The Russian Armed Forces will deal with compensation for frozen transfers abroad
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The Supreme Court (SC) will for the first time consider a company’s dispute with a Russian bank over the blocking of funds in the process of transferring abroad. The decision will be made on the dispute between IS TEKS and Promsvyazbank, the legal successor of MInBank. The latter came under US sanctions while transferring payment for goods in dollars to a company in Kazakhstan. As a result, the money did not arrive. Such situations were not uncommon this and last years, when Washington actively included Russian banks in the SDN list. Lawyers note that the practice is contradictory and are waiting for clarification from the Supreme Court in which cases victims can recover losses from a Russian bank.
The Supreme Court agreed to consider the case of recovery of losses from a Russian bank, due to whose inclusion in the US SDN list the client’s funds were blocked.
In March 2022, IS TEKS LLC became a client of the Moscow Industrial Bank (MInBank), and on May 6 of the same year, it ordered the transfer of $59.4 thousand through Halyk Savings Bank of Kazakhstan (intermediary bank) to the account of Universal Art Textile in the Kazakh Tenge Bank ( beneficiary bank). The purpose of the payment was payment for cotton yarn under the 2020 contract. The money was debited from the IS TEX account, but the payment did not reach the beneficiary. The fact is that on May 8, MInBank came under US sanctions (in the SDN-list). The company asked the Moscow bank to return the funds, but did not receive them and went to court.
In October 2022, the Moscow Arbitration Court recovered from MInBank in favor of the LLC $59.4 thousand as damages. The decision explained that for the transfer of US dollars, funds were transferred through the correspondent account of the American The Bank of New York Mellon (BNY Mellon), which blocked them due to sanctions against MinBank. The court concluded that the Russian bank violated the terms of the transfer, since the client’s application indicated a specific intermediary bank, and MInBank, at its discretion, carried out the transfer through another bank, which led to the blocking. Thus, the decision says, the bank violated its obligations and is liable to the company. The position survived the appeal and cassation.
Promsvyazbank (in June 2023 became the legal successor of MInBank) filed a complaint with the Supreme Court, insisting that the bank acted in accordance with the “established practice of international settlements in foreign currency.”
The applicant does not agree with the conclusions of the courts about the bank’s unauthorized change of the payment route and the blocking of funds due to his negligence. Promsvyazbank clarified that since December 1991, BNY Mellon was for MInBank “the only correspondent bank for settlements in US dollars” and dozens of foreign currency payments were successfully carried out through it. The Kazakh intermediary bank also carried out dollar transfers only through BNY Mellon, so this “payment route is the only correct one.” MInBank, according to the applicant, “did not know and could not know” about the upcoming inclusion in the SDN-list; at the date of transfer of funds there were no sanctions yet. The blocking occurred when the order was executed and did not depend on the actions of the bank.
In addition, Promsvyazbank believes that the plaintiff’s funds are “not lost,” since OFAC (US Office of Foreign Assets Control) regulations allow the possibility of transferring funds under a special permit (license) if the operation is not performed in the interests of the sanctioned entity. IS TEX even applied for a license, but did not provide additional documents at OFAC’s request and did not receive it. But, according to the bank, the company still has the opportunity to return the money by again contacting the American regulator.
The Supreme Court considered these arguments worthy of attention and on September 25 referred the case to the Economic Collegium. The meeting date has not yet been set.
This is the first dispute over the freezing of funds due to sanctions against a Russian bank that the Supreme Court will consider, lawyers say. “In the current sanctions realities, situations in which funds are blocked in correspondent accounts in foreign jurisdictions due to the imposition of sanctions against one of the persons in the chain occur quite often,” emphasizes Tatyana Neveeva, senior partner at the law firm Verba Legal. Delcredere CA lawyer Artem Kasumyan believes that the final position of the Supreme Court “will be important for all persons involved in foreign currency payments in one way or another.”
Regblok chief analyst Anna Avakimyan notes that “in March-October 2022, the scale of such currency transfers could amount to tens of billions of dollars, half of which could relate to business transfers.” Independent expert Andrey Barkhota estimates the volume of transfers specifically from legal entities for March-July 2022 (when most sanctions were introduced) at about 100 billion rubles. Of these, he said, at least 40% could be stuck on business transfers due to banks falling under sanctions.
But not all victims decided to sue. There is still very little practice regarding the claims of citizens whose funds were also frozen due to sanctions (see Kommersant on September 6).
There are more claims from corporate clients against banks, but court decisions on them are contradictory, notes Kira Vinokurova, co-head of the sanctions law and compliance practice at Pen & Paper. Thus, she says, in the case of Elmash LLC (UETM) against Gazprombank, the court refused to recover damages, considering that the blocking of funds from the intermediary was outside the area of responsibility of the Russian bank. But in the dispute between Pivoindustriya LLC and Alfa Bank, the court, on the contrary, upheld the company’s claim, deciding that failure to fulfill obligations by the correspondent bank does not exempt from liability for failure to fulfill obligations to the client.
Lawyers believe that before going to court, the victim should still try to obtain permission to transfer funds from OFAC. When deciding on a license, the regulator first of all seeks to make sure that the unlocked funds “will not be used to provide benefits to a sanctioned person,” explains Ms. Vinokurova. But there is no exhaustive list of documents that OFAC may require. Most likely, the request for additional information from IS TEKS concerned the source of receipt of blocked funds, the corporate structure of the company and its beneficiaries, Tatyana Neveeva believes. The regulator could also request data on the sanction status of the recipient of the funds, confirmation of the basis for the transfer of money and the route of their movement, adds Kira Vinokurova.
Artem Kasumyan emphasizes that OFAC can be contacted more than once. However, he admits, even the provision of additional documents “does not guarantee the issuance of a license.”
Lawyers have different opinions regarding the judicial prospects of the IS TEKS case. Artem Kasumyan believes that MInBank “is not responsible for the actions of the correspondent bank.” Moreover, the lawyer clarifies, when the latter “commits actions prescribed to him by his legislation.” Kira Vinokurova agrees that, in general, the bank could not foresee inclusion in the SDN-list and blocking of the transfer of funds, and taking into account the possibility of obtaining an OFAC license, the plaintiff has not yet completely lost them.
However, the issue of compensation for losses, in her opinion, is complicated by the fact that MInBank did not transfer money through the bank that was written down by the client in the order. In this regard, Tatyana Neveeva believes that the Supreme Court will assess the legality of MInBank’s actions to unauthorizedly change the payment route. “This circumstance in itself may not lead to damage, but given the risk of sanctions, the question arises whether it was reasonable to transfer funds through an American intermediary bank in May 2022,” points out Ms. Neveeva. Perhaps, lawyers note, “it would have been worth offering to transfer funds in another currency.”
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