The impact of sanctions against Russia at the enforcement stage: How to monetise awards against frozen assets in a nutshell

Enforcement is often overlooked during the early stages of arbitration proceedings. No party, however, intends to go through the trouble and expense of an arbitration only to end up with an unenforceable award. From the outset of an arbitration, claimants and their counsel should consider whether the assets of their opponents are frozen under any applicable sanctions regime. The release of frozen assets of an award debtor to satisfy an arbitral award requires a specific authorisation from the competent authorities that is granted only under certain conditions (i.e. "Licence"). This article addresses the key considerations under some of the major sanctions regimes against Russia and concludes with practical steps claimants can take to enhance their prospects of enforcing awards against frozen assets.

The chances of obtaining a Licence

1. In the US

In the US, a Licence from the US Treasury Department’s Office of Foreign Assets Control (OFAC) is generally required to enforce arbitral awards against frozen assets when the award debtor has been designated on a sanctions list under the various US sanctions against Russia ("US Sanctions"). Yet, in the context of the sanctions imposed by the US against Venezuela, several enforcement proceedings directed against Venezuelan state assets in the US have advanced to judgment without the need for a Licence. It remains to be seen whether OFAC will embrace such a liberal approach regarding Russia-related US sanctions.

OFAC has broad discretion in granting a Licence. It generally decides in favour of US foreign policy interests and regularly in concert with other US federal agencies. There is no publicly available guidance on how OFAC exercises its discretion in this regard, and the specific requirements for obtaining a Licence depend on the particular facts and circumstances of each case. OFAC's application instructions underline that "while no explicit burden of proof exists, it is important to include detailed, accurate, and verifiable information to OFAC so that the agency can make an informed decision regarding [the] application".

Precedents rendered in relation to US sanctions show that OFAC generally takes a positive and constructive approach in granting Licences. For example, in United Media Holdings, N.V. v. Forbes Medial LLC (2017), Forbes Medial LLC obtained a Licence to enforce the restitution of a portion of prepaid royalties it had been granted in an arbitral award against frozen bank assets of United Media Holdings, N.V.

2. In the EU

Art. 5(1) of the EU Regulation No. 269/2014 ("EU Regulation") provides that the release of funds of a person designated in Annex I to the EU Regulation may be authorised by the competent authority of the member states if the award was rendered before the relevant person was designated. After the designation, a Licence to satisfy monetary claims against frozen funds will only be granted in judicial or administrative decisions rendered or enforceable in an EU member state. This means that the enforcement of arbitral awards rendered post-designation against frozen assets is halted indefinitely (i.e. until the freeze is lifted), whereas enforcement of qualified court judgments is still permitted.

The reason for placing arbitral awards at a disadvantage in relation to court judgments is unclear. The practical implication is that claimants may see themselves deprived of the possibility to have a potential arbitral award enforced within a reasonable time.

3. In Switzerland

In Switzerland, Art. 15 para. 5 lit. c of the Ordinance on Measures in Connection with the Situation in Ukraine provides that a Licence may be granted by the State Secretariat for Economic Affairs (SECO) to enforce an "existing" decision of a court, administrative body or arbitral tribunal against frozen assets.

The term "existing" is neutral in the sense that the Swiss licensing regime does not appear to differentiate between arbitral awards having been rendered before or after the designation of a party. Thus, compared to the EU Regulation, the Swiss Licence regime generally appears to be more favourable for claimants seeking to enforce arbitral awards against frozen assets of award debtors.

The data available relate to Licences issued to avoid hardship in specific cases, such as for the payment of taxes, legal fees, or humanitarian activities. Despite SECO's practice of granting Licences to enforce arbitral awards, the statistics do not suggest that SECO's licensing policy is overly strict.

How to obtain clearance from banks

After obtaining a Licence to enforce an arbitral award against frozen assets, award creditors still must make sure they obtain bank clearance for any related transaction. Depending on the relevant legislation and practices, banks might not be able or willing to receive payments from sanctioned accounts even in the presence of a Licence. In particular, banks may risk being subject to unilateral, extraterritorial sanctions that are not covered by the available Licence.

Before executing a transaction, banks will consider the currency involved and the scope of activities they are required to perform. For instance, even with an EU Licence in place, banks may be reluctant to process or receive payments in USD involving a party designated on a US sanctions list. In cases of this type, banks will regularly insist on obtaining formal clearance from the relevant foreign authorities. If, however, the banks are provided with all documentation required pursuant to their internal policies, these administrative burdens may be overcome.

How to maximise the chances of enforcing against frozen assets

To increase the chances of enforcing an arbitral award against the frozen assets of a designated debtor, parties should consider developing enforcement strategies already before at a sufficiently early stage. This may include the collaboration with asset tracers and local sanctions law specialists. By carefully considering enforcement options, claimants can enhance the likelihood of successfully monetising arbitral awards, even against frozen assets. Parties should consider these strategies, even if the opposing party is not yet designated, but at risk of being designated due to its ties to Russia. Strategic foresight and informed collaboration are ultimately crucial to navigating the complexities of Russia related sanctions and enforcement regimes.

For more information, contact your usual CMS contacts or these experts at CMS Zurich: Niklaus Zaugg and Marzia Schilleci.