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Cyberfraud: What Responsibility Do Banks and Telecommunication Companies Have?
Photo by Anna Shvets on Pexels.com Introduction
Cyberfraud is an increasingly frequent and serious problem that affects both customers and financial institutions. It involves a set of illegal techniques used by cybercriminals to obtain personal and banking information from users, access their accounts, carry out unauthorized transactions, or extort them by locking their electronic devices. Some of the most common types of banking cyberfraud include phishing, vishing, smishing, spoofing, malware, and SIM swapping.
Given this situation, the question arises as to what responsibility banks and telecommunication companies have in cases of cyberfraud, and what rights affected customers have to claim back the money that has been stolen or compensation for the damages and losses caused by this cyberattack.
Responsibility of Banking Entities
According to Spanish law, banks can be held responsible for cases of cyberfraud, especially when it involves phishing, a technique used by criminals to obtain personal and banking information from users by sending false messages that impersonate a legitimate entity.
The Law 16/2009 on payment services states that payment transactions not authorized by the account holder must be automatically reimbursed to them, provided that the customer has not acted fraudulently or with gross negligence, or has immediately reported the unauthorized transfer to the bank.
In addition, Regulation (EU) 2015/847 on information accompanying fund transfers imposes a series of obligations on payment service providers regarding control and monitoring of payments, such as verifying the identity of the beneficiary and refusing to execute the transfer in case of discrepancies. Therefore, if the bank fails to comply with these obligations, it can be responsible for the damages and losses caused to the customer by cyberfraud and must return the stolen money plus accrued interest.
However, the responsibility of the bank is not limited to phishing but can extend to other types of cyberfraud that also involve unauthorized access to customers’ accounts, such as vishing, smishing, spoofing, or malware. These types of cyberfraud can cause damage to both the customer and the bank, so it is important that both adopt security and prevention measures, such as verifying the authenticity of messages or calls received, not sharing their data or access keys with anyone, using antivirus and firewalls, updating their operating systems and applications, and reporting any incidents or suspicions of fraud.
Assessing User Responsibility and Bank Liability in Online Banking Security Breaches
Decisions from various Spanish courts address the issues of negligence and liability in the context of online banking security.
The courts have highlighted the significant negligence on the part of plaintiffs in safeguarding their online banking credentials, with a particular focus on the failure to adequately explain how fraudulent transactions were executed or how fraudsters managed to maintain control over their mobile devices.
The rulings emphasize the user’s imperative duty to protect their personalized security credentials and to avoid sharing them with third parties. Reckless sharing of such sensitive information is considered gross negligence, absolving the bank from any liability.
Furthermore, the judgments note that payment service providers may be exempt from liability if it can be shown that the incident occurred due to the customer’s intentional or grossly negligent actions.
Discussions within these rulings include the methods by which criminals may clone SIM cards through various cybercrimes, such as pharming, hijacking, or by installing malware-ridden apps that capture comprehensive data from the compromised device.
These cases underscore the essential need for user diligence in protecting personal data and access credentials in online banking environments, setting forth the conditions under which banks may be absolved of responsibility, contingent on the proven negligence of the customer.
Responsibility of Telecommunication Companies
Another type of cyberfraud that has become significant in recent years is SIM swapping, which involves duplicating the SIM card of a person’s mobile phone to impersonate their identity and access their bank accounts or other services that require SMS verification.
In this case, the responsibility of the bank may be reduced or excluded if it has complied with the security and prevention measures established by the regulations, such as sending unique and random confirmation codes to the customer or rejecting suspicious operations.
However, the responsibility of the telecommunication company can be increased or aggravated if it has not guaranteed the confidentiality and security of its customers’ data and has facilitated the SIM duplication without the consent or verification of the holder.
The Spanish Data Protection Agency (AEPD) has imposed multimillion-euro fines on the main mobile operators for this reason. Moreover, the courts have sentenced some telecommunication companies to compensate customers who have suffered this type of fraud, in cases where their SIM card was duplicated, and money was stolen from their bank account.
Joint and Several Liability of Banks and Telecommunications Companies (Including Internal Recourse Actions): Addressing SIM Swapping Cases in Spanish Courts
In SIM swapping cases, Spanish courts have established that entities, such as banks and payment service providers, may be held responsible under data protection laws if their actions, or lack thereof, facilitated financial fraud.
If a SIM card is illegally duplicated and used in fraudulent activities, not only the telecommunication company that carried out the duplication but also financial institutions that failed to implement adequate security measures might be implicated.
These entities can be deemed jointly and severally liable for the resulting damages to the affected parties.
However, the courts also recognize the right of these entities to pursue internal recourse actions against each other to recover contributions to any compensation paid to the victim. This legal principle acknowledges the complex interplay of responsibilities among different service providers in protecting against and responding to data breaches and fraudulent acts.
Conclusion
The multifaceted nature of banking cyberfraud, encompassing phishing, vishing, smishing, spoofing, malware, ransomware, and SIM swapping, necessitates a collaborative and vigilant approach from both financial institutions and telecommunication companies.
Spanish case-law has established a framework of responsibility where banks and telecom companies are accountable for ensuring the security of their customers’ data and transactions. In cases of negligence or failure to adhere to regulatory standards, these entities face the possibility of being held liable for the damages suffered by the victims of cyberfraud.
Particularly in SIM swapping incidents, the courts have underscored the concept of joint and several liability, where both telecommunication companies and financial institutions can be held responsible if their actions have directly or indirectly facilitated the fraud. This approach not only emphasizes the need for stringent security measures and compliance with data protection laws but also highlights the importance of customer awareness and precaution in safeguarding their personal and financial information.
Ultimately, these rulings serve as a critical reminder of the shared responsibilities in the digital age, urging banks, telecom companies, and customers to remain proactive and cooperative in combating the evolving threats of banking cyberfraud.
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Section 1782’s Influence and UNCITRAL’s Progressive Stance on International Asset Recovery
Photo by Pixabay on Pexels.com Introduction
In the realm of international asset tracing and recovery, the landscape is marked by a paucity of efficient legal mechanisms for cross-border cooperation. This gap is highlighted by the unique characteristics of Section 1782 of the United States Code, a provision that stands out for its direct approach in assisting foreign legal proceedings. This scenario set the stage for the United Nations Commission on International Trade Law (UNCITRAL) to initiate comprehensive work in this area, particularly focusing on insolvency law.
Section 1782 of the US Code: A Pioneering Tool in International Law
Section 1782(a) represents a novel approach in international legal cooperation. This U.S. statute allows foreign litigants to directly request U.S. courts to assist in gathering evidence for use in foreign proceedings. Its uniqueness lies in its capacity to bypass traditional diplomatic channels, offering a more expedient and direct method for evidence collection. This feature, while specific to the U.S. jurisdiction, has had a ripple effect in highlighting the need for similar mechanisms in international law, especially in asset tracing and recovery.
The International Gap and UNCITRAL’s Response
The advent of Section 1782 underscored the scarcity of comparable legal tools in the international arena. It spotlighted the challenges in cross-border asset tracing and recovery, emphasizing the necessity for a more unified and effective global legal framework. Recognizing this imperative, UNCITRAL embarked on an initiative to address these challenges, with a particular focus on insolvency law.
UNCITRAL’s Approach to Asset Tracing in Insolvency
UNCITRAL’s work in insolvency law has been geared towards creating harmonized legal standards and practices. By developing guidelines and resources for asset tracing and recovery in insolvency cases, UNCITRAL aims to bridge the gaps in international cooperation. Its efforts include compiling detailed inventories of tools and creating best practice guidelines, thus facilitating a more coherent approach to cross-border insolvency proceedings.
The Synergy Between Section 1782 and UNCITRAL’s Initiatives
The existence of Section 1782 has not only highlighted the potential for direct legal assistance in international law but also inspired broader discussions about improving international cooperation in asset recovery. UNCITRAL’s initiatives, while not directly replicating Section 1782, take cues from its direct and effective approach. The commission’s focus on insolvency law serves as a strategic entry point, considering the complexities and international implications often inherent in insolvency cases.
Digital Assets and Emerging Challenges
In an era of rapid technological advancement, UNCITRAL’s work also addresses the burgeoning challenges related to digital assets. Cryptocurrencies and blockchain technology, for instance, have introduced new complexities in asset tracing, necessitating adaptive legal responses. UNCITRAL’s efforts in this domain are crucial for ensuring that international insolvency law keeps pace with technological evolution.
The Future of International Legal Cooperation
Looking ahead, the interplay between national tools like Section 1782 and international efforts spearheaded by bodies like UNCITRAL is likely to shape the future of asset recovery in international law. The need for effective, harmonized legal frameworks is increasingly pressing in a globalized economic landscape marked by intricate financial transactions and technological advancements.
Conclusion
The influence of Section 1782 in the U.S. has been a catalyst for global legal developments in asset tracing and recovery. UNCITRAL’s response, particularly in the area of insolvency law, signifies a crucial step towards establishing more robust and coherent international legal mechanisms. As this field continues to evolve, the collaborative efforts of national and international bodies will be key in navigating the complexities of cross-border asset recovery.
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The ‘Spanish Saga’ in the Antin case and beyond: award recognition and asset recovery in EU investment arbitration
Photo by Vlad Ioan on Pexels.com This article was first published in the newsletter of the Asset Recovery Committee of the International Bar Association
Introduction
Recently, on 24 May 2023, the High Court of London issued its long-awaited decision in the Antin case. The High Court dismissed the appeal against the registration (ie, the recognition) of the International Centre for Settlement of Investment Disputes (ICSID) award that ordered Spain to pay €120m in favour of Infrastructure Services Luxembourg SÀRL and Energia Termosolar BV, for breach of its obligations under the Energy Charter Treaty (ECT). Spain opposed the recognition of the ICSID award invoking its sovereign immunity, which in turn was based on the Achmea and Komstroy doctrines developed by the Court of Justice of the European Union (CJEU).
Appropriately, the High Court of London referred to the analysis of these doctrines as ‘the EU law question’. In short, what the court had to determine was whether, based on the principle of primacy of EU law, Spain held sovereign immunity from jurisdiction that invalidated ICSID’s competence to resolve such disputes through arbitration and, consequently, whether it was appropriate to deny recognition of the award.
The High Court of London dismissed Spain’s opposition, on the grounds that the primacy of EU law does not render Spain’s (or the UK’s) obligations under the ICSID Convention or ECT ineffective ‘as a matter of international law’. Thus, the High Court of London considered that Spain, by signing the ICSID Convention and ECT, waived its immunity from jurisdiction and submitted to arbitration for dispute resolution in this matter.
Does EU law have primacy over international law?
The CJEU established in its decisions on the Achmea and Komstroy cases that investment arbitration established both in bilateral investment treaties between EU states and in multilateral treaties signed by them, are contrary to the ‘primacy’ of EU law.
The CJEU considered that investment arbitration leaves the final word on the application of EU law to an arbitral tribunal and not to the CJEU, which violates the exclusive competence of the latter for the interpretation and application of EU law.
As a matter of principle, ‘primacy’ of EU law means that its application prevails over the national law of EU Member States. Domestic law of an EU Member State that contradicts EU law must be disregarded, giving priority to the application of EU law.
However, can this primacy also be invoked with respect to international law? May EU Member States invoke EU law to render ineffective the obligations imposed on them by international law, in the case at hand, the ICSID Convention and the ECT, that these same EU Member States have freely signed? The High Court of London understands that they may not.
Certainly, from the perspective of an EU Member State, international law is ‘domestic law’, from the moment that EU Member States have incorporated their international obligations into their legal system. However, the ICSID Convention and the ECT also impose international obligations on States that are not members of the European Union (EU), such as, for example, the UK. Hence, the High Court wonders whether EU law prevails over the ICSID Convention and the ECT ‘as a matter of international law’ because it is the only link between EU Member States and non-Member States in such matters.
In this respect, the High Court of London invokes the Vienna Convention on the Law of Treaties Article 26 (‘pacta sunt servanda’) and Article 27 (ie, the prohibition of invoking an internal rule to render ineffective an obligation arising from an international treaty) to reject the primacy of EU law over the ICSID Convention and the ECT. Consequently, the High Court of London considers that it cannot either rely on the alleged primacy of EU law to render ineffective the obligations that arise from the ICSID Convention and the ECT, of which the UK is also a party.
That is, according to the High Court of London, international law does not allow it to disregard the ICSID Convention or the ECT based on EU law. In other words, EU law is not a kind of ‘supra-international’ order that prevails over the international obligations of Member and non-Member States of the EU.
A controversial topic
This decision of the High Court of London has been received with special joy in common law jurisdictions, particularly in England, which from now on can present itself as a ‘safe haven’ in which to execute awards issued in investment arbitrations that the EU Member States refuse to recognise.
In the author’s opinion, the Achmea and Komstroy doctrines should not render unenforceable the arbitral awards issued in arbitrations that started before the elaboration of these doctrines by the CJEU. Rather, these doctrines impose on EU Member States the obligation to walk away from the international treaties that contravene EU law, as interpreted by the CJEU. This is what Spain has recently done denouncing the ECT.
However, this denunciation should not have ‘retroactive’ effects. Therefore, arbitral awards issued in accordance with the ECT while it was binding on Spain should be respected and complied with. (By the way, this opinion is exactly the opposite to what Spain and the EU are currently defending. However, since this is my honest point of view, I have no problem expressing it.)
The topic remains a controversial one. In fact, the decision of the High Court of London has not been the only decision on identical or similar cases issued in common law jurisdictions outside the EU. Specifically, Australia and the United States have dealt with other recognition requests, both for the same award as in the Antin case and for other awards against Spain arising from renewable energy investment arbitrations.
However, although most of those decisions have been favourable to the claimant investors, this has not always been the case.
For example, the ‘Memorandum Opinion’ of 29 March 2023, issued by the US District Court for the District of Columbia in the case Blasket Renewable Investments LLC v The Kingdom of Spain, resolved the case in the opposite direction, indicating that the Achmea and Komstroy doctrines invalidated any arbitration agreement applicable and, consequently, the exception to jurisdictional immunity provided for in section 1605(a)(6) of the Foreign Sovereign Immunity Act, consisting of the existence of an arbitration agreement in favour of a private party, was not applicable. Consequently, according to the US District Court, the arbitral award was issued in violation of the jurisdictional immunity that protects Spain as a sovereign State and, therefore, cannot be either recognised or enforced in the US.
Currently, this decision is pending an appeal filed by the enforcing party.
Conclusion
The decision of the US District Court is an interesting example of the enormous uncertainty caused by the Achmea and Komstroy doctrines, as well as the different interpretations that still exist in the field of state immunity, even among common law jurisdictions, such as the US and the UK.
These differences in interpretation are aggravated by the lack of validity of the 2004 United Nations Convention on Jurisdictional Immunities of States and Their Property, which the US has not even signed and which the UK has signed but not ratified (unlike Spain, which did ratify this Convention in 2011, although it has not entered into force as the minimum of 30 ratifications required for this purpose in the Convention itself has not been reached).
On the other hand, one can expect that these different interpretations regarding the scope of jurisdictional immunity may also translate into differences in interpretation regarding the scope of execution immunity, and consequently, to the efforts of tracing and recovering of sovereign assets.
This will continue to affect the effectiveness of the awards and will continue to highlight the need for greater harmonisation of asset recovery at an international level, especially when it comes to its relations with sovereign immunities.
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Journalists will be allowed to “stick their noses” into UBO registers. Right or wrong?
Photo by Pixabay on Pexels.com The debate around UBO registers drags on.
As anticipated, Spain just launched its new UBO register (“UBOR”), adapted to the CJEU’s ruling of November 22, 2022.
As is well known, such ruling declared that allowing access to UBORs to the general public in all cases was contrary to the right to privacy and to the protection of personal data.
In addition, some observers had criticized early on that unrestricted access to UBORs would jeopardize effective asset tracing and recovery.
In the aftermath of the CJEU ruling, EU countries have had to adapt their regulation. Spain has been no different.
Who can access the new Spanish UBOR?
The new Spanish UBOR, according to its regulation enacted last July, which will enter into force next September, will allow access to:
- National authorities and of other EU Member States with competences in the prevention, detection, investigation and prosecution of terrorist financing, money laundering and predicate offenses; as well as national and EU authorities that manage, verify, pay or audit European Funds.
- Professionals with reporting obligations under AML regulations (financial institutions, investment firms, Notaries, lawyers, tax advisors, to name but a few), in order to comply with their obligations regarding the identification of the beneficial owner.
- Other persons with a legitimate interest.
What is a “legitimate interest” and who has it?
Interestingly, the regulation does not define the meaning of “legitimate interest”.
However, the regulation does say that legitimate interest shall be presumed in the case of:
- Media outlets and
- Civil society organizations related to the prevention and fight against money laundering and financing of terrorism.
My thoughts
Yes, of course, both media outlets and civil society organizations are important to combat fraud and corruption.
But isn’t this equivalent to allowing unrestricted access to UBORs , which is precisely the most criticized aspect of former UBOR regulations?
What is the difference between allowing access to the general public and allowing it to journalists and to “civil society” entities?
I personally believe there is no difference and that the quality of information available at the UBOR will suffer as a result.
Access to the UBOR should be allowed only to authorities and to professionals with reporting duties, i.e. those who need access to the data on the beneficial owner to perform their legal obligations.
Your thoughts?
This is certainly a controversial topic. Feel free to comment below.
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How to enforce crypto-related decisions in Spain?
Photo by David McBee on Pexels.com This article was originally published at ICC FraudNet’s 2023 Global Annual Report: “Fraud and Asset Recovery in an Unstable World“, under the title “What about volatility? Enforcement of crypto-related decisions in Spain“. ICC FraudNet’s Global Report is a compilation of 28 original articles authored by 52 contributors beloging to the ICC FraudNet network, from some 20 jurisdictions, which cover the hottest current issues related to fraud and asset recovery.
Introduction
How to enforce an arbitral award ordering the refund of cryptocurrencies and similar digital assets?
We deal here with the possibilities at the disposal of a judgment or award creditor to obtain the refund in kind of crypto assets and digital assets during enforcement proceedings in Spain.
We explore the enforcement orders that Spanish Courts may issue and the existing alternatives when those orders fail to provide with the return in kind of the digital assets.
In particular, we analyze the risk of volatility and the instruments at the disposal of the creditor to reduce it according to Spanish law.
Request of legal opinion: a case-study
CryptoABC obtained an international arbitration award against the Spanish company XYZTechno.[1]
In that award, XYZTechno was ordered to return to CryptoABC a certain amount of digital assets, consisting of cryptocurrencies and various types of tokens, which CryptoABC had provided as interest-free funding to XYZTechno.
CryptoABC has asked for our opinion about the possibility to enforce such award in Spain.
CryptoABC is interested in tracing and recovering those digital assets, wherever they may be.
Bearing in mind that the arbitral award ordered XYZTechno to refund those digital assets in kind -and not their monetary equivalent-, CryptoABC has asked us to consider whether Spanish courts may issue disclosure and attachment orders, addressed both to the debtor and to third parties that may lead to:
- Ascertaining the crypto exchange where those digital assets may be deposited.
- Making sure that those digital assets are returned to CryptoABC. CryptoABC is also interested in learning more about the enforcement alternatives under Spanish law, in case the disclosure and attachment orders fail, i.e., they do not lead to the tracing and recovery of the digital assets.
Also, and crucially, CryptoABC is asking what protection Spanish law has to offer against the risks arising from the volatility of such assets, meaning, who bears the risk of potential loss in value of those digital assets between the date when they were delivered to XYZTechno and the time when those same assets will be possibly returned to CryptoABC.
In this article, we explore the Spanish legal framework to the extent necessary to answer those questions and provide insight in this particularly topical area.
Background
CryptoABC is a crypto exchange, i.e., a company dedicated to the trade and custody of cryptocurrencies and other digital assets. As such, it enjoys a solid reputation as a safe and reliable operator in the market.
XYZTechno is a market leader delivering liquidity solutions to blockchains. In this capacity, it reached an agreement with CryptoABC to provide market maker services[2] on one of the cryptocurrency exchange platforms developed by CryptoABC, called “ABC SuperExchange”.
To help it launch its services as a market maker, CryptoABC provided XYZTechno with interest-free funding (via the signature of several Loan Agreements) consisting of exact quantities of cryptocurrencies and digital assets (payment and utility tokens)[3] that XYZTechno would have to return.
At one point, CryptoABC requested TechnoXYZ to return the exact quantities of the cryptocurrencies and digital assets loaned at TechnoXYZ’s account in ABC SuperExchange. TechnoXYZ failed to comply with this request, which led the parties to arbitration. A sole arbitrator was appointed to handle the dispute.
The object of the refund: digital assets, or its equivalent initial value in fiat currency?
This was one of the critical issues of the dispute. CryptoABC argued it provided funding in the form of an exact quantity of digital assets.
CryptoABC further claimed that XYZTechno had to restitute this interest-free funding in the exact same quantities as received, in conformity with the parties’ intention that the funding should always remain the property of CryptoABC and that XYZTechno would bear the risk of losing it.
XYZTechno argued that funding had to be repaid based on its initial value in Euro, and not token-for-token.
The consequences of one option or the other are obvious. If the sole arbitrator was to order that the funding had to be refunded based on its initial value in fiat currency (the currency used was Euro), the volatility risk of the digital assets would be borne by the funder, insofar as that initial Euro value would be equivalent, at the time of repayment, to an amount different from that which was the initial subject of the funding.
If, on the other hand, the sole arbitrator was to rule that the funding had to be repaid in the exact amount of digital assets originally received, the volatility risk would be borne by the borrower since, if it did not hold the digital assets received, it would have to purchase them on the market at their equivalent price in Euro at the time of repayment.
Photo by Alesia Kozik on Pexels.com What the award rules
The award rules that the parties intended the return of the digital assets on a token-for-token basis, and not on a monetary value basis. It further considered that the parties agreed on an obligation to return the funding received in the same asset and in the same quantity as received.
Can a Spanish Court issue disclosure and attachment orders to the debtor and third parties in relation to digital assets?
Considering that the award orders the restitution of digital assets in kind (and in the exact amount initially received), CryptoABC needs to know whether a Spanish court can, during enforcement of the award, issue disclosure and attachment orders to the award debtor and to third parties – aimed at learning about the whereabouts of such digital assets and to make them available to the Spanish court, for their delivery to the award creditor.
The answer to this question of Spanish law is affirmative.
A Spanish court may, according to the Spanish Code of Civil Procedure, issue disclosure orders to the award debtor and to third parties.
First off, the Spanish court may order the award debtor to disclose whether it keeps the received digital assets and where they are deposited; the Spanish court may also order the award debtor to make these digital assets available to the court for delivery to the creditor.
To third parties (e.g., cryptocurrency exchange platforms, where the digital assets may be under custody), the Spanish court may also request them to disclose whether they deposit those assets and, if applicable, to make them available to the court for delivery to the award creditor.
Limitations on the effectiveness of disclosure and attachment orders addressed to the award debtor and to third parties
Even though it is possible to issue orders both to the debtor and to third parties, the effectiveness of both types of order is potentially different, particularly in matters related to cryptocurrencies, whose place of deposit can be anywhere in the world.
On the one hand, the award debtor is fully subject to the jurisdiction of the enforcement court and must comply with its orders.
If he fails to do so, the Spanish court may impose coercive fines on him. In addition, repeated non-compliance with judicial disclosure orders, as well as incomplete or mendacious responses to such requests, may be criminal offences under the Spanish Criminal Code.
However, in the case of third parties and, particularly, in the case of crypto exchanges, one can expect that it will only be materially possible to force them to comply with the Spanish court’s orders if their domicile is Spain.
If their domicile is not Spain (as is usually the case for most crypto exchange platforms), there are generally no international instruments that would allow Spanish courts to force the third party to comply with such order.
In any case, the few legal instruments that may be considered are very difficult to apply in practice.
This is a considerable limitation to international asset tracing and recovery affecting all types of assets, both digital and non-digital.
Photo by Jonathan Borba on Pexels.com What enforcement options does the award creditor have if the debtor or third party fails to comply with the orders issued by the Spanish Court?
To answer this question, it is first necessary to analyse the legal nature of cryptocurrencies (which Spanish legislation names “virtual currencies”) and other digital assets (which Spanish legislation names “crypto assets”).
In relation to the former, Spanish regulations define them as “a digital representation of value, not issued nor guaranteed by a central bank or public authority, and not necessarily associated with a legally established currency, which does not have the legal status of currency or money, but which is accepted as a medium of exchange and can be transferred, stored or traded electronically”.
What is noteworthy about this definition is that virtual currencies do not have the legal status of “currency” or money under Spanish law.
As for digital assets or “crypto-assets”, Spanish financial regulations define them as the “digital representation of a right, asset or value that can be transferred or stored electronically, using distributed ledger technologies or other similar technology”.
It follows from this definition that crypto assets are purely electronic and decentralised assets.
It also follows that digital assets are fungible and, as such, likely to be used as a medium of exchange in economic transactions.
We must therefore conclude that the cryptocurrencies and other digital assets that are the object of the award have the legal nature, under Spanish law, of non-cash and fungible assets (as opposed to the so-called “NFTs” or Non-Fungible Tokens, which, by definition, have a different legal nature).
Therefore, the enforcement of any court or arbitral decision whose object is cryptocurrencies and other fungible digital assets will follow the legal regime of non-monetary enforcement and, specifically, that of the enforced delivery of generic or indeterminate assets. In other words, the delivery of cryptocurrencies and digital assets has the same legal procedural treatment as that of a kilo of rice or potatoes (also generic or indeterminate assets); as opposed to the regime of delivery of a Picasso painting (which would be a specific movable asset, non-fungible and, therefore, the legal-procedural equivalent of an “NFT”…).
Option 1: Attachment of the debtor’s assets to pay for the acquisition of the fungible digital asset
When the debtor has refused to comply with the order to deliver fungible (i.e., generic, or indeterminate) assets, Spanish law allows the award creditor to acquire such assets at the debtor’s expense.
For this purpose, the creditor may request the court to empower him to acquire them, ordering at the same time the attachment of sufficient assets of the debtor to pay for the acquisition.
Naturally, the attachment of sufficient assets will be made in the fiat currency governing the enforcement; typically, in Spain, such currency will be Euros, but it could be any other of legal tender.
Therefore, an interesting question is what value, or “exchange rate” in fiat currency, will be used to determine the exact amount of the debtor’s assets that will have to be seized to finance the acquisition of the cryptocurrencies and other fungible digital assets that are the object of the award.
Some of the (countless) possibilities could be: (i) the exchange rate at the time when they were delivered to the borrower; (ii) at the time when the breach occurred; (iii) at the time of the arbitration claim; (iv) at the time of the award; (v) at the time of enforcement; (vi) or at the time of the award creditor’s acquisition of such cryptocurrencies and digital assets.
The correct answer under Spanish law is the latter: the debtor’s assets will be seized according to their value in fiat currency at the time of acquisition of the digital assets by the award creditor during the enforcement of the award. In this way, the risk of volatility of the digital assets will rely on the award debtor and not on the award creditor.
The creditor will receive value in fiat currency of the digital assets at the time of purchase and can therefore buy the same exact number of cryptocurrencies and digital assets that were borrowed at the time by the award debtor.
Option 2: Request that the non-deliveryof the digital assets be replaced by the payment of a fair monetary compensation
Spanish law also contemplates the possibility of it becoming impossible to purchase the generic or indeterminate asset.
This possibility is relevant in the case of cryptocurrencies and digital assets, one of whose characteristics, in some instances, is their lack of liquidity. In certain cases, such lack of liquidity may make it impossible to find buyers and sellers of the cryptocurrency or digital asset in question (hence the importance of the “market maker” services that XYZTechno undertook to provide on the CryptoABC platforms).
In these cases, Spanish law provides that the impossibility to deliver the asset should be replaced by the payment of a fair pecuniary compensation. What should the amount of such compensation be?
In our opinion, the compensation should cover, on the one hand, the value in fiat currency of the undelivered cryptocurrencies and digital assets (at the time when such compensation is calculated, i.e., at the time of the failed attempt to purchase them).
On the other hand, the compensation should cover any other demonstrable damages that the creditor has suffered because of the non-delivery of the cryptocurrencies and digital assets (i.e., direct and indirect damages).
To this end, the Spanish Code of Civil Procedure provides for a specific proceeding for the creditor to assert and prove the totality of damages suffered.
Conclusion
Spanish procedural law has not undergone any modification to adapt to the enforcement of court and arbitral decisions on the return of cryptocurrencies and other digital assets.
However, the current regulation is already relatively well-suited to certain aspects relating to the enforcement of judgments and awards involving the delivery in kind of such assets.
Spanish law provides that, in the absence of return in kind, the creditor may acquire the digital (fungible) assets at the debtor’s expense, seizing his other assets for the value, in fiat currency, necessary to purchase such assets at the time of the acquisition during the enforcement.
If this is not possible, Spanish law provides that the creditor may claim a fair monetary compensation from the debtor.
In either case, Spanish law protects the creditor against the inherent volatility of digital assets, allowing the creditor to recover the exact amount of digital assets recognised in the enforceable title, to be calculated in fiat currency at the time of the enforcement.
In this case, paradoxically, the latter option in the enforcement stage would reach the opposite solution to the one envisaged in the award, which rejected that the return of the digital assets could be made in fiat currency instead of being made in kind.
However, one must acknowledge there are no alternatives to the impossibility of recovering the digital assets in kind, other than converting them into their fiat currency value, be it to attach the debtor’s assets to assist in the purchase, or to pay to the award creditor a fair monetary compensation.
Therefore, the basic element to consider is protection for the award creditor against the volatility in the value of cryptocurrencies and digital assets.
As we have seen, Spanish law contemplates what seems a fair solution to this problem.
[1] This article refers to an actual case that is the subject of an international arbitral award issued in 2022 and administered by one of the world’s leading arbitral institutions. For reasons of confidentiality, the reference to the award is omitted. For the same reasons, the names of the parties and references to the products and services covered by the cryptographic platform have been modified and anonymized.
[2] “The term market maker refers to a firm or individual who actively quotes two-sided markets in a particular [asset], providing bids and offers (known as asks) along with the market size of each. Market makers provide liquidity and depth to markets and profit from the difference in the bid-ask spread. They may also make trades for their own accounts, which are known as principal trades.”, Market Maker Definition: What It Means and How They Make Money, Investopedia (Dec 8, 2022). This begs the question, why are market makers necessary? A market maker serves as a middleman or broker between the demand and supply for digital assets. Market makers provide liquidity in markets of digital assets, which ensures there is enough orders to buy and sell, while cryptocurrency exchanges offer the infrastructure that allows traders to operate. Market makers ensure traders can quickly and easily liquidate their holdings. Market makers are also necessary because they maintain price stability in a market with a somewhat small bid-ask spread. In addition to being seen as reputable and trustworthy by cryptocurrency traders, a market with price stability is an indication of significant liquidity, since it means that many participants are transacting, which in turn increases the market maker’s profit.
[3] “Payment tokens” are issued with payment medium functions on a given blockchain, while “utility tokens” grant the right to claim the provision of a service from issuers. There are also “security tokens”, which have equivalent functions to financial instruments (i.e. Initial Coin Offerings (ICOs) or other crypto-assets that represent tradable financial instruments, such as shares, bonds or rights to investment contracts).
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Spain- New regulation on the access and use of the UBO Register
Martin Kenney, the oracle of the BVI This post is dedicated to my good friend and ICC FraudNet fellow member, Martin Kenney, “the oracle of the BVI”.
Martin had long proclaimed that unrestricted access to beneficial ownership registries was contrary to the right to privacy and would have a counterproductive effect in terms of asset tracing and recovery.
As is well known, CJEU judgment of November 22, 2022 (Case No. C-37/2022) declared just that, proving Martin right.
The CJEU declared in such judgment the invalidity of EU Directive 2015/849, which provided that Member States had to ensure that information on UBOs had to be made available to the general public in all cases.
The CJEU considered that such provision violates Articles 7 and 8 of the EU Charter of Fundamental Rights regarding the right to privacy and the right to the protection of personal data.
The aftermath of the CJEU ruling
Obviously, the consequences of this decision have been that the authorities of the EU Member States have had to adapt to the new criteria established by the CJEU.
The Spanish authorities have done so relatively “quickly”.
The new regulation, issued just last week (Royal Law-Decree 5/2023, of 28 June) adapts Spanish law to such ruling. It ensures that only parties with due diligence obligations (according to anti-money laundering regulations) will have access to the information contained in the Ultimate Beneficial Ownership Register (“UBOR”).
They will also be able to obtain an extract from it, in order to comply with their obligations regarding the identification of the beneficial owner.
Right of access to the person with legitimate interest
In addition, all other persons or organizations that can demonstrate a legitimate interest shall have access exclusively to data consisting of:
(i) the name and surname,
(ii) month and year of birth,
(iii) country of residence and
(iv) nationality of the current UBO of a legal person or entity or structure without legal personality.
Access to the information available in the UBOR will require the prior identification of the applicant and the evidence of the legitimate interest.
But what is “legitimate interest”?
Spanish authorities have declared they will establish a list of “presumptions” of legitimate interest, but it remains to be seen whether this list will facilitate or hinder access to the UBOR.
In any case, the requirement to provide proof of the legitimate interest may certainly pose an obstacle to access.
Only experience will allow us to say whether such possible difficulties will be justified or whether, in practice, they will amount to a virtual impossibility of accessing the information.
What information will the UBOR contain?
On any case, the “future” UBOR (not yet in force, but expected to become fully operational before the Spanish general elections scheduled for July 23, 2023) will contain UBO information relating to:
- Spanish legal entities (and entities or structures without legal personality) that have the seat of their effective management or their main activity in Spain, or that are managed or administered by persons resident or established in Spain.
- Entities (or structures without legal personality) that are not managed nor registered in Spain nor another EU Member State, which intend to establish business relations, carry out occasional operations or acquire real estate in Spain.
The information will cover UBO available in public registries, such as:
- Registries of Spanish Foundations (state and regional).
- Registries of Spanish Associations (state and regional).
- Spanish Companies Register.
- Information obtained by the General Council of Notaries.
- Information and data on all legal entities, foreign “foundation-type” entities such as trusts and unincorporated entities or structures that do not declare their real ownership, which will be obliged to declare this information directly to the Register.
Sanctions will apply for the lack of declaration of the relevant information to the UBOR.
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Piercing the corporate veil in Spain
Photo by Daisy Anderson on Pexels.com Avoiding the use of legal entities to commit fraud
One of the most important elements of company law is the limitation of the liability of the partners or shareholders.
It is of course permissible to articulate business activities through a company, so that the personal assets are protected from the eventual outcome of the company. However, this separation of assets must not be used in a fraudulent manner, amounting to what is known under Spanish law as “abuse of legal personality”.
Spanish case law has constructed its own mechanisms to combat possible abuses of legal personality, making use of the lifting of the corporate veil doctrine, first developed in Spain by a Supreme Court ruling of 28 May 1984 that has been used and developed ever since in virtually all areas of law.
It is generally understood that this inappropriate use occurs when the purpose of the company is not that which is proper to it (the exercise of commercial activities) but the mere avoidance of personal liabilities.
Requirements of the Spanish “piercing the corporate veil” doctrine
The doctrine will be perfectly applicable when the requirements for assessing such possible fraud are met, namely: (i) control of several companies by the same person; (ii) related-party transactions between those companies; (iii) lack of economic and legal justification for those transactions.
When this type of situation arises, in which intra-group transactions serve no purpose other than fraud, diverting for example the funds of the company that has debts to another company that does not, to the obvious detriment of the creditors of the former, the courts apply the doctrine of piercing the veil, thus rendering ineffective the apparent transactions that have constituted the abuse.
Once this first judicial formulation of the doctrine was carried out in Spain, a significant number of decisions, both by the Supreme Court and the Courts of Appeal, as well as by the Courts of First Instance, have led to its full confirmation and progressive use until it can be said that it has become an institution of judicial creation fully integrated into all areas of Spanish law.
Piercing the veil in civil-commercial and insolvency matters
It is in the civil-commercial sphere where the doctrine of lifting the corporate veil has had its confirmation and development through a body of case law that has been shaping and delimiting it.
One of the guidelines that Spanish jurisprudence has always been clear about this doctrine has been its necessarily restrictive application.
On the other hand, having clarified its restrictive nature, the doctrine cannot be applied “ex officio” by the judge.
Although there have been different attempts made by Spanish doctrine to classify the cases in which it is understood that the doctrine could be used, it is understood in case law that these are not “numerus clausus”.
It is frequently used, for example, in cases of misuse of the legal personality to the detriment of creditors, when the sole or majority shareholder normally empties the debtor company of its business and assets to continue with the same business and operations by setting up a new company and thus evade liability for the obligations assumed by the first entity. An example of fraudulent succession of companies can be found in the Supreme Court ruling of 20 December 2017, which condemns a company that formally did not contract the debt to pay it.
In insolvency matters, the doctrine is also applicable, among others, in: (i) claw-back actions (ii) for credit-ranking purposes (iii) determination of personal liabilities for the causation or worsening of the insolvency (iv) opening of joint insolvency proceedings (v) To resolve third-party claims, particularly when denying the status of third party to the company “confused” with the foreclosed company.
The Supreme Court Judgment of 30 January 2018 goes a step further by extending the application of the doctrine to consumer matters, by extending the contractual liability of the developer to the construction company against individual owners in a claim for construction defects.
Piercing the veil in criminal matters
In criminal law we can find frequent use of the doctrine of lifting the corporate veil, mainly in matters of economic criminal law, tax offences, as well as in the claim for civil damages caused by the criminal offence, where the perpetration of the crime occurs precisely by means of the interposition of “apparent” companies.
In terms of tax avoidance, we can cite the Supreme Court ruling of 8 June 2018, according to which, through a different company, income was concealed that belonged to another. Or the most recent ruling of the same Court dated 18 September 2018 on the avoidance of the special tax on hydrocarbons.
We can also apply it to crimes of embezzlement of public funds to clarify whether we are dealing with a public official or not. Thus, the Supreme Court ruling of 8 February 2018 states:
Or in matters of crimes of misappropriation as in the judgement of the same Chamber dated 21 February 2017 or 30 November 2016.
And the lifting of the veil has been applied with similar forcefulness in money laundering offences. Thus, by way of example, the Supreme Court ruling of 22 October 2013.
In short, we can say that in criminal law, we have seen an increasing use of the doctrine of lifting the veil, mainly for the prosecution of crimes committed using front companies.
The Spanish State General Prosecutor’s Office instructed Spanish public prosecutors to invoke the piercing of the corporate veil, notwithstanding the also available criminal liability of legal entities (Circular Letter 1/2011, dated 1 June 2011).
Photo by Pedro Figueras on Pexels.com Piercing the corporate veil in employment matters
Special mention should be made of the doctrine of lifting the veil in the employment law sphere, as here its justification is given by the specific need to identify the true centre of business management, especially in those cases in which the employer is a group of companies, as well as in those in which the employer hides behind the screen of a company that acts as an apparent employer.
It can be said that, although it was created by commercial doctrine and formulated in case law in the civil sphere, for some years now in Spain there has been a consolidated line of case law by labour courts.
In addition to the cases of groups of companies, the doctrine of lifting the veil is also fully effective in cases of company succession, i.e., those cases in which the intention is to circumvent the employee’s employment rights by means of a transfer of ownership of the company carried out with abuse of the legal personality by the employer.
Piercing the corporate veil in tax matters
In the field of taxation, it was regarding the personal income tax from work concealed by certain sportsmen and sportswomen -by means of interposed special purpose vehicles- that the courts resorted to the use of the doctrine of lifting the veil during the 1990s.
However, it was not until the decision of the Supreme Court of 19 April 2003 that the latter accepted the application of the doctrine to resolve a case of tax evasion using shell companies.
Since that date, there have been frequent cases in the tax sphere, whether in liquidation or collection matters, in which the Spanish Courts have resorted to the use of the lifting of the veil doctrine.
In fact, it could be said that the doctrine has gradually become part of tax legislation itself. Thus, the current wording of section 6 of Article 170 of the General Tax Law is inspired by the doctrine when, in precautionary measures, it ignores the legal personality of the company in cases where the taxpayer “exercises effective control, total or partial, direct or indirect, over the company of the owner of the property“. In addition, Article 43 of the same Law, sections g) and h), in listing subsidiary liable parties, includes the case that “it is proven that the legal persons have been created or used abusively or fraudulently to evade the universal patrimonial liability to the Treasury and there is a single person or economic sphere, or confusion or diversion of assets“.
In terms of case law, Courts recognise the doctrine of lifting the veil as a “complementary” technique to combat tax avoidance, in a case in which taxation on corporate income tax was avoided by charging high interest on a debt to one of the non-resident group of companies; or the case where a company was set up to provide professional consultancy services actually rendered on a personal basis.
Piercing the corporate veil in administrative litigation
In the administrative litigation sphere (i.e., litigation by private individuals/companies against the State), the application of the lifting of the veil doctrine is accepted without objection, based on the same arguments offered by the civil jurisdiction. Thus, the judgement of the Supreme Court of 16 April 2008, regarding the reimbursement of a public subsidy, states that “the legal figure of lifting the veil has been used to overcome the abusive use of the legal personality of companies”.
However, despite this admission of the doctrine, in general, it has been scarcely used by this jurisdiction, which prefers to resort to the generic institutes of “fraud of law” and/or “abuse of rights”, mainly in cases of extensions of liability for public debts, sanctions or the patrimonial liability of the State.
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Don’t come to me with “Achmeas” nor “Komstroys”- ICSID “Antin” award fully enforceable in England against Spain, according to English Court
Photo by Pixabay on Pexels.com A London court ruled on 24 May 2023 that Spain can’t use state immunity nor EU law to avoid paying a €120 million ICSID arbitration award (the Antin award) for cutting back its economic incentives for renewable energy projects.
The investors, Infrastructure Services Luxembourg SÀRL and Energia Termosolar BV, argued that Spain was bound by its arbitration clause as a signatory to the Energy Charter Treaty Spain was seeking to set aside a January order that registered the arbitral award in England.
Spain’s challenge to the recognition of the Antin award by English Courts was based on grounds of sovereign immunity and European Union case law (mainly, the Achmea and the Komstroy cases).
In the wake of the Court of Justice of the European Union (CJEU) rulings in the mentioned cases, the judgment clarifies, from the point of view of English law, a protracted international legal argument regarding the legality of intra-EU arbitration awards. The London High Court ruled that those cases had no bearing on the Antin ICSID award’s ability to be enforced in England.
In addition, the combined effect of Article 54 of the ICSID convention and Section 2(2) of the State Immunity Act 1978 has also been decided for the first time in an English court to constitute a submission by a signatory state to the jurisdiction for the registration of ICSID awards in England.
English practitioners are now be able to shamelessly promote England as an enforcement-friendly jurisdiction for international arbitral awards involving non other than EU parties…
It’s no surprise that the judgment has been very well-received by practitioners of international arbitration and enforcement specialists throughout the common law world.
At the end of the day, this is not a matter of Spanish national pride because the mess was created by the CJEU. Its legal doctrines simply do not stick together as a matter of international law. And so says no less than a High Court in London.
The CJEU is a dogmatic giant with feet of clay. Its brilliant jurisprudence is rendered ineffective as soon as it crosses the borders of the EU. This is a matter of concern that undermines the credibility of the whole EU legal system. It is something that should lead to reflection by judges and policy-makers.
Usually, when a door closes, a window opens. And that window is being opened by common law jurisdictions. In the case of investors in renewable energies, these jurisdictions are not just England, but also the USA, Australia and even the BVI. These are offering legal shelter to EU investors, who have to flee their own home, unprotected by the “community of law” that the European Union falsely claims to be.
Or what did the CJEU think? Not everything had to be bad about Brexit, after all!
Congratulations to my good friend Nick Cherryman for obtaining this landmark victory.
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ICC Spain’s podcast on “Arbitration & Asset Recovery”
I was happy to discuss all things “Arbitration & Asset Recovery” ahead of our Madrid event on the same topic of June 17.
Thank you ICC Spain for the opportunity.
You can listen to the podcast here (in Spanish).
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“Arbitration & Asset Recovery” event in Madrid on June, 17 – Registrations now open!
Registrations are now open for what promises to be an exciting event around “Arbitration & Asset Recovery” next June 17 at ECIJA in Madrid, Calle Serrano, 69.
The event is co-organized by ICC Spain and ICC FraudNet with huge thanks to our sponsors Grant Thornton UK LLP and Ramco Litigation Funding.
If you attend the Annual Congress of the Club Español del Arbitraje starting the next day, do not miss this chance and join us.
Please follow this link to register.
The program is as follows:
10.00 – 10.10: Welcome and opening words
Jordi Sellarés│Secretary General│ICC Spain
Héctor Sbert │Partner│ECIJA (Barcelona)
10.10 – 11.00: Starting with the end in mind: strategizing award enforcement from the outset of arbitration
Moderator: Miguel Casas│Partner│Casas & Lacambra (Andorra)
Speakers:
David Mizrachi│Partner│MDU Legal (Panamá)
Ben Herzberg│Partner│Bodenheimer (Berlín)
Fabio Nuñez del Prado│Partner│Rebaza Alcazar (Lima)
11.00 – 12.00: Asset tracing & recovery and arbitral award enforcement: the practitioner’s toolkit
Moderator: Patricia Saiz│Independent Arbitrator│Member ICC International Court of Arbitration
Speakers:
Prashan Patel│Partner│Grant Thornton (London)
Aïcha Brahma│Partner│Brahma Avocats (Morocco)
12.00 – 13.00: Enforcement of arbitral awards and third-party funding
Moderator: Librado Loriente│Partner│ECIJA (Madrid)
Speakers:
Clifford J. Hendel│Partner│Hendel IDR (Madrid)
Philip Marshall │KC│Seral Court (London)
13.00 – 13.30: Q&A– Closing remarks
Rodrigo Callejas│Partner│Carrillo & Asociados (Guatemala)│Executive Director│ICC FraudNet.
13.30 – 14.00: Cocktail│Tapas & Drinks
General registration fee: 50 €
ICC FraudNet and CEA members: 40 €
Here is the link to registration.
Come and join us!
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Hector Sbert 