By Lili Feher^[1] and Sebastian Lukic^[2]

Introduction

In December 2022, the General Court of the EU rendered a set of judgments rejecting claims initiated by Latvian bank PNB Banka for the annulment of prudential measures imposed against it by the European Central Bank (ECB) (see T-275/19, T-301/19, T-330/19 and T-230/20).

The cases had attracted attention considering the larger context of the issue, rooted in ongoing ICSID arbitration proceedings between PNB Banka and the Republic of Latvia (Latvia). In those proceedings, provisional measures were issued by the ICSID Tribunal, restricting Latvia from withdrawing PNB Banka’s licence to operate. Following the Tribunal’s decision, Latvian authorities requested the ECB to assume prudential control over PNB Banka. The ECB complied and, inter alia, revoked PNB Banka’s licence. PNB Banka’s actions for annulment have failed, and the question is whether the ECB’s sanctions will have any bearing on the ongoing ICSID proceedings – considering that the Tribunal lacks jurisdiction to directly adjudicate any dispute between PNB Banka and the ECB. This post argues that there is a way for PNB Banka to incorporate the ECB’s actions into its ongoing investment claim: by holding the Latvia accountable through the operation of the doctrine of attribution.

Background

PNB Banka and four of its British shareholders commenced ICSID proceedings in 2017, arguing that Latvia had violated their rights under the Latvia-UK bilateral investment treaty (BIT). PNB Banka’s claims arose out of sanctions imposed on it by the Latvian banking regulatory authority (FCMC) through its allegedly arbitrary and excessive exercise of prudential control. At the time, the FCMC’s powers were exercisable over PNB Banka by virtue of its classification as a “less significant entity” under a EU regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

In September 2018, the ICSID Tribunal issued provisional measures restricting Latvia’s regulatory oversight of the bank. This included a recommendation that Latvia refrain from the withdrawal of PNB Banka’s authorisation to operate. Prompted by this decision, the FCMC turned to the ECB requesting that it assume prudential control over PNB Banka – the ECB complied. Through the reclassification of PNB Banka as a “significant entity” and thus placing it under its regulatory purview, the ECB had assumed the controlling activities previously exercised by the Latvian authority. In the following months, the ECB ordered an on-site inspection of PNB Banka’s premises and opposed certain transactions of the bank. Finally, in 2020, PNB Banka had found its licence to operate as a credit institution withdrawn by the ECB. This led to the initiation of PNB Banka’s claims for annulment concerning the suspension of its licence and the ECB’s aforementioned measures; however, the actions ultimately failed before the General Court of the EU.

Analysis

With the dismissal of PNB Banka’s claims, the ECB measures are set to remain in place for now, and the question arises as to what remedies may be available to the bank. The case ostensibly serves as an example for how an ICSID Tribunal’s authority may be undermined through the acts of a body outside of its jurisdiction. The immediate follow-up question is whether PNB Banka may be able to seek remedies from Latvia in the ICSID proceedings, for the damages suffered due to the ECB’s measures. This avenue may be open to PNB Banka through the operation of the international law rules of state responsibility – by showing that the ECB’s measures are attributable to Latvia.

Attribution is one of two core elements that need to be established to prove an internationally wrongful act of a state. In the present case, where there is an absence of special rules of attribution provided for by the relevant investment treaty (the Latvia-United Kingdom BIT), the most authoritative sources on state responsibility are the ILC Articles on Responsibility of States for Internationally Wrongful Acts 2001 (ARSIWA). However, where a state circumvents its international obligations through the operation of an international organisation, Article 57 of the ARSIWA refers to the ILC Articles on the Responsibility of International Organizations 2011 (ARIO). Article 57 of the ARSIWA also precludes the application of the principle that a “conduct acknowledged and adopted by a State as its own” is considered as an act of that State under international law (Article 11 of the ARSIWA).

Article 61 of the ARIO encapsulates the principle that States may not circumvent their obligations through international organisations. This doctrine is an established tenet of international law, as discernible from the practice of international courts and tribunals (see, for example, Waite and Kennedy v. Germany and the Bosphorus case). Article 61 of the ARIO provides for three criteria which must be satisfied for responsibility to attach to the state: First, the international organisation shall have competence in relation to the subject matter of an international obligation of the State. The requirement for the international organisation to have subject-matter competence is broad and flexible. As per the ILC Commentary, the essence of this point is that the State’s obligation covers the area in which the international organisation was delegated competence. In this case, the obligation on the State was not to withdraw PNB Banka’s banking licence. This falls within the subject-matter of the exercise of prudential control over financial entities, a subject-matter where the ECB has delegated competence. In general terms, the ECB has subject-matter competence over the prudential supervision of financial institutions within the eurozone. Additionally, since PNB Banka has been reclassified as a “significant entity”, it falls under the ECB’s regulatory scope.

Second, Article 61 of the ARIO posits that a State needs to have caused the organisation to commit an act. The present case concerns acts of the FCMC, and before the liability of Latvia may be discussed, it must be shown that the FCMC’s conduct is attributable to Latvia. There are two main ways to do this: under Article 4, or Article 5 of the ARSIWA. Under those Articles, an act committed by an organ of the state (Article 4), or by an entity exercising elements of government authority (Article 5), shall be considered an act of the state under international law. The FCMC is a public authority exercising prudential control over financial institutions within Latvia. Depending on the precise characterisation of the body under Latvian law, the FCMC falls within either Articles 4 or 5, therefore its conduct is attributable to Latvia.

Next, causation shall be shown between the act of the organisation and the State’s conduct. The ILC Commentary explains that the operative word to understanding Article 61 is “circumvention”. This term expresses that, under Article 61, it is necessary to show that it was the State’s intention to avoid compliance with an international obligation – implying that the conduct shall be in “bad faith”. In Case T-301/19, the General Court noted that the FCMC had requested that the ECB take over PNB Banka’s supervision. While it may seem that Latvia did not cause, but merely invited the ECB to take the measures, under Article 61 this invitation may suffice. Indeed, the ILC Commentary explains that a significant link between the State’s conduct and the organisation’s act must be established. Here, the ECB had assumed control over PBN Banka following the FCMC’s request. Moreover, the General Court was explicit in recording that the ECB was petitioned by the FCMC to act, justified by the restrictions placed on Latvia by the ICSID Tribunal.

One additional argument Latvia may raise is that it did not act in bad faith but merely complied with its obligations under EU law. Whether this is the case depends on the nature of EU law and whether EU law takes superiority over public international law. When ruling on Latvia’s intra-EU objection, the Tribunal analysed whether the EU Treaties, as they apply within the EU, override purely international obligations undertaken by Member States and found that they do not. The question turned on the characterisation of EU law and whether EU laws can be seen as “internal” for the purposes of Article 27 of the Vienna Convention on the Law of Treaties 1969 (VCLT). Article 27 VCLT provides that a State may not invoke its internal law as justification for its failure to perform a treaty. On this point, the Tribunal acknowledged the dual character of EU law and concluded that EU laws have a “binding effect anchoring in the domestic legal system” (Decision on the Intra-EU Objection, para 669), preventing Latvia to invoke EU law as a reason for a State’s failure to perform a treaty.

Third, the act in question needs to constitute a breach of an international obligation if committed by the State. In other words, it need not be shown that the act committed was wrongful for the organisation. The act does not have to be internationally wrongful per se, it should merely be wrongful for the State to commit the act. Here, the ECB was within its right to impose the measures – as per the General Court’s judgments. But the FCMC, Latvia’s national regulator of financial institutions, was bound by the provisional measures recommended by the ICSID Tribunal. By requesting the ECB’s help after the ICSID Tribunal’s provisional measures were made, the FCMC effectively bypassed the ICSID Tribunal’s provisional measures. Beyond the mere circumvention of these measures, any ECB act which conflicts with the BIT may, if it would be wrongful had the FCMC committed it, engage Latvia’s responsibility under international law.

Conclusion

The past years bear testament to the tensions that may arise between investment law and EU law. The buzz words are Achmea, PL Holdings, or Komstroy. The question whether EU Member States are internationally responsible for actions of EU institutions illustrates another area of potential fracas, one which may arise in intra-EU and extra-EU cases alike. The rules of state responsibility provide a touchstone, by attaching responsibility to Latvia for the damages suffered due to the ECB’s measure through the doctrine of attribution. While PNB Banka’s situation is by no means simple or straightforward, the bank may be able to achieve compensation for the damages caused to it by the ECB’s measures through the application of international law principles recorded in the ARSIWA and the ARIO.

1. Lili Hanna Feher completed an LLB degree at University College London and an LLM in International Business Law at the Central European University. Lili is an associate at Schoenherr. ↑

2. Sebastian Lukic is an attorney at Schoenherr, specialising in international arbitration, public international law, and EU law. Sebastian graduated from the University of Oxford (MJur), where he was awarded the Winter Williams Prize in International Economic Law, and the Clifford Chance Award (Proxime Accessit) for the Second Best Performance in the MJur. ↑