The State May Use the Assets of the Subject of International Sanctions for Pre-Payment of Compensation for Damage Caused by Violation of International Law

The amendments to the Estonian International Sanctions Act, in effect from 17 June 2024, the Estonian state may use the assets of persons subject to international sanctions as prepayment of the comensation for the damage caused by violation of public international law. In the context of Russia’s aggression against Ukraine, Estonia’s international initiative to use the aggressor’s assets abroad to compensate Ukraine for war damage has been widely discussed. This is a fair approach, but many commentators have found it legally complicated, short of impossible, to implement, as it clashes with the fundamental right to property as protected in a democratic state governed by the rule of law (see § 32 of the Estonian Constitution: “Everyone’s property shall be inviolable and equally protected. Property may be expropriated without the consent of the owner only in the public interest, in the cases and pursuant to a procedure laid down by law, and for fair and immediate compensation./…/“). As this is a unique and pioneering instrument in the international context, it deserves further examination.

International Sanctions

An international sanction, as the name suggests, is imposed at international level by bodies devised for international cooperation and to which sovereign states have agreed to grant such authority. However, the implementation of the international sanction is left to the sovereign states through the operation of their domestic law and public authorities. To this end, Estonia has enacted a specific act of law (the International Sanctions Act (in Estonian: rahvusvahelise sanktsiooni seadus, the “ISA”), which lays down the competence, rights and obligations of the various branches of the executive and judicial authorities and private persons for the enforcement of international sanctions. The content matter of an international sanction is, in simple terms, some sort of restriction of the rights of the addressee (the sanctioned subject), e.g. a prohibition to engage in certain transactions with him, a prohibition of entry into the state, etc. (see ISA § 3). The sanctioned subject may be a public or private legal person, including a structural unit or an institution, as well as a physical person. The purpose of an international sanction is “to support the maintenance or restoration of peace, international security, democracy and the rule of law, following human rights and international law or achieving other objectives of the United Nations Charter or of the Common Foreign and Security Policy of the European Union“.

Advance Payments of Compensation for Damage Caused by an Act of War or Violation of the Law of the Armed Conflict

A novelty introduced by the recent amendments to ISA is the power granted to the Estonian Ministry of Foreign Affairs (the “MFA”) by a newly enacted § 291 ISA to decide, if it is in the interest of achieving the objectives of the international sanction, the sanction subject will be deprived of his or her money or other property (the assets), which shall then be used as advance payment to an injured state of damages caused by unlawful use of force within the meaning of the UN Charter (ius ad bellum) or by violation of the rules of warfare (ius in bello). The person whose property is thus expropriated, gains a claim for the amount of damage payable by the state, which caused the damage in breach of the international law. The procedure established by ISA is an administrative procedure carried out by the MFA in accordance with the general rules of administrative procedure (in Estonian: haldusmenetlus) and subject to judicial review by an administrative court (in Estonian: halduskohus). The MFA is also tasked with administration and sales of the expropriated assets and disbursements of the proceeds to the injured State.

Formal Preconditions

The formal preconditions, which must be satisfied in order to use the property of the sanctioned subject as advance payment of the compensation, are enumerated in § 292 ISA as follows:

Damage has been caused by breach of international public law and such damage must be compensated;
The injured foreign state has submitted a claim of compensation against the violating state;
The violating state has not paid the compensation amount fully or partially withi a reasonable period of time; and
The injured foreign state, in international organisation (IO), or an internationally recognized compensation mechanism related to the claim has requested from Estonia to use the property of a sanctioned subject as advance payment for the damage;
The person or a structural body is connected to the violating state and the violating act or contributed to the violating act;
The assets are owned by the persons defined in the ISA (see below) from whom the property may be expropriated for the purpose of advance compensation payments; and
There are no extraordinary circumstances due to which the interests of a person outweigh the implementation of the expropriation measure.

The formal preconditions listed above are domestic Estonian requirements, which the MFA will address when motivating the expropriation measure. However, in order to satisfy these formal domestic preconditions, a number of preconditions arising from the public international law must be satisfied simultaneously.

Preconditions arising from International Public Law

The first precondition arising from the international public law is, naturally, the imposition of an international sanction. This is a political act, but since it takes the format of a formal legal act, it the verification of this precondition should not be complicated. The second precondition is the violation of international law by the sanctioned subject. This can be either the unjustified use of military force (an aggression) against another state or the violation of the rules of warfare (the ‘law of war’ as based on the system of the Geneva conventions on the rules of conduct of war). The third precondition is the occurrence of damage, which in turn presupposes the existence of some authoritative international mechanism for registering and assessing damage. The fourth precondition is the legal obligation to compensate the damage caused by an aggression or breach of the rules of armed conflict. The assessment of both the third and the fourth preconditions would require knowledge of international law and a reasoned analysis thereof. The fifth precondition is that the injured state must have submitted a claim of compensation (reparation) against the violating state, which the violating state has failed to satisfy within a reasonable time. Both are primarily questions of fact, however, the assessment of a reasonable period of time depends on the circumstances of the case. As a sixth precondition, the injured state, an IO or the international compensation mechanism must have submitted a request to Estonia to use the sanctioned subject’s property as an advance payment of compensation. The “international compensation mechanism” in this case is a special legal body or some organisation established by agreement between the states to administer the accounting and payment of compensation (reparations) to the injured state. The seventh precondition is a tripartite agreement between the injured State, Estonia and the international body concerned, which determines inter alia the terms and conditions of the claim which the owner of the affected property gains due to the expropriation of the assets. The default presumptions are that the violating state itself compensates the damage which it has caused and that the injured state does not receive compensation in double. The terms and conditions must therefore be agreed on how the violating offending state itself will compensate the value of the expropriated property or how the injured state will return the amounts received in advance once the violating state honours its obligation to pay the compensation.

Persons whose Property may be used as Advance Payment of Compensation

The scope of persons, whose property may be used for advance payments of compensation for damage caused by violation of the international public law on illegitimate use of force and abiding to the rules of warfare, is narrower than the scope of persons who may be subject to international sanctions. Firstly, a state violating international law must be established. Secondly, the violating state must have received a claim of compensation from the injured state. Thirdly, a legal person (corporation) must be a structural unit of the violating state or incorporated or registered in the violating state, or controlled by majority shareholding or other type of controlling measure and supported, “financially or otherwise” the violating actions. Persons not controlled by the violating state, must be sufficiently proved to have been connected to the violating act.

Claim in Exchange for Property

Finally, the owners of the expropriated property derive a freely disposable and heritable claim for the compensation owed by the violating state for the damage caused. The terms of such claim must be agreed in the tripartite agreement between Estonia, the injured state and IO or authorised international compensating mechanism. The ISA does not provide any further specifics on this. It may be presumed that the interests of the state of Estonia are to exclude any claims against itself i.e. Estonia, acting in strict compliance with the public international and domestic law, would assume only the enforcer’s role in this process.

Conclusion

The amendments to the ISA regarding the use of sanctioned subject’s property for advance payments of damage caused to the injured state by breach of the rules if international law concerning refraining from use of force in international relations and the rules applicable to the (legitimate or illegitimate) conduct of war itself, are clearly designed in the circumstances of the ongoing Russian aggression against Ukraine, specifically taking into account that large portion oof the assets of the Russian state, entrepreneurs and physical persons has been placed outside of Russia and the actions of the Russian state and the formal owners of these assets may be deemed to serve the same interests. Political statements and public opinion are, however, not sufficient to satisfy proper legal assessment criteria. In this light, should Estonian MFA initiate the expropriation of the property in accordance with the ISA, the Estonian courts will have an opportunity to create new public international law precedents.

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