UniCredit v Constitution and Celestial: Exposure under the UK's Russian Sanctions Regime

In our 31 March 2026 post, we considered the Supreme Court’s then hot-off-the-press decision in UniCredit Bank GmbH (London Branch) v Constitution Aircraft Leasing (Ireland) 3 Ltd and another; UniCredit Bank GmbH (London Branch) v Celestial Aviation Services Ltd [2026] UKSC 10 (the “Judgment”), and its potential commercial impact on the aviation trade financing market. This post addresses an important possible implication of the Judgment for financial institutions and aircraft lessors, namely as to whether payments they made or received after 1 March 2022 on the basis that, at that stage, the payments were considered to be lawful, in fact contravened the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Regulations”); and if so, what their obligations are.  Our third and final post in this series will consider whether the Proceeds of Crime Act 2002 (“POCA”) may have been engaged by such payments, and the relevance of the licensing regime to the overall analysis.

Territorial scope: which transactions are caught?

Not all payments made or received after 1 March 2022 in respect of leasing arrangements with Russian counterparties will have contravened the Regulations. The Regulations primarily apply to persons undertaking activities inside the United Kingdom, although they may apply extra-territorially where a United Kingdom person (i.e. a British and Northern Irish national, or an entity incorporated in the United Kingdom) is involved.[1]

Whether a particular transaction has a sufficient UK nexus will be highly fact-specific, but in the context of letter of credit (“LC”) payments arising out of aircraft leasing arrangements, parties should consider the following factors in particular:

1. whether the paying financial institution (including the contractually-stipulated branch) and/or the receiving entity were or are incorporated in the United Kingdom; or
2. whether the transfer of funds originated from, was or is received into, and/or was/is to be routed through, a United Kingdom bank account.

The fact that an LC is governed by English law would not ordinarily be sufficient to establish the required UK nexus.

Liability under the Regulations: paying entities

Following the Judgment, Regulation 28(3) should be read as having prohibited, and prohibiting, payments under LCs opened in connection with aircraft leasing arrangements with Russian counterparties, regardless of when they were opened and/or whether the underlying leases have been terminated – as long as there is a relevant UK nexus. Financial institutions that made such payments without a valid UK licence have therefore likely done so in breach of the Regulations.

A breach of Regulation 28(3) is a criminal offence, and liability is strict, meaning that the prosecuting authority does not need to establish the offending party’s state of mind. This is subject to Regulation 28(7) which provides a defence if a party is able to prove that it “did not know and had no reasonable cause to suspect” that the funds were provided in pursuance of or in connection with an arrangement mentioned in Regulation 28(3).  This is a narrow defence, as it is unlikely to be sufficient to show that the party was aware of the arrangement but did not believe that payment would be in breach of the Regulations. Whether a party can establish the defence will depend on the information available to the financial institution and its officers at the time of the relevant payment. Potentially affected financial institutions should carry out this assessment and seek legal advice. 

Where the defence under Regulation 28(7) is unavailable, the offending party may face a maximum sentence of 12 months on summary conviction or up to 10 years on conviction on indictment.[2]

Substantial civil monetary penalties (exceeding £1 million or 50% of the value of the breach, whichever is greater) may also be imposed on a strict liability basis.[3]

Lessors: a different analysis

The prohibition under Regulation 28(3) applies only to the party providing the funds or financial services, not the recipient. A lessor receiving payment under an LC would therefore not be in breach of Regulation 28(3) by reason of receipt alone. 

Lessors should nonetheless be aware of, and consider potential exposure under, Regulation 55, which prohibits the intentional participation in activities knowing that their object or effect is to circumvent any of the trade sanctions prohibitions in Part 5 of the Regulations, including Regulation 28(3). The wording of Regulation 55 suggests that it would not apply to lessors which genuinely believed, at the time of making demands under the LCs, that Regulation 28(3) was not engaged.  Whether such a genuine belief in fact existed at the relevant time will depend on the totality of the circumstances, including what they knew or should have known when making the demands.

Self-reporting: mandatory (for some) but also mitigating

The Office of Trade Sanctions Implementation (“OTSI”) and Office of Financial Sanctions Implementation (“OFSI”) are responsible for enforcement of sanctions. Breaches of Regulation 28(3), being a trade sanction, have fallen under OTSI’s purview since October 2024.[4] 

Most financial institutions will already be under a mandatory obligation to report to OTSI as soon as practicable if they know or have reasonable cause to suspect that a breach of Part 5 of the Regulations (including Regulation 28(3)) has occurred.[5] There is no equivalent mandatory reporting regime for lessors.

Separately, OTSI and OFSI treat voluntary self-disclosure as a significant mitigating factor. Where a financial institution or a lessor identifies a potential unlicensed payment, it should consider whether voluntary disclosure is warranted or appropriate, even if it may not be strictly obliged to make a report:

1. In civil cases, timely voluntary disclosure can lead to reductions of up to 50% of any civil monetary penalty imposed, and in less serious cases may result in no more than a warning letter being issued.
2. In criminal cases, voluntary disclosure does not immunise against prosecution, but it is a material factor in any decision whether to refer the case to the prosecuting authority, and in any subsequent prosecution or deferred prosecution agreement negotiations.

The timing and framing of any disclosure are critical. A poorly framed disclosure, or one made without good reason for any delay, may cause significant issues, particularly given the interplay between criminal and civil exposure. Any disclosure should be made with the benefit of specialist legal advice.

FCA-regulated firms may have separate and additional reporting obligations to consider.  For example, payments in breach of sanctions may constitute a ‘material compliance failure’ that would trigger notification obligations under the Senior Managers and Certification Regime (“SMCR”) and the FCA’s threshold conditions.  Firms should also take advice on whether the prudential regulator should also be notified.

Yasseen Gailani

Email: yasseengailani@quinnemanuel.com

Phone: +44 20 7653 2021

Jasdeep Gill

Email: jasdeepgill@quinnemanuel.com

Phone: +44 20 7653 2061