This is a guest post from professors Marcin Menkes and Jerzy Menkes:
On February 5, 2019, Hungary agreed to the transfer of the International Investment Bank’s seat from Moscow to Budapest. An international financial institution, which despite Russia’s major stake has already been exempted from EU sanctions, enters the European legal space and Schengen. The bank, its personnel, and a broad category of related persons have been granted generous immunities and privileges.
In light of this, we first analyse international norms that have already been or will soon be violated by Hungary. Subsequently, we consider the possible indirect legal and political consequences of the transfer. We are particularly concerned about the consequences of exempting the bank’s core activity, i.e., financial instruments and operations, from any supervision and the long-term implications for international immunities and the stability of public international law.
Violations of Hungary’s International Obligations
- First international illegal act concerns the non-disclosure of the Headquarter Agreement between. As of September 2019, it remains confidential, even though its conclusion has been confirmed in 2018 by the amendment of the Bank’s charter. Hungary thus continues to violate its universal obligation to register the treaty in accordance with UN Charter, art. 102(1). Accordingly, the following considerations are based on indirect sources.
- From a plurilateral perspective, Budapest violated its obligations towards the EU and NATO. By virtue of TEU art. 24(3), Hungary is obliged to “support the Union’s external and security policy actively and unreservedly in a spirit of loyalty and mutual solidarity and shall comply with the Union’s action”. This stipulation is strengthened by TEU art. 32, which requires the EU members to consult one another on any matter of foreign and security policy of general interest in order to determine a common approach and show mutual solidarity. This duty applies in particular to any commitment that could affect the Union’s interests.
- With regard to the IIB’s capacity to counter the EU sanctions adopted, inter alia, in response to Russia’s aggression against Ukraine, Hungary is obliged to “refrain from any action which is contrary to the interests of the Union or likely to impair its effectiveness as a cohesive force in international relations”, to uphold the Union’s position, and, again, to coordinate its actions with other members (TEU art. 34(1)). Analogous obligations bind Hungary towards its NATO allies.
There is no document or information in the public domain that would allow the assumption that Hungary has discharged its consultation obligations.
Long-term consequences
Due to the first violation analysis of the headquarters transfer is based on legal status ex ante. However, the official statement on the agreement merely “confirms (sic!.) the high status of IIB as an international organisation (IO) with headquarters in Budapest.”
- The IIB’s transfer to Budapest will allow Russia to avoid financial-economic sanctions, to the extent the transactions in question fall within the powers of the bank. It will also shield persons, otherwise prohibited from entering the EU, from personal sanctions by virtue of travel documents issued by Hungary. In other words, the IIB can serve as a vehicle allowing Russian natural and legal persons to enter the European legal space. The former is possible thanks to the exclusion of the bank from capital market restrictions (“Preamble” to Council Regulation (EU) No 833/2014, par. 5). As to the latter, by virtue of Hungarian implementing legislation, IIB officers, their family members, guests etc. will be able to enter the EU, and obtain diplomatic immunity “with no regard to their citizenship.”
- Aside from full legal personality and full legal capacity, the IIB also enjoys jus standi. The IIB was endowed with privileges and immunities within the territory of its member states, including procedural immunities, and fiscal immunities and privileges analogous to diplomatic missions. The inviolability privilege has been extended to the bank’s premises, archives, and documents. IIB governors and their deputies enjoy immunities and privileges analogous to diplomatic representatives. Furthermore, “the Bank’s members [shall not be] liable for the Bank’s obligations”, which shan’t shield from the consequences of states’ political decisions.
In light of the above, let us consider the implications of the HQ transfer for the efficiency of US/EU sanctions. Looking at the IIB goals: “The Bank’s primary objective shall be arranging financing and co-financing (…) for investment projects and programmes implemented by the Bank’s members and organisations (…)The Bank shall strive to provide financing for those projects that feature cutting edge technologies, implement new technological processes, and develop the production of new products. (…) (IIB Statute, art. 2)”. To this extent IIB has power to “manage special-purpose funds established using the resources of interested states and organisations” (Statute, art. 5) while secrecy of IIB clients’ and correspondents’ transactions, documents, accounts, and deposits remains protected (Statute, art. 6). This allows to undermine any sanctions against Russia.
Until the transfer to Budapest, IIB headquarters status was regulated under Headquarters Agreement between the USSR and the IIIB (HA). The agreement, together with the IIB statute (Appendix N 2 to the Agreement Establishing the IIB) jointly stipulated a general renouncement of the jurisdictional immunity in civil litigation and a general confirmation of the executive immunity (HA, art. 2(2)). With regard to services, the USRR bestowed the IIB with the same privileges as diplomatic missions. The USRR granted the IIB right to issue travel documents. Some personal benefits were granted even to the USSR’s own citizens serving as bank officials. Most importantly, the bank has been exempted from financial supervisions and enjoyed fiscal immunity.
At the same time, in order to maintain control over the bank’s senior management, the IIB governors were obliged to rescind their immunities and privileges with regard to their country of origin, which contradicted IIB statute. In other words, while the IIB’s most senior officers enjoy broad international personal protection, their statute does not guarantee autonomy towards home jurisdiction.
As for the broader implications of the seat transfer and generous legal benefits on the effectiveness of the international sanctions, it is worth reiterating that Hungary consciously turns a blind eye on any probable abuse of the bank’s mandate. One hardly expects Budapest to institute proceedings in case of sanctions violation. Hence, a questions arises, whether any non-Hungarian entity will be able to effectively bring a claim against the IIB.
Given that the law of international organisations’ immunities and privileges continuously evolve, the answer to this question is problematic. For lack of specific regulation, the Convention on the Privileges and Immunities of the United Nations, art. II(2) provides general guidance.
Hence, aside from express immunity waiver, any litigation will stumble upon immunities from jurisdiction and execution, and its absolute or limited nature.
On the one hand, in so-called Cholera litigation, US courts upheld the immunity of the United Nations from claims (Georges v. United Nations). On the other hand, the UN recognized its role in the epidemic, which may constitute relevant practice for the evolving customary norm. More significantly in 2019 US Supreme Court in Jam v. International Finance Corporation ruled that the organisation enjoys the same immunity as currently enjoyed by states with regard to nefarious consequences of its financing.
This was a breakthrough, because, under US law, IOs are beneficiaries of immunities on the basis of International Organisations Immunities Act (IOIA). IOIA 22 USC § 288a(b) stipulates that IOs, their property and their assets generally enjoy the same immunity from suit and other forms of judicial process as enjoyed by foreign governments. IOIA was adopted in 1945, when states benefited from absolute immunity under international customary law. The restricted immunity of states has been recognised by the US only in 1976 Foreign State Immunities Act. Until the Jam v. IFC, the dominating view was that the IOIA couldn’t make a reference to a legal act adopted three decades later. This had been confirmed, inter alia, in another case involving financial IO Atkinson v Inter-American Development Bank. Even when the World Bank has explicitly waived its immunity, in accordance with the corresponding benefits doctrine that the waiver “should be more broadly construed when the waiver would arguably enable the organization to pursue more effectively its institutional goals (…) limitations on immunity that subject the organization to suits which could significantly hamper the organisation’s functions are inherently less likely to have been intended” (Mendaro v. World Bank).
Going back to Jam v. IFC, the International Financial Corporation argued that affording IOs restrictive immunities is particularly problematic with regard to development banks, which “use the tools of commerce to achieve their objectives, they may be subject to suit under the (…) commercial activity exception for most or all of their core activities.” While the argument was conflated, it highlights the burden upon any judge that would be asked to rule upon IIB immunity in case of alleged sanctions violation. On the one hand, far-reaching consequences of restricting immunities may justify a cautious approach and, as a result, sacrifice international sanctions for the sake of immunities regimes. On the other hand, while the jure imperii–jure gestionis classification of state acts shouldn’t necessarily be applied directly to IOs, it compels to inquire about ratio legis behind IOs immunities. Immunities are supposed to allow IOs to effectively exercise its mandate. Harnessing immunities for undermining international peace and security would threaten the stability of the system. This should embolden courts to raise the immunity protection threshold.
IOs cannot be allowed to systemically abuse their immunities for illicit purposes. Yet, international financial organisations can hardly operate without this shield.
