Setting the scene: assets freezing between EU and Italian law
Following the Russian invasion of Ukraine, the European Union (as well as UK and US) has issued unilateral sanctions against the Russian Federation. These sanctions follow those already enacted after the unlawful annexation of Crimea by Russia and, as of today, five “packages” of measures have been adopted by the EU.
Among these measures, one of the most pervasive forms of sanctions consists in the freezing of assets owned by Russian entities and individuals somehow tied with the Russian Government. This kind of sanction has been largely used in the past (also by the United Nations) in order to fight terrorism and money laundering. The main source providing for the discipline of asset freezing in the EU is Regulation no. 269 of 2014.
Freezing regards both “funds” and “economic resources”. The latter is to be intended as assets of every kind, whether tangible or intangible, movable or immovable, which are not funds, but may be used by the sanctioned entities as a source of funds, goods or services. It is commonly accepted that freezing may also involve companies and going concerns.
People subject to asset freezing are listed in the annexes to the EU law sources providing for the sanctions (usually regulations following decisions issued by the Council in the context of the Common Foreign and Security Policy). The inclusion of an individual or entity in a list is to be necessarily accompanied by a statement of reasons.
Asset freezing is materially carried out by domestic authorities within Member States.
As to Italy, the procedure of asset freezing is set forth by the Legislative Decree n. 109 of 2007 (the “Decree”).
The Decree created the Financial Security Committee (located within the Ministry of Economy), which has, inter alia, the duty to (i) establish how sanctions are to be materially implemented and (ii) make proposals for the adoption of sanctions by the Ministry, who will finally issue a decree to be notified to the relevant Russian individuals or entities by the police.
Freezing of assets lasts six months and is prolongable for other periods of six months, during which assets are administered by the Italian “Agenzia del Demanio” (the entity managing Italian public goods and commons).
The issue: How to protect creditors and third parties?
While a large amount of literature addressed the subject of the protection of the fundamental rights (e.g. property and due process rights) of the individuals and entities subject to sanctions, it is difficult to find some guidance on the means available to creditors of Russian individuals and entities whose assets have been frozen.
Is it possible to satisfy a credit by selling an asset which is subject to freezing pursuant to the sanctions? Is it possible to enforce a security?
Nothing is said in the Decree, while the EU Decision 2014/145/CFSP literally provides that (art. 2, par. 4, lett. a)) that release of frozen funds is allowed if the funds or economic resources are the subject of (i) an arbitral decision rendered prior to the date on which the person, entity or body has been subjected to sanctions, or (ii) a judicial or administrative decision rendered in the Union, or a judicial decision enforceable in the Member State concerned, prior to or after that date.
The Decision also specifies that, in any case, sanctions shall not prevent a listed natural or legal person, entity or body from making a payment due under a contract entered into prior to the date on which such natural or legal person, entity or body was subjected to the sanctions, provided that the Member State concerned has determined that the payment is not, directly or indirectly, received by a natural or legal person, entity or body subject to sanctions.
First of all, the above provision creates a scarcely understandable distinction between judicial decisions and arbitral awards and could let a doubt arise with regard to the enforceability of credits arisen by means of arbitral decisions issued after the sanctions, notwithstanding the fact that the arbitral proceedings were started before the sanctions. In this regard, while a literal interpretation of the wording of the Decision could let us infer that these credits are not to be protected, a systemic interpretation – which takes into account the principle of substantive equality under Italian and EU law – should lead to the opposite conclusion. Indeed, according to this principle, all credits related to events occurred (or obligations arisen) prior to the issuance of the sanctions deserve equal legal protection, regardless of the form of dispute resolution adopted (judicial or arbitral) and without taking into account the moment in which the relevant arbitral decision is issued.
Moreover, the wording of the Decision refers to funds or economic resources which are the subject of an arbitral award or judicial/administrative decision, without clarifying whether (i) the award or decision shall directly regard the frozen funds or economic resources, or (ii) any creditors for credits arisen before the enactment of the sanctions may enforce the frozen funds. In the lack of judicial precedents in this regard, it seems that the latter interpretation better complies with the goal of ensuring the protection of creditors who, in good faith, have the legitimate expectation of being satisfied.
In addition to the above, another possibly available tool for individuals and entities damaged, for whatsoever reason, by the freezing of the assets of their contractual counterparties consists in a claim before the General Court of the European Union. The reference applies, e.g., in the case of European individuals or entities that suffered a direct prejudice by Russian countermeasures adopted in response to the EU sanctions. In this regard, some decisions by the General Court envisaged the possibility that EU institutions are considered liable for their lawful actions, such as in the case of international sanctions lawfully adopted by the EU but generating a prejudice to private entities or individuals (other than the sanctioned ones). In this regard, the Court pointed out that if the EU is to incur noncontractual liability as the result of a lawful or an unlawful act, it is necessary in any event to prove the existence of an actual damage and causation. Secondly, with respect to the EU's liability for a lawful act, as in the case under discussion, the Court noted that a precondition for such liability would in any event be the existence of 'unusual' and 'special' damage. It is thus necessary to consider, on a case-by-case basis, whether the alleged damage exists, in the sense that it is 'actual and certain', whether that damage is a direct result of the actions of the EU, and whether the damage alleged is such as to render the EU liable in respect of a lawful act under the above mentioned requirements.
Next steps
Creditors of Russian individuals and entities subject to asset freezing have various chances to be satisfied, notwithstanding the issuance of sanctions, provided that their credit arose before the issuance of the sanctions or that the relevant litigation or arbitration proceedings were started before that moment.
In addition, it is also possible to envisage a form of legal protection for third parties which, for whatsoever reason, indirectly suffer a damage due to the issuance of the EU sanctions.
In the current, rapidly changing landscape, keeping on top of international sanctions regimes is more challenging than ever. Our comprehensive Sanctions Navigator collates sanctions regimes from the EU, France, the United Kingdom, United Nations, and United States in one place, to help our clients answer any questions or address any sanctions-related issues they may have. Explore the Sanctions Navigator here.
It is advisable to promptly look for legal advice in order to set up the adequate strategy on the basis of the circumstances of the case at hand, avoiding to waste time and money. Hogan Lovells is available to assist you in assessing your sanctions exposure and in ensuring compliance.
Authored by Andrea Atteritano and Giovanni Zarra.
