The Need for Greater Immunity from Execution for Central Banks: The Case of Da Afghanistan Bank
April 25, 2023
Central banks play a crucial role in the global economy. They are responsible for managing monetary policy, regulating financial institutions, maintaining financial stability, and ensuring that a country’s monetary policy aligns with its economic goals. Because of their essential role in the economy, and the sovereign functions that they perform, central banks should have a high level of legal protection and immunity from measures of constraint or execution in foreign domestic courts.
This idea has led to varying degrees of protection for central bank assets in domestic laws, in customary international law, and in Article 21 of the United Nations Convention on Jurisdictional Immunities of States and their Property, which provides that property of a central bank shall not be considered as property specifically in use or intended for use by the state for other than government non-commercial purposes. However, in recent years, inconsistency in state practice regarding central banks’ execution immunity has grown, and a growing trend towards eroding the immunity of central banks from measures of constraint has emerged. In some states, especially those that are host to central banks’ investments, central banks enjoy strong protection and near absolute immunity. Examples include the United States (in most cases), the United Kingdom, France, and Belgium.
Other countries like Canada and the Netherlands treat foreign central banks like other foreign sovereign agencies and instrumentalities. This approach is problematic because many central bank activities have a dual character, as they can have both commercial and sovereign aspects. This raises the important question of whether central bank activities can be commercial and to what extent. The relatively recent terrorism exception to immunity from execution in a few jurisdictions poses another challenge for central banks, especially for foreign central banks with assets in the United States, because the Foreign Sovereign Immunities Act (FSIA) eliminates the immunity of central banks as agencies and instrumentalities of their states for the execution of certain judgments in cases related to terrorism. Based on this exception, the United States has turned the assets of Bank Markazi, the central bank of Iran, over to judgment creditors of the Islamic Republic of Iran. Now there is a new action in the U.S. courts to turn over assets of the central bank of Afghanistan to judgment creditors in terrorism cases against the Taliban.
The Case of Da Afghanistan Bank
As regular readers of TLB know, a case was brought by four groups of judgment creditors with judgments against the Taliban related to terrorist attacks on September 11, 2001. These groups of judgment creditors sought to satisfy their judgments with assets held at the Federal Reserve Bank of New York (FRBNY) amounting to $3.5 billion, which are held by the central bank of Afghanistan (Da Afghanistan Bank or DAB).
The case was initiated after the Taliban took over Afghanistan and the government of Afghanistan collapsed. At that time, there were assets worth about $7 billion deposited at FRBNY in the name of DAB. In February 2022, the President of the United States issued an executive order freezing DAB’s assets and kept half of those funds to benefit the people of Afghanistan while leaving the remaining $3.5 billion blocked for the claimants to pursue in court. The claimants have argued, among other things, that since now the Taliban controls DAB, DAB is an agency or instrumentality of a terrorist party and thus not entitled to immunities granted to sovereign states and their central banks in the FSIA, including immunity from attachment and execution for their assets.
The Southern District of New York (Judge Daniels) issued a decision on February 21, 2023, denying the turnover motionson the grounds that the court lacks subject matter jurisdiction under FSIA and is constitutionally restrained from determining that the Taliban is the legitimate government of Afghanistan as required to attach DAB’s assets. However, the judgment creditors have appealed this decision.
Why Does Immunity Matter?
Although the court denied the turnover motion at this stage of the proceedings, the case highlights the need for high levels of immunity for central banks. Afghanistan has been a war-torn country for decades. Its economy has deteriorated significantly since the Taliban took over, and the financial and banking sector has almost collapsed due to the economic crisis. Specifically, lack of access to the central bank’s reserves has created a liquidity crisis, and as emphasized in an open letter by 70 economists addressed to the President and the Secretary of the Treasury of the United States, has rendered DAB unable to manage money supply, stabilize the economy, and pay for imports.
At the same time, a humanitarian crisis is unfolding in Afghanistan. It is estimated that more than 20 million Afghans are in need of aid, and urgent action is needed to address this situation. Irrespective of the nature of the relationship between Da Afghanistan Bank and the Taliban, and irrespective of whether there is a sound legal basis to relate them together or whether the lawsuit has legal merit or not, these assets belonged to the former government of Afghanistan and its people. These assets are necessary for meeting the needs of the people of Afghanistan. Allowing execution and enforcement proceedings against them will keep those assets out of people’s reach and will have disastrous consequences for the country’s population. To be clear, this argument does not mean that Da Afghanistan Bank’s assets must be handed over to the Taliban. What can be done with the assets is not an issue discussed in this post.
The crippling effects of removing central banks’ immunity are not limited to Afghanistan. But it does serve as a perfect example of how a new trend towards eroding central bank execution immunity – although still an anomaly and limited to a few countries – is worrying and why central banks need even greater immunity than their respective states. Central banks hold significant assets and reserves that are critical to maintaining financial stability. If these assets are subject to seizure or attachment by creditors or litigants, it could have severe consequences for the economy as a whole. This could lead to a lack of liquidity during times of crisis or an inability to manage inflation effectively and impact monetary policy and exchange rates, which all are sovereign functions.
Granting central banks high-level immunity also helps protect them from political interference. Central banks must be able to make independent decisions based on economic data and analysis without fear of political repercussions. If they were subject to litigation or seizure of assets, it could compromise their ability to make decisions in the best interest of the economy. Governments and other stakeholders might use this vulnerability as leverage to influence monetary policy decisions that benefit them politically but harm the economy in the long run, or central banks may be pressured into making decisions that favor the creditor’s interest over those of the broader economy. This could result in decisions that are not in line with the central bank’s mandate or undermine its independence.
Finally, if central bank assets are not immune from legal action, central banks may be reluctant to engage in activities that are essential for their duties, making them ineffective.
Iran & Suriname
The problems with denying immunity to central bank assets are illustrated by the case of Iran. So far, U.S. courts have rendered judgments awarding damages amounting to $120 billion against Iran, some of which are directed against the central bank of Iran. Some of the judgment creditors are already trying to enforce their judgments in other countries, such as Luxembourg and Italy, against assets of Iran’s central bank. If immunity from execution is stripped away, the ability of Iran’s central bank to hold reserves abroad or perform other tasks will be hampered seriously, even if an agreement is reached in the political sphere and sanctions are removed.
As another example, in 2021, Netherlands Supreme Court issued a judgment in favor of criminal attachment of more than 19 million euros in cash on suspicion of money laundering. The money belonged to three Surinamese commercial banks but was in control of the central bank of Suriname. The central bank claimed that Suriname was facing a euro cash surplus and that in order to manage cash flow and currency circulation, it had transferred the money to Hong Kong to turn it into book-entry form and add it back to the liquid assets of commercial banks. The central bank issued a declaration in 2019, stating that the country was facing a shortage of cash US dollars and a euro surplus, and a negative influence on the exchange rate due to this seizure. Nevertheless, the supreme court rejected the immunity argument on the ground that commercial banks were the real owner of the seized money.
Allowing enforcement proceedings against central banks could also have diplomatic implications. Central banks often act as intermediaries between governments and international organizations, and subjecting their assets to execution and enforcement can undermine their ability to perform their duties as such. Additionally, it can create tension between countries and undermine diplomatic relations. One example is the case of Bahrain courts ordering the confiscation of assets that allegedly belong to the Central Bank of Iran and other Iranian banks. The Bahrain High Criminal Court issued a verdict in 2021 fining Iranian banks and confiscating money amounting to $1.3 billion for involvement in money laundering, a ruling that the Bahrain Higher Court of Appeal later confirmed. Although this case relates to criminal proceedings and there are scarce examples of criminal attachment of central bank assets, it can be assumed that execution immunity in criminal proceedings is not more limited than in civil cases. This move led to further deterioration in relations between Bahrain and Iran, which have been strained for many years. The Iranian government has already condemned the decision and warned that it would take retaliatory measures if necessary. It was seen as a direct attack on Iran’s sovereignty and economic interests amid ongoing tensions between the two countries, and it will likely be a challenging issue in negotiations to resume relationships. If other countries follow suit, it could lead to a situation where countries engage in tit-for-tat actions against each other, which would only increase tensions and instability.
One argument against granting greater immunity is that it could lead to abuse by central banks. Critics argue that if central banks are immune from execution, they may act with impunity and engage in illegal activities such as money laundering or financing terrorism. However, central banks are already subject to strict regulations and oversight by national authorities and international bodies under standards developed by authorities such as IMF, FATF, and Basel Committee. These bodies set standards for banking regulation and supervision and work to promote the safety and soundness of the international banking system by issuing global standards, guidelines, and other recommendations which sometimes exceed national regulations in terms of effectiveness and are adopted by most national and supranational supervisory bodied. These standards are applied to central banks’ transactions and operations as well, and ensure that central banks are operating in a responsible and transparent manner.
In conclusion, central banks play a vital role in maintaining financial stability and economic growth in their respective countries. To ensure that they can carry out their responsibilities effectively, they must enjoy a high level of immunity.While some may argue against granting such immunity due to concerns about accountability, there are other ways to ensure accountability without compromising central banks’ ability to make independent decisions and perform their functions properly, including changes in the structure and laws of central banks to make their responsibilities more defined and clear; implementing stricter internal controls and regular audits of financial operations by internal and external auditors; implementing more robust anti-money laundering measures; increasing transparency and monitoring by national authorities; strengthening international cooperation through international authorities; and holding states responsible for possible wrongdoings of their central banks. These possible alternatives are more effective in enhancing accountability and preventing abuse by central banks than subjecting their assets to constraining measures and they do so with fewer repercussions for the ordinary population.