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How an asset recovery team helps with sovereign state enforcements

  • Phoebe Waters
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Phoebe Waters

Phoebe Waters

Analyst

Crisis Management Analyst, Goldman Sachs

The enforcement of arbitration awards is often more challenging when claimants are pursuing payment from a sovereign country due to state immunity protections or complex ownership structures designed to provide defences against enforcement.

And as states become increasingly comfortable with the limited consequences of non-payment, these challenges have become even more pronounced.

Fortunately, claimants may opt to engage an asset recovery team to help inform and develop an effective strategy, one that both addresses the many legal hurdles sovereign respondents pose and exerts sufficient pressure to force state debtors into settlement negotiations.

This article explores why enforcing against recalcitrant states has added challenges to enforcing against commercial parties and describes how asset recovery specialists conduct investigations and devise international recovery strategies.

Addressing hurdles to enforcement against sovereign states

Sovereign states pose unique challenges for claimants seeking award enforcement. Unlike traditional debtors, they are afforded immunity protections from enforcement unless specifically waived and have more opportunities to make assets inaccessible — two characteristics that add real complexity to the execution of any award.

The sovereign immunity doctrine poses a significant challenge to claimants seeking enforcement against states. Sovereign immunity can be invoked to assert that tribunals and courts do not have jurisdiction over states, thereby potentially preventing the enforcement of an award against state assets at home or abroad.

In some jurisdictions that immunity is absolute, while in others it is more qualified. As a result, the burden falls to claimants to distinguish between acts of a sovereign or those of a purely commercial nature.

This hurdle, known as the commercial purpose test, requires parties seeking enforcement to establish that relevant assets are purely commercial in nature or even intent. Often this is a threshold issue at the outset of enforcement proceedings.

The volume and variety of assets owned by a sovereign and a sovereign’s lack of transparency create additional challenges to enforcement. States may use complex ownership structures, restructuring and ostensible privatisation as a tactical manoeuvre to obscure, dissipate or otherwise firewall assets, enabling them to claim that they lack the requisite levels of control over money-making interests.

Alternatively, claimants may deal with an impoverished state that is given more legal leniency by arguing that paying an award would inflict national harm to its people. In either case, claimants face the risk of being unable to recover on their judgment or award.

Building an effective enforcement strategy

To counter the poor conduct of recalcitrant and obstructive debtor-states, recovery teams conduct investigations to understand their available assets, secure intelligence relating to the commercial purpose of transactions and help counsel build arguments of alter ego or similar to pierce the veil of separate corporate identity.

The first step of any enforcement strategy is for clients, legal advisers and their asset recovery teams to develop an understanding of states’ international asset profile. To do this, recovery specialists conduct initial investigations assessing states’ cash flow, investments, real estate, commercial enterprises and sovereign bonds.

Recovery teams also review states’ history of compliance relating to international payments and identify instances and patterns of obstructive behaviour.

Following a comprehensive evaluation of strategically valuable assets, recovery experts can advise counsel on the assets worth pursuing. As proceedings move forward, teams will continually refresh asset profiles, domestic and international activity and monitor key decision-makers within the debtor states.

Further insight can be gleaned by providing intelligence relating to key commercial counterparties. States are obviously important players in the global economy, and as such, they and their trade partners face increased susceptibility to discovery and targeted subpoenas.

This type of exposure to discovery makes it possible to identify transactions involving key state-owned enterprises and assets, information that can then be used to disrupt or intercept funds owed to the sovereign.

For example, recovery specialists can assist the claimant by putting a counterparty on notice of money transiting to a state that might be subject to attachment. 

Finally, identifying information including asset holding structures and state-owned enterprises that can help counsel build arguments of alter ego is crucial to an investigation.

In the context of enforcement against a sovereign, arguments of alter ego aim to determine whether the debtor state and its instrumentalities have separate identities. To successfully argue an instrumentality is an alter ego, counsel must prove, increasingly as a preliminary issue, that the state-owned enterprise is an arm of the state.

To collect evidence for an alter ego argument, asset recovery specialists will review international corporate filings of the state-owned entity, publicly available government legislation, minutes and media — searching for signs including of the state-owned enterprise's functional and financial dependence on the state.

It is important to note that state-owned enterprises often own a sovereign’s most valuable and international assets. Successfully arguing alter ego can result in valuable assets becoming attachable for execution, because it can be evidenced that the state-owned entity is in fact the state itself and therefore its assets belong to the sovereign. 

Engage a team early

Sovereign states have more resources, legal protections and avenues to deter or delay enforcement than your typical debtor. Given the many hurdles involved in proceedings against them, claimants are wise to engage an asset recovery team early and as part of a wider team.

Recovery specialists help claimants develop an engagement strategy and effect settlement; distinguish strategically important assets; prove legal and beneficial ownership, identify risk of dissipation and bars to enforcement; and provide the claimant with actionable intelligence accordingly.

To maximise recoverability against a recalcitrant sovereign, asset tracing, investigation and assessment of enforcement should be embedded components of a claimant’s strategy.

This article was originally published in GAR and can be found here.