The impact of international financial sanctions in the administration of international arbitration proceedings

There are numerous points at which international sanctions might affect the conduct of arbitration proceedings when one of the parties is a sanctioned entity. The following payments usually take place in arbitration:

• the payment of the registration fee at the filing of a request for arbitration;
• the payment of the advance on the tribunal’s and institution’s costs;
• the remuneration of counsel; and
• payment under the arbitral award itself.

These can all be circumstances in which a license may be required for a paying and/or a receiving party to perform the transfer of funds. The processing of licenses can be time-consuming and delay the start of arbitral proceedings, especially when multiple license applications to different national authorities are required to take place.

Accordingly, complying to international sanctions may result in due process infringements or, also, to denial of justice.

Following the entry into force of Council Regulation (EU) No 833/2014 of 31 July 2014, concerning restrictive measures due to Russia's actions destabilizing the situation in Ukraine (Regulation 2014/833), available here, the EU’s  most prominent arbitral institutions established stringent compliance and sanctions checks and procedures in the administration of arbitration proceedings to ensure compliance with Regulation 833/2014.

On 17 June 2015, the International Chamber of Commerce (ICC), the London Court of Arbitration (LCIA) and the Stockholm Chamber of Commerce (SCC) jointly issued a note (available here) to reassure users of arbitration of the integrity of the process in the context of sanctions. The institutions stressed their neutrality despite the fact of being located in the EU, and that sanctions did not directly interfere with a party’s right to arbitrate.

In the aftermath of Russia’s invasion of Ukraine in February 2022, on 15 March 2022, the EU adopted Council Regulation (EU) 2022/428 of 15 March 2022, amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia's actions destabilizing the situation in Ukraine (Regulation 2022/428), available here.

As a result of the modification, Article 5aa of the Regulation 833/2014 prohibits direct or indirect engagement in any transaction with:

“(a) a legal person, entity or body established in Russia, which is publically controlled or with over 50% public ownership or in which Russia, its Government or Central Bank has the right to participate in profits or with which Russia, its Government or Central Bank has other substantial economic relationship, as listed in Annex XIX;

(b) a legal person, entity or body established outside the Union whose proprietary rights are directly or indirectly owned for more than 50% by an entity listed in Annex XIX; or

(c) a legal person, entity or body acting on behalf or at the direction of an entity referred to in point (a) or (b) of this paragraph.”

However, the new Article 5aa as amended by Regulation 2022/428 justifiably raised doubts as to whether attorneys, arbitrators and arbitral institutions were authorized to provide any of the services required to ensure these entities access to justice inter alia through arbitration proceedings. And whether attorneys, arbitrators and arbitral institutions were authorized to receive any kind of payment in relation to these services.

Several arbitral institutions, such as the Vienna International Arbitration Centre (VIAC); the German Arbitration Institute (DIS); the Milan Chamber of Arbitration (CAM); the Swiss Arbitration Centre; the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) and the Finland Arbitration Institute of the Chamber of Commerce (FAI) reportedly provided the regulator with the arbitration users’ feedback, expressing their concern about the potential impact of the measures on arbitrations involving sanctioned Russian parties and requested clarification from the EU on the scope of the prohibition in Article 5aa.

On 21 July 2022, the EU adopted Council Decision (CFPS) 2022/1271 of 21 July 2022, amending Decision 2014/512/CFSP concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine (Decision 20221/1271), available here, and Council Regulation (EU) 2022/1269 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine (Regulation 2022/1269), available here. This regulation clarifies the scope of the prohibition in Article 5aa of Regulation 2022/428, related to the listed companies. In particular, as the Council explains in Regulation 2022/1269 “[i]n order to ensure access to justice, Decision (CFSP) 2022/1271 […] allows an exemption from the prohibition to enter into any transactions with Russian public entities necessary to ensure access to judicial, administrative or arbitral proceedings.”

New Article 5aa(3)(g) as amended by Regulation 2022/1269 stipulates that such prohibition will not apply to “transactions which are strictly necessary to ensure access to judicial, administrative or arbitral proceedings in a Member State, as well as for the recognition or enforcement of a judgment or an arbitration award rendered in a Member State and if such transactions are consistent with the objectives of [Regulation 833/2014] and [Regulation 269/2014],” both of which contain provisions that affect not only the administration of arbitration proceedings but also the ruling by arbitrators on substantive claims and the enforcement of arbitral awards.

This clarification was widely welcomed by the arbitral institutions, which, in a joint statement published on 26 July 2022 (available here), emphasized that arbitral institutions play an essential and irreplaceable role in upholding the rule of law, ensuring access to justice, safeguarding the integrity of arbitral proceedings and guaranteeing the impartial and equal treatment of parties.

In addition, the ICC released a statement on 5 August 2022 (available here), welcoming “the amendment, which would undoubtedly help in clarifying the scope of the EU Regulation and increase legal certainty for the business community.”

 

Practical aspects of arbitrating under sanctions

Though the abovementioned amendments in EU Regulations retain a requirement for full compliance with the sanctions directive, there are still some practical difficulties for arbitral institutions when a sanctioned entity is party to arbitration proceedings. As Richard Happ (President of the DIS council) reportedly noted, “’convincing’ banks to accept funds from sanctioned entity may continue to be “difficult and time consuming”

Other arbitral institutions have put systems in place to facilitate payments from sanctioned entities. According to the “SCC General information for parties covered by the EU sanctions” of 11 March 2022, a listed party should, before filing a request for arbitration to the SCC, apply for authorization to transfer funds to the SCC under the exemption provided in Article 4 1.b of the Council Regulation (EU) No 269/2014 of 17 March 2014, concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.

This provision allows the relevant authority (the Swedish National Board of Trade (Kommerskollegium) in case of an entity and the Swedish Social Insurance Agency (Forsakringskassan) in case of a natural person) to grant an exemption from the sanctions for funds “intended exclusively for payment of reasonable professional fees or reimbursement of incurred expenses associated with the provision of legal services.”

Lastly, on 17 October 2022, the UK’s Office of Financial Sanctions Implementation (OFSI) issued a general license to the LCIA allowing it to process payments from parties subject to the UK’s recent financial sanctions against Russia and Belarus to cover their arbitration costs.

However, the license, which applies for an unlimited time-period, only covers cases administered by the LCIA under its own arbitration rules. UNCITRAL cases administered by the LCIA, and cases in which the institution merely acts as fundholder, will still require an individual license from OFSI.

 

Moving forward

Despite the long-awaited clarification brought by Regulation 2022/1269, several sanctions-related issues on the conduct of arbitration proceedings remain.

By way of example, at the enforcement stage, Article 5(1) of Regulation 269/2014 provides that frozen funds of an entity included in Annex I (which might also happen to be a listed entity under Article 5aa(1) of Regulation 833/2014) may be released to satisfy an arbitral award only in situations in which the award was rendered before the entity in question was included in Annex I.

Practitioners have reportedly commented that complications also remain as a result of recent Russian case law that allows local courts to injunct and thus prevent the commencement or continuation foreign arbitrations, in which Russian entities are parties, where their access to justice is impeded as a result of sanctions.

On 9 December 2021, in the ruling of JSC Uraltransmash v. PESA (available here, in Russian), the Supreme Court of Russia confirmed that the mere fact that sanctions had been imposed is deemed sufficient to create a perception that the Russian sanctioned entity would not have access to justice. For example, that it would not be treated equally, fairly, or impartially in arbitration proceedings seated in a country which had imposed sanctions. The Russian courts would therefore have exclusive jurisdiction over disputes (unless otherwise agreed by both parties) and a party would be entitled to seek an anti-arbitration injunction to enforce this position.

Such an approach raises crucial questions as to the legality of anti-arbitration injunctions and the independence of arbitral tribunal as to the determination of their jurisdiction. These injunctions, in fact, attack the very foundations of the principle of Competence-competence, and would strip arbitral tribunals of their power to determine their own jurisdiction and to determine that the arbitration agreement is invalid or inoperable.

On a final note, the persistent difficulties encountered by parties and institutions of international arbitration proceedings affected by the international sanctions regime have also shifted international arbitration trends and practices.

The most striking example is “The 2022 Russian Arbitration Association Survey: The Impact of Sanctions on Commercial Arbitration” (available here) a study conducted by the Russian Arbitration Association and published on 12 January 2022 (before the international sanctions’ strengthening following the beginning of the war in February 2022), which surveyed arbitration users from Russia, Belarus, China, Cuba, Iran, Venezuela and other countries to understand what effect sanctions have on arbitration. One of the main survey findings was that arbitration users try to “delocalize” arbitration.

Compared to the same survey conducted in 2016, this is demonstrated by:

• the rise in preference towards ad hoc arbitration, instead of institutional arbitration, from 6.5% in 2016 to 21% in 2022;
• the option to use “neutral” currencies as contract currency instead of payments in USD and EUR;
• the intensification in the choice of lex mercatoria as substantive law to avoid the nexus to national legal regimes.

Interestingly, especially with regards to Russian parties, compared to the same survey conducted in 2016, the role of arbitral institutions located in the Asian jurisdictions as the SIAC and the HKIAC has been growing as well as the role of these common law Asian jurisdictions as seats of arbitration.

It is worth noting, however, that choosing an Asian arbitral institution may address some of the above-mentioned practical issues, but not all. Although the institutions may not need to wait for a license to administer the dispute, certain arbitrators may still be unable to accept appointments and the banks may still be unable or unwilling to carry out transfers involving funds of persons under sanctions.