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Banks warn against EU plan to redistribute Russian assets

Some Western banks have begun lobbying against EU proposals to redistribute billions in interest earned on frozen Russian assets, senior industry sources said, fearing it could lead to costly litigation.

European Union leaders are discussing a plan to use up to €3 billion a year to supply arms to Ukraine as they try to bolster the country’s fight against Russia, which would still own the underlying frozen assets.

Some banks fear, however, that they might later be held liable by Russia if they are involved in any transfer of money to Ukraine and that the EU plan could be extended to assets in accounts they hold for sanctioned individuals and companies.

Such an extension has not yet been raised by the EU.

The sources are also concerned that the proposals will lead to a wider erosion of trust in the Western banking system.

The sources, who declined to be named due to the sensitivity of the matter, said they were sharing their concerns with British and Euro zone policymakers, flagging likely litigation when anti-Russian sanctions are eventually eased or lifted.

A woman walks past a currency exchange office in Moscow

Russia said any attempt to take its capital or interest is “banditry” that will lead to decades of legal action against all those involved.

Russia has also repeatedly said it will retaliate if its assets or income are expropriated.

Euroclear holds the equivalent of €190bn of Russian central bank securities and cash. Western banks also hold billions of euros, pounds and dollars in assets owned by companies and individuals subject to sanctions.

More than 3.5 million Russians have frozen assets abroad worth around 1.5 trillion roubles (€15bn), Russia’s Finance Minister Anton Siluanov said last year.

The EU plan envisages paying a fee to Euroclear, which did not respond to a request for comment.

The Belgium-based central securities depository, which counts some of the world’s largest banks as shareholders, will also be permitted to temporarily retain 10% of the profits on stranded Russian assets as a safeguard against litigation.

Western arms and military aid has been crucial for Ukraine as it fights against Russia’s invasion

Under the EU plan, some 90% of the seized cash would be channelled through the European Peace Facility to buy weapons for Ukraine. The rest will be used for recovery and reconstruction.

EU, UK and US sanctions law typically provides for freezing assets owned by designated parties, but not confiscation. Assets can be confiscated under UK law, but only if ruled to be the proceeds of crime.

Permitting the confiscation and redistribution of interest earned on those assets puts banks at risk of being challenged by owners, the sources said.

One source warned of the precedent this proposal would set and the “weaponisation of foreign-held reserves and assets”.

Russia itself has seized assets, installed new management at Western companies’ subsidiaries and forced departing firms to sell at huge discounts in response to Western sanctions.

A second person said their bank was seeking legal advice on indemnities it could demand to participate in the EU’s plan.

“If these proposals move forward, the whole legal architecture would need to change,” said Paul Feldberg, partner and head of Brown Rudnick’s White Collar Defense, Investigations & Compliance practice in London.

“As far as banks go, I think they’re right to be concerned because we have already seen huge amounts of civil litigation in relation to sanctions,” said Mr Feldberg, who is not currently directly involved in any lobbying.

Reputation

Russia has said that any confiscation would be a blow to property rights, harm confidence in Western bonds and currencies and torpedo trust between central banks.

Kremlin spokesman Dmitry Peskov said the EU proposal would undermine international law and warned of inevitable damage to Europe and decades of legal wrangling.

“The Europeans are well aware of the damage such decisions can cause to their economy and to their image, their reputation as a reliable, so to speak, guarantor of the inviolability of property,” Mr Peskov told reporters.

Russian spokesman Dmitry Peskov said the EU’s plan would undermine international law

Francis Bond, senior associate at law firm Macfarlanes said the detail on the EU proposal was crucial when gauging the likelihood of prolonged international legal disputes.

“…this proposal is not going to represent the end of this story but more likely the latest salvo in a perennial debate about the nature of sanctions and their appropriate role in the global financial system,” he said.

The European Commission did not respond to a request for comment. Britain’s finance ministry deferred comment to the UK Foreign Office.

It said British Foreign Secretary David Cameron had addressed the issue in a debate on 5 March in which he said: “The moral case is there – this money should be used for the benefit of the Ukrainian people”.

‘Clawback’

It is not yet clear how many EU member states will support the EU proposals or how quickly they could be implemented.

In the meantime, lawyers examining them said indemnities would not necessarily neutralise potential litigants.

Ukrainian and EU flags flying in front of the Kharkiv Regional Government headquarters

“There isn’t an immediately obvious way for banks to insulate themselves comprehensively from future challenges and clawback actions,” Oliver Browne, litigation and arbitration partner at Paul Hastings, told Reuters.

“Prudent financial institutions need to anticipate the likely future costs of the inevitable disputes that will come,” said Mr Browne, who is not lobbying directly but is talking with clients who might be impacted by changes to sanctions law.

A third industry source said the potential confiscations had compounded worries among bankers about their compliance with sanctions, including navigating any possible misalignment between the EU, UK and the US.


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