifically The Russia (Sanctions) (EU Exit) Regulations 2019. Given the ownership structures and their opacity, it was reasonable of Mazars to refuse services as it was acting in compliance with sanctions – the relevant consideration was therefore not nationality, but XTX's ownership by Cayman Islands companies.
2. By refusing services, Mazars reasonably believed its actions were required to comply with sanctions. This is a section 44 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) defence, by which a person is not liable to any civil proceedings in respect of an act, to which it would have been liable, if the act had been done in the reasonable belief that it was in compliance with sanctions regulations.

Judicial commentary

However, the Court found difficulties with both arguments. Firstly, the ownership structure and offshore link to the Cayman Islands was not the reason given at the time of refusal to XTX. The judge aptly summarised it as follows: "[The ownership structure and the link to the Cayman Islands] might have been a good reason and it might have been addressed by [XTX] if the company had been told that was the reason…The good reason why the services were refused was not stated namely the sanctions regime and exercising caution around the same given the risk to Mazars. Where, as here, the express reason was nationality, these other factors go to motive and are irrelevant. It may be relevant to other defences but not on the issue of direct discrimination."

Further, the Court rejected the section 44 SAMLA defence on the basis that there was a gap in the evidence. The judge explicitly mentioned that the persons who made the decision to refuse services – individuals on the Mazars' Group Independence and Acceptance Committee – had not given evidence in the case. There was therefore no basis for concluding that there was a subjective belief that services were refused on the basis of compliance with sanctions regulations. Even so, based on evidence present, the judge considered that such a defence would have been difficult to argue, given that nationality was not a basis on which the Russian sanctions regulations applied.

Commentary

Mazars' policy to not accept new clients from Russia – one that is all too familiar to compliance officers and nationals of sanctioned countries alike – is not uncommon. In response to Russia's invasion of Ukraine and in the face of rapidly changing sanctions legislation, businesses worldwide have had to come to grips with sanctions compliance as best and as fast as possible. The inevitable result has often been the adoption of blanket compliance policies, leaving limited scope for rebuttal. Until it seems now.

There are two aspects to the judge's comments that are worth considering:

1. Entities with sanctions policies that apply extra scrutiny to individuals and entities from certain locations should ensure that their due diligence is properly conducted, documented and communicated. The section 44 SAMLA type protection may have been more readily afforded had it been more obvious that the decision maker did indeed consider XTX's ownership structure and had reasonable concerns regarding Mazars' own compliance with UK sanctions regulations.
2. Blanket policies are not the answer to growing demands for more robust compliance. It is difficult not to empathise with Mazars. The UK government alone has been advocating a 'do more' mentality to private businesses and suggesting businesses augment their compliance measures. However, the guidance and tangible examples on how to do so has been, at best, scant. The Court's recent judgment is perhaps a welcome reminder that compliance should in fact also take a nuanced form: compliance policies that allow for derogations, improved engagement with potential clients during the KYC process, more accurate record keeping, and continuous internal training. The options are plenty and need to be tailored to each business, but also target clients, factoring in the risk profile of each.

Sanctions are increasingly becoming a quotidian concern faced by businesses. Challenges such as the ones brought by Dr Gerko's company may likely become more commonplace. It is perhaps a welcome reminder to reconsider sanctions policies that were once appropriate in a climate of regulatory uncertainty and as a stop-gap, but which may now risk overreach. In a world where geopolitics increasingly intersects with business, this case offers a timely reminder: compliance may tolerate caution, but it does not excuse discrimination.

With thanks to Trainee Solicitor Charles Kornberg, co-author of this article.