Liability of Russian banks towards clients for the blocking of funds by foreign intermediary banks

The imposition of sanctions by foreign countries against Russian banks has led to the inability of these banks to fulfill their obligations to clients regarding cross-border transfers of funds in foreign currency.

Foreign correspondent banks block funds transferred by Russian banks that have been included in the sanctions list, even though the money belongs to clients who are not sanctioned individuals.

The blocked funds do not reach the accounts of foreign recipients and are not returned to the accounts of Russian payers. As a result, the payers file lawsuits against Russian banks seeking compensation for damages in the form of undelivered funds to the recipients. However, the judicial practice is not favorable to the plaintiffs.

Arbitration courts, in rejecting claims, refer to the following circumstances regarding the responsibility of Russian banks towards clients for the blocking of funds by foreign intermediary banks:

• There is no causal link between the actions of Russian banks and the losses incurred by clients, as the losses are caused by the unfair and unfriendly actions of foreign intermediary banks.[1]
• The blocking of funds by the intermediary bank falls outside the responsibility of the payer bank as a party to the banking account agreement.[2]
• The payer bank cannot be held accountable for the actions of the recipient bank or correspondent bank of the recipient bank since the obligations of the payer bank to the client are considered fulfilled upon the receipt of funds into the correspondent account of the recipient bank.[3]
• The rules of settlement and cash services stipulate that the bank is not liable to clients for the blocking and non-return of funds by correspondent banks and other banks. Courts consider such provisions of banking service rules permissible in accordance with the principle of freedom of contract.[4]
• The mere blocking of funds does not indicate that clients have incurred losses, as the funds are not lost or irretrievably taken from them. Clients can seek administrative remedies by contacting the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury, the Office of Financial Sanctions Implementation (OFSI) of the U.K. Treasury, other public regulatory authorities of the payment destination or the countries of correspondent banks, and obtain a special license to lift restrictions, recover the transferred amount, or direct it to the recipient.[5]
• The imposition of sanctions by foreign countries against Russian banks and the unfriendly actions of foreign banks towards residents of the Russian Federation may be considered force majeure circumstances if they have affected the performance of obligations by Russian banks regarding cross-border transfers of funds.[6]
• When engaging in foreign trade activities and selecting the currency of settlement, legal entities must take into account the risk of restrictive measures. In order to minimize the risk of fund blocking, legal entities are not deprived of the opportunity to change the currency of settlement and choose counterparts. The choice of counterparties, determination of currency and settlement procedures are made independently by legal entities at their own risk and are beyond the control of credit institutions.[7]

We believe that the aforementioned conclusions of the arbitration courts are based on the correct application and interpretation of the norms of substantive law.

In case of non-performance or improper performance of a payment order, the bank is liable to the payer in accordance with Chapter 25 of the Civil Code of the Russian Federation.[8] The provisions of this chapter stipulate that the debtor must compensate the creditor for the losses incurred as a result of non-performance or improper performance of an obligation.[9]

To hold the bank civilly liable for the compensation of damages, the court must establish the wrongful nature of the bank’s actions, the existence and amount of losses suffered by the client, as well as the causal link between the bank’s wrongful behavior and the client’s losses. The absence of evidence of at least one of these circumstances results in the failure to prove the entire extent of the damages and the rejection of the claims.

It should be noted that the current legislation allows for holding the payer bank responsible in cases of non-performance of a payment order due to a violation of transfer rules or the agreement between banks by the intermediary bank or the recipient bank, provided that the payer bank has chosen the intermediary bank.[10]

• However, in order to apply this provision, the courts must establish the following facts:
  1. When transferring funds in a specific currency chosen by the client, the payer bank had the option to select intermediary banks (for example, when transferring funds in US dollars, the payer bank had the option to choose a bank that is not a US bank as the intermediary).
  2. There was a violation of transfer rules or the agreement between banks by the intermediary bank or the recipient bank.[11]

In addition, banking service rules often place the choice of intermediary bank on the client, which excludes the possibility of holding the payer bank responsible in case of funds being blocked by the intermediary bank. For example, the banking service rules may state that by submitting a payment document for the transfer of funds in foreign currency to the bank, the client confirms the choice of the foreign correspondent bank.

Such provisions of banking service rules are applied by the courts in dispute resolutions, as clients, by signing an application to adhere to these rules, confirm that they have acquainted themselves with them, express their agreement with the rules, undertake to comply with them, and do not object to the bank’s right, in accordance with Article 450(1) of the Civil Code of the Russian Federation, to unilaterally make changes to the rules.

Therefore, in most cases, there is a lack of the necessary grounds to hold the payer bank responsible.

Considering the above, it appears highly unlikely to recover losses from Russian banks due to the blocking of funds by foreign intermediary banks. We believe that it would be advisable for the payer or payee to approach public regulatory authorities in the destination country of the payment or the governments of correspondent banks (such as OFAC, OFSI, etc.) with a request for obtaining a special license to lift restrictions, recover the transferred amount to the payer, or direct it to the payee. Moreover, the courts link the possibility of recovering losses from Russian banks to whether the client has taken preliminary measures to unblock and recover the funds within the aforementioned administrative procedure.

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[1] Resolution of the Arbitration Court of the Moscow District dated 18.05.2023, case number А40-112267/2022. Resolution of the Arbitration Court of the Moscow District dated 13.11.2017, number Ф05-15971/2017, case number А40-222224/2016. Resolution of the Arbitration Court of the Ural District dated 17.05.2018, number Ф09-2026/18, case number А60-38121/2017. Resolution of the Ninth Arbitration Appeal Court dated 22.12.2022, number 09АП-81818/2022, case number А40-171407/2022. Resolution of the Ninth Arbitration Appeal Court dated 06.02.2017, number 09АП-64195/2016-ГК, case number А40-185332/2016.

[2] Determination of the Supreme Court of the Russian Federation dated 01.10.2018, number 309-ЭС18-13524, case number А60-38121/2017. Resolution of the Arbitration Court of the Ural District dated 17.05.2018, number Ф09-2026/18, case number А60-38121/2017.

[3] Resolution of the Arbitration Court of the Moscow District dated 30.03.2023, case number А40-183776/2022. Resolution of the Eighth Arbitration Appeal Court dated 11.04.2023, number 08АП-16059/2022, case number А75-14329/2022. Resolution of the Ninth Arbitration Appeal Court dated 22.12.2022, number 09АП-81818/2022, case number А40-171407/2022.

[4] Resolution of the Arbitration Court of the Moscow District dated 18.05.2023, case number А40-112267/2022. Resolution of the Arbitration Court of the Moscow District dated 05.04.2023, number Ф05-3628/2023, case number А40-109469/2022. Resolution of the Arbitration Court of the Moscow District dated 30.03.2023, case number А40-183776/2022.

[5] Determination of the Supreme Court of the Russian Federation dated 01.10.2018, number 309-ЭС18-13524, case number А60-38121/2017. Resolution of the Arbitration Court of the Ural District dated 17.05.2018, number Ф09-2026/18, case number А60-38121/2017. Resolution of the Arbitration Court of the Moscow District dated 05.04.2023, number Ф05-3628/2023, case number А40-109469/2022. Resolution of the Arbitration Court of the Moscow District dated 27.04.2023, number Ф05-6833/2023, case number А40-125768/2022.

[6] Resolution of the Arbitration Court of the Moscow District dated 05.04.2023, number Ф05-3628/2023, case number А40-109469/2022. Resolution of the Arbitration Court of the Moscow District dated 27.04.2023, number Ф05-6833/2023, case number А40-125768/2022. Resolution of the Arbitration Court of the Moscow District dated 18.05.2023, number Ф05-862

[7] Resolution of the Arbitration Court of the Moscow District dated 30.03.2023, number Ф05-35914/2022, case number А40-183776/2022. Resolution of the Ninth Arbitration Appeal Court dated 23.05.2023, number 09АП-21468/2023, case number А40-201490/2022. Resolution of the Eighth Arbitration Appeal Court dated 11.04.2023, number 08АП-16059/2022, case number А75-14329/2022.

[8] Paragraph 1 of Article 866 of the Civil Code of the Russian Federation.

[9] Paragraph 1 of Article 393 of the Civil Code of the Russian Federation.

[10] Paragraph 2 of Article 866 of the Civil Code of the Russian Federation.

[11] Resolution of the Arbitration Court of the Moscow District dated 05.04.2023, number Ф05-3628/2023, case number А40-109469/2022. Resolution of the Arbitration Court of the Moscow District dated 27.04.2023, number Ф05-6833/2023, case number А40-125768/2022.