Some western banks are lobbying against European Union proposals to redistribute billions of euros in interest earned on frozen Russian assets, senior industry sources said, fearing it could lead to costly litigation.
Its leaders The European Union agreed Thursday (March 21) to move forward with work on a plan that calls for the use up to three billion euros per year for the supply of arms to Ukraine, as they seek to bolster Kiev’s fight against Russia, which will continue to hold the underlying frozen assets. EU leaders said the proceeds could be used within months.
Some banks fear, however, that they could later be held liable by Russia if they are involved in any money transfer to Ukraine, and that the EU plan could extend to assets in accounts they hold for sanctioned individuals and companies .
Such a dimension has not yet been set by the EU.
The sources also worry that the proposals will lead to a wider erosion of confidence in the Western banking system.
The sources, who declined to be named because of the sensitivity of the matter, said they were sharing their concerns with British and eurozone policymakers, pointing to potential legal battles when anti-Russian sanctions are eventually eased or lifted.
THE Russia says any attempt to take her principal or interest is “robbery” that will lead to decades of legal action against everyone involved. Moscow has repeatedly said it will retaliate if its assets or income are expropriated.
THE Euroclear (b.c. a Belgian-based financial services company) owns the equivalent of 190 billion euros in Russian central bank securities and cash. Western banks also hold billions of euros, pounds and dollars in assets belonging to sanctioned companies and individuals.
More than 3.5 million Russians have frozen assets abroad worth about 1.5 trillion rubles (15.7 billion euros), Russia’s finance minister said last year Anton Siluanov.
The EU plan calls for a fee to be paid to Euroclear, which did not respond to a request for comment.
The Belgium-based central securities depository, which counts some of the world’s biggest banks as shareholders, will also be allowed to temporarily retain 10% of the profits from the trapped Russian assets as a guarantee against legal disputes.
According to the EU plan, around 90% of the seized cash will be channeled through the European Peace Mechanism to buy arms for Ukraine. The rest will be used for recovery and reconstruction.
Its legislation EUher England and of USA on sanctions usually provides for the freezing of assets belonging to specified parties, but not for confiscation. Assets can be seized under English law, but only if they are found to be the proceeds of crime.
By allowing the confiscation and redistribution of interest earned on such assets, the banks risk being resented by the owners, the sources said.
One source warned of the precedent this proposal would set for her “weaponization of reserves and assets held by foreign banks”.
Russia itself has seized assets, installed new management in subsidiaries of Western companies and forced exiting companies to sell at huge discounts in response to Western sanctions.
A second person said their bank was seeking legal advice on the compensation it could claim to join the EU scheme.
“If these proposals go ahead, the entire legal architecture will have to change”stated Paul Feldbergpartner and head of the practice White Collar Defense, Investigations & Compliance her Brown Rudnick in London.
“As far as the banks are concerned, I think they’re right to be concerned because we’ve already seen huge amounts of civil suits in relation to the sanctions.”said Feldberg, who is not currently directly involved in any lobbying.
“As far as the banks are concerned, I think they are right to be concerned because we’ve already seen huge civil litigation over the penalties.”he said himself, who is not currently directly involved in any lobbying.
Reputation
Moscow says any seizure would hurt property rights, damage confidence in Western bonds and currencies and undermine confidence among central banks.
The representative of the Kremlin Dmitry Peskov said this week that the EU proposal would undermine international law and warned of inevitable damage to Europe and decades of legal wrangling.
“Europeans know very well the damage that such decisions can cause to their economy and to their image, to their reputation as a reliable, let’s say, guarantor of the inviolability of property”Peskov told reporters.
Francis Bond, senior partner at law firm Macfarlanes, said the details of the EU proposal were crucial when measuring the likelihood of protracted international legal disputes.
“…this proposal is not going to be the end of that story, but rather the final blow to an eternal debate about the nature of sanctions and their appropriate role in the global financial system,” he stated.
The European Commission did not respond to a request for comment. Britain’s Treasury referred comment to the UK’s Foreign, Commonwealth and Development Office.
The FCDO stated that the British Foreign Secretary David Cameron addressed the issue in a debate on March 5 in which he said: “This money must be used for the benefit of the Ukrainian people.”
“Clawback” – Recovery
It is not yet clear how many EU member states will support the EU proposals or how quickly they could be implemented.
Meanwhile, lawyers looking into them said the damages won’t necessarily deter potential plaintiffs.
“There is no immediately obvious way for banks to completely shield themselves from future challenges and recovery actions,” told Reuters Oliver Browneher partner Paul Hastings in disputes and arbitration matters.
“Prudent financial institutions should anticipate the likely future costs of the inevitable disputes that will arise”said Browne, who is not directly lobbying but is talking to clients who may be affected by the changes to the sanctions law.
A third industry source said the potential seizures have heightened concerns among bankers about their compliance with sanctions, including navigating any potential deviations between the EU, Britain and the United States.
Source: Euractiv / Western banks warn of risks in EU plan to grab Russian assets
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