The growing consensus among enforcement lawyers is that enforcing judgments and arbitral awards against sovereign states is becoming harder.
Beyond the maze of legal and procedural hurdles already encoded in the US Foreign Sovereign Immunities Act (1976), a spate of recent developments has made the pursuit of sovereign debtors more difficult. In March 2018, the European Court of Justice found, in the now-famous Achmea ruling, that arbitration clauses contained in intra-EU bilateral investment treaties (BITs) were incompatible with EU law.
Then, in November 2021, the same court held in Bank Sepah v Overseas Financial Ltd et al. that absent a prior authorization from a competent national authority, European law prohibited the attachment of assets already frozen under international sanctions.
While the Achmea ruling led to EU courts refusing to enforce arbitral awards between EU parties under BITs and Energy Charter Treaties, Sepah upended numerous carefully planned recovery campaigns against pariah states like Russia and Iran. It also led to the lifting of two attachments previously secured against Libya in France.
With national courts regularly raising further evidentiary tests, creditors might be forgiven for thinking they should forgo legal recovery routes altogether, instead opting for alternatives such as diplomatic-style lobbying or public relations campaigns.
But legal redress remains the most potent weapon for award-holders facing “won’t pay” sovereign debtors, and providing they invest properly in research work, enforcement teams will continue to find suitable assets to prompt effective court action.
At the core of recovery campaigns, creditors should continue to seek high-value commercially active assets situated overseas. Those assets should be unsanctioned and ideally in enforcement friendly jurisdictions, albeit not – if the creditor is European – in an EU state. For sure it is a complicated matrix; but for sovereign debtors, avoiding international exposure is also difficult and no government that wishes to be part of the global finance system is invulnerable.
Virtually all states own expensive properties in western capitals. While the great majority of these are embassy buildings protected by sovereign immunity provisions, researchers should always verify how properties are being used before discounting them. Commercial activities are not unheard of, and where money is being made the assets become viable attachment targets.
A team I once worked in found that a sovereign debtor was advertising its former US embassy building for long term private let. As well as soliciting rental offers on its official website, the state’s foreign ministry had hired a sales agency to produce a glossy marketing document, setting out property specifications and pricing options, as well as room-by-room photographs. All of it was essential evidence for counsel trying to convince a judge that the building was no longer fulfilling protected diplomatic functions.
More commonly, researchers will need to look further down corporate ownership structures, to state-owned-entities possessing overseas bank accounts, transport infrastructure or goods-in-transit. Here, identifying assets may be the easy part; harder will be evidencing that owner-entities are “alter egos” of the state - “so exclusively controlled” by the government that “a relationship of principal and agent is created”, per the US Supreme Court’s Bancec guidelines of 1983.
This work can be painstaking. Assets will be identified but discounted because the SOEs that own them are run at arm’s-length from the state. Others will be homed in on because the holding entities can be shown to have “no effective separate existence” from the government, subject “to the controlling will of the state”, per the UK Privy Council’s Gécamines v FG Hemisphere ruling of 2012.
Energy companies become especially interesting in this context. By and large, governments in the Middle East and former Soviet region tend to keep a firm eye over their hydrocarbon resources, often the lifeblood of their economies. Government officials oversee decision-making at some SOEs on a day-to-day basis, dominating company boards and making decisions on hiring and firing and the use of company profits.
Since such companies also trade on global markets, they are also prime enforcement targets with internationally exposed assets. Liquid natural gas suppliers own or charter vessels carrying cargoes into enforcement-friendly jurisdictions. Crude oil producers contract with western buyers for payment in US dollars, with receivables funds sometimes sitting for weeks in traceable US bank accounts before transiting to the SOE.
In 2009, lawyers for Yukos Capital Sarl forced Russian oil giant Rosneft to make full payment of its USD 419 million arbitral debt, after attaching receivables monies sitting in the accounts of US oil buyers. A New York judge found that the funds were - technically and traceably - the property of Rosneft, and the resulting freezing order dealt a hammer blow to the company’s operations.
The same combination of close government control and overseas exposure also applies to many state-owned airlines. Air Tanzania saw its aircraft grounded three times between 2017 and 2019, each time after creditors mounted arguments in international courts that the planes were owned and controlled by the Tanzanian state.
Precisely to negotiate the myriad of legal doctrines guiding counter-sovereign enforcement work, researchers need to be flexible and creative. Demonstrating ownership and control can be difficult and registries and databases are just the start of the process; freedom of information requests, interviews, social media trawling and site visits all have their place. The process should be ongoing, iterative, and interactive, with close contact between investigators and legal counsel asking what do we need? and how might we get it?
A team I worked in found it impossible to obtain a SOE’s articles of association from an official government registry without endangering the document collector. The papers were important to prove the unusual functioning of the entity and its close relationship to the state. Fortunately, the British Library in London held a full archive of the country’s government gazette, which had printed all amended version of the entity’s articles going back to the late 19th century.
Sovereign asset tracing research is rarely quick and frequently frustrating, but where investigative teams are properly briefed, and work closely with enforcement counsel, their work remains essential for creditors seeking to force governments to make good on their obligations. It is not worth throwing the towel in yet.
This article originally appeared in TL4 Magazine here.