November 29
2021
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15th November 2021
External Relations & Trade Human Rights Internal Market Justice & Litigation

Op-Ed: “Frozen means frozen: Creditors of a person or entity subject to an asset freeze cannot initiate protective measures without prior authorization by the national authority” by Celia Challet

On 11 November 2021, the Court of Justice handed down its judgment in Bank Sepah (C-340/20). Answering preliminary questions from the French Cour de cassation, it ruled that a creditor of a person or entity subject to the freezing of funds and economic resources under the Common Foreign and Security Policy cannot initiate protective measures to secure the satisfaction of its debt claims without prior authorization by the competent national authority.

This case touches upon a key aspect of the EU’s sanctions practice, namely the definition and scope of the notions of ‘freezing of funds’ and ‘freezing of economic resources’ (commonly referred to under the broader notion of ‘asset freezes’).

In this Op-Ed I will argue that the reasoning followed by the Court of Justice could be expected. The Court’s broad interpretation of the concepts and of the provisions at hand is yet another example of its concern to ensure the effectiveness of EU sanctions. What is particularly interesting in Bank Sepah, however, is the emphasis put by the Court on the need to avoid any circumventions of the sanctions by economic operators.

Background to the case

The facts of the case are the following. In 2007 Bank Sepah, an Iranian bank allegedly involved in Iran’s nuclear or ballistic missile activities, was subjected to an asset freeze under Regulation 423/2007 (‘the Regulation’). Under Article 8 of the Regulation, and by way of derogation from the prohibition to make the listed entities’ frozen assets available, the competent national authorities may authorize the release of certain frozen funds or economic resources if they are the subject of a lien or of a judgment.

Shortly after being added to the EU’s sanctions list, Bank Sepah was sentenced by a French court to pay a sum to two creditors, Overseas Financial and Oaktree Finance. Bank Sepah did not pay the sum in full due to the asset freeze imposed on it. The Iranian bank was subsequently removed from the EU’s sanctions list in 2016. The two creditors then brought another action before French courts in order to obtain the payment of the remaining amount and of the interests established by the initial judgment. Bank Sepah argued that it could not be held liable for such interests: it had been prevented from paying its debt by the asset freeze.

The referring court noted that a five-year limitation period applied to the case and that the two creditors could have interrupted it by initiating enforcement steps as a precautionary measure. Under French law, creditors may request measures with no earmarking effect, on the basis of which they can ultimately be paid on a priority basis over other creditors. The referring court wondered, however, to what extent the adoption of such measures without prior authorization from the competent national authority could be compatible with the Regulation. On the one hand, these measures, which ensure that the creditor will be paid in priority once the freeze is lifted, could induce an economic operator to enter a contract with the person or entity whose assets are frozen. This would amount to the use by the latter of the economic value of its assets, which would circumvent the asset freeze. On the other hand, such risk seemed inexistant in this case: the two creditors sought to recover a claim based on a cause that was unrelated to the Iranian nuclear and ballistic program and which pre-dated the imposition of the asset freeze. The referring court thus asked the following questions to the Court of Justice:

  • do the relevant provisions of the Regulation preclude ‘a measure with no earmarking effect’, such as a ‘judicial lien or preventive attachment’ as provided for under national law, from being implemented if there has been no prior authorization granted by the competent national authority in respect of frozen assets?
  • is it relevant that the grounds for the claim to be recovered from the person or entity whose assets are frozen are unrelated to Iran’s nuclear and ballistic program and pre-date the adoption of the sanctions?

The case thus offered the Court of Justice an opportunity to clarify the scope of the concepts of ‘freezing of funds’ and of ‘freezing of economic resources’.

The Court of Justice’s judgment

In its reply to the first question, the Court of Justice relied on both a literal and a teleological interpretation of the provisions at stake in order to confirm the broad meaning of ‘freezing of funds’ and of ‘freezing of resources’.

The Court started by recalling the definition of both concepts as laid down in Article 1(h) of the Regulation. The latter defines ‘freezing of funds’ as ‘preventing any moving, transfer, alteration, use of, access to, or dealing with funds in any way that would result in any change in their volume, amount, location, ownership, possession, character, destination or other change that would enable the funds to be used, including portfolio management’. According to the Court, the large number of situations referred to in the provision indicates that the purpose of freezing funds is to limit as much as possible the transactions that may be carried out with the frozen funds. Such interpretation is also confirmed by the broad definition of the means of attaining the limitations of those transactions. The same reasoning could be applied, according to the Court, to the concept of ‘freezing of economic resources’, defined in the Regulation as ‘preventing the use of economic resources to obtain funds, goods or services’.

The Court then stressed that measures which establish a right to be paid on a priority basis over other creditors in favor of the creditor concerned have the effect of changing the destination of frozen funds and are liable to permit the use of frozen economic resources to obtain funds, goods or services. It is irrelevant that such measures do not have the effect of removing assets from the debtor’s estate: they nevertheless fall withing the concepts of ‘freezing of funds’ and ‘freezing of resources’.

Such interpretation was, according to the Court, supported by the objectives of the Regulation and of the EU’s sanctions regime against Iran: the latter were intended to prevent a risk of proliferation of sensitive nuclear activities in that State. In particular, the purpose of asset freezes is to prevent the assets concerned from being used to obtain funds, goods or services that could contribute to such proliferation. According to the Court, therefore, a broad interpretation of the concepts of ‘freezing of funds’ and ‘freezing of economic resources’ is ‘not only legitimate, but also indispensable’. Otherwise, the sanctions could be circumvented and ‘the weaknesses in the system […] exploited’. As a result, measures such as those in the main proceedings ought to be authorized by the competent national authorities pursuant to the Regulation.

The Court of Justice’s choice for a broad interpretation of the provisions of the Regulation was also confirmed in its answer to the second question. The Court recalled that the Regulation does not make any distinction as to the grounds for the claim for recovery from the person or entity subject to restrictive measures. It is thus possible to implement a measure in respect of frozen assets solely in terms of the legal effects it brings about, and not in terms of the grounds for the claim relating to that measure. In addition, the Court stressed that if the grounds for the claims for recovery had to be taken into account, the existence of such circumstances would need to be established on a case-by-case basis. This would, once again, entail a risk of circumvention of the asset freezes and further complicate their implementation by Member States. These elements led the Court to conclude that the fact that the grounds for the claim for recovery from the person or entity whose funds or economic resources are frozen are unrelated to Iran’s nuclear and ballistic program and pre-date the adoption of the sanctions is irrelevant.

Assessment

Overall, the Court’s findings in Bank Sepah do not seem particularly surprising. The Court’s use of a broad interpretation of the concepts of ‘freezing of funds’ and of ‘freezing of economic resources’ is yet another illustration of its willingness to ensure the effectiveness of EU sanctions.

Of particular interest, however, is the Court’s emphasis on the need to avoid any possibility for the targeted entities to circumvent the asset freezes imposed on them. In its observations, the Commission had considered that prior authorization for the adoption of precautionary measures was not required. It suggested that the party intending to take precautionary measures should simply be obliged to inform the authority in advance and on a systematic basis. By ruling otherwise and holding that even precautionary measures which do not remove assets from the debtor’s estate − as admitted in the judgment − must be authorized by a national authority, the Court therefore took a clear stance on the matter. From the EU judges’ perspective, such approach seems understandable: EU sanctions are primarily implemented at the Member States’ level, and allowing certain debt claim operations to be adopted without supervision by their national authorities could threaten the consistency and effectiveness of the EU’s sanctions regimes. This is all the more so given that asset freezes are, in practice, one of the most widely used types of restrictive measures. The Bank Sepah judgment thus sends a clear message to both economic operators and national authorities: no softening of the rules is to be expected with regard to the practical implementation of asset freezes.

 

Celia Challet is Ph.D. candidate at Ghent University (Belgium) and Academic Assistant in EU law at the College of Europe.

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