Attachment; Garnishment; Iraq-OFAC Regulations


Pursuant to two arbitral awards handed down by the International Chamber of Commerce International Court of Arbitration against its debtors in the amount of US$ 5,948,110.30, the creditor served a restraining notice on a foreign bank to prevent it from transferring out funds or property belonging to any of the debtors or a third party corporation, which the creditor claimed to be an alter ego of one of the debtors.

None of the judgment debtors held any assets at the bank, but the third party corporation was the beneficiary of several LCs issued by the foreign bank as part of a program under a United Nations Agreement of 12 September 1996, entitled "Oil for Food," which was a humanitarian relief effort directed at supporting the population of Iraq through transactions involving Iraqi domestic petroleum and foreign foodstuffs. The Agreement and the accounts related to the program were created subject to Security Council Resolutions 661 and 986 and were subject to U.S. Department of Treasury Office of Foreign Asset Control ("OFAC") provisions. The accounts, were created by the UN to hold the proceeds of the otherwise illegal transactions, and protected by UN privileges and immunities prohibiting attachments, liens and garnishment. Furthermore, the issuer's control of the accounts was limited: (I) It had no power to transfer except in accordance with the terms of the Agreement; (2) It had no rights to the assets held in the accounts; (3) It was reimbursed for any payments on the LCs; and (4) The LCs were paid only from those accounts. Additionally, because the funds were initially the property of the Government of Iraq, they were considered "blocked property", and required permission by OFAC for their transfer. On these and other grounds, the bank/issuer moved to vacate the restraining notice.

The creditor opposed this motion arguing, "(a) that [the third party corporation/beneficiary] is an alter-ego of [one of the debtors]; (b) that [creditor] is entitled to execute its Judgment against funds which have become irrevocably due under the letter of credit; (c) the neither U.N.'s privileges and immunities nor its' and the United Nations' and the United States' Sanctions Resolutions apply to [the bank/issuer's] 'indebtedness' to [the third party corporation/beneficiary], and (d) that the court must consider the Letters of Credit in commercial terms."

The court noted that, "[c]ontrary to [the creditor's] arguments, the Letters of Credit do not create a 'completely separate and personal obligation of [the bank/issuer]', but rather are to be paid solely from the funds in the United Nations Iraq Account...." The court then stated that, "requiring [the bank/issuer] to pay the Letters of Credit from its own accounts would create an unacceptably inequitable result by exposing [the bank/issuer] to a potential double liability."

Additionally, the court recognized the official opinions issued by both the United States and the United Nations, that the restraining notice should be vacated because it encroaches on the privileges and immunities to which the U.N. account is entitled.

For the reasons laid out above, the court granted the bank/issuer's motion to vacate the restraining notice. The court also denied the creditor's request for a stay pending appeal, on the grounds that the creditor's private interests are "overwhelmingly outweighed by the public interests that constitute the foundation for this opinion, i.e. the orderly operation of the United Nations in accordance with its Charter and the treaty obligations of the United States."



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.