Emma Lindsay and Ruzin Dagli explain how to avoid nationality-related pitfalls to safeguard foreign investments against political risk.
Nationality is the key that unlocks the protections that international investment agreements, including bilateral investment treaties (BITs), afford to qualifying investors. There are currently more than 2,600 such international investment agreements in force worldwide, covering every region.
In the event of a dispute between a national of a contracting "home state" (i.e. the investor) and the state in which the national invested (the host state) over action by the host state that harms the investment, the wronged investor can seek redress from the host state under an applicable international agreement between the two states.
The question of nationality is especially interesting in the context of Brexit and the resulting change in the demographics of Britons' nationality. Between 2016 and 2018, the number of British nationals acquiring another EU nationality more than tripled."
However, timing is critical. If nationality is to unlock these protections, the investor must be a national of the home state when they are wronged by the host state and when they make a claim against the host state.
If the investor was a national of a state other than the home state, whether the host state or a third state, at the relevant times, this may bar protection since international investment agreements, in most cases, are designed to protect foreign investment from the home state and not the investments of nationals of the host state or any other state.
Surge in Britons acquiring other nationalities
The question of nationality is especially interesting in the context of Brexit and the resulting change in the demographics of Britons' nationality. Between 2016 and 2018, the number of British nationals acquiring another EU nationality more than tripled. The number has increased tenfold since 2015. What does this mean in the context of international investment law—are Britons reducing their access to the protections it affords?
International law on nationality and international investment protection
Nationality has been the subject of numerous important legal decisions, which highlight the potential pitfalls of holding multiple nationalities when claiming the protection of international investment agreements.
In Soufraki v. United Arab Emirates (ICSID Case No. ARB/02/07), Mr Soufraki claimed protections available to Italian investors in the United Arab Emirates under the Italy-UAE BIT in respect of his investment in a port concession. The UAE argued that Mr Soufraki was a Canadian national and not an Italian national because he automatically lost his Italian nationality when he acquired Canadian nationality and took up residence in Canada. Despite producing no less than two Italian passports, five certificates of Italian nationality and a letter from Italian authorities attesting to his Italian nationality, Mr Soufraki was denied the protection of the BIT as he did not have Italian nationality at the relevant times.
In Champion Trading v. Egypt (ICSID Case No. ARB/02/9), the claimants—investors in a cotton trading and processing company in Egypt—were two US companies and three US individuals who were all members of the Wahba family. The three individuals were born in the United States to two US national parents but the father also held Egyptian nationality which was fatal to the Wahbas' claims under the BIT.
Under Egyptian law, sons of Egyptian nationals retain Egyptian nationality for 100 years. Despite having never even visited Egypt, the Wahba claimants fell squarely within this law and as a result they could not claim protection against their own state of nationality under the United States-Egypt BIT.
Dual nationals holding the nationality of the host state in addition to the home state under an international investment agreement also were prevented from taking forward their claims in the recent case Ballantine v. Dominican Republic, decided in September 2019. Relying on their US nationality, Mr and Mrs Ballantine claimed that the Dominican Republic violated the investment protections guaranteed by the free trade agreement between the United States and the Dominican Republic in respect of their investment in a residential housing development project in the Dominican Republic.
However, in addition to being US nationals, the Ballantines were also nationals of the Dominican Republic. In considering which of the two nationalities was the Ballantines' 'dominant and effective nationality' for purposes of determining whether they were protected by the free trade agreement, the tribunal looked to a number of factors: the Ballantines' habitual residence; their personal attachments to each country; the centre of their economic, social and family life; the circumstances in which they were naturalised and the reasons behind their being naturalised as Dominicans; the conduct towards them of the host state and its authorities; and how the claimants presented themselves.
The tribunal ultimately concluded that the Ballantines' Dominican nationality was their dominant and effective nationality at the relevant times, thus depriving their investment of protection under the free trade agreement.
In contrast, the tribunal in García Armas and García Gruber v. Venezuela (PCA Case No. 2013-3) held in a December 2014 decision that investors holding two nationalities could bring a claim against one of their states of nationality where that is permitted by the particular language of the international investment agreement under which the claim is brought. Here, according to the tribunal, the Spain-Venezuela BIT at issue did not exclude dual nationals from investment protection (in contrast to other Spanish and Venezuelan BITs).
The tribunal applied the specific language of the Spain-Venezuela BIT in holding that the Spanish/Venezuelan claimants' investments in the food distribution sector in Venezuela were protected. It is worth noting that a different tribunal applying the same BIT in a more recent case involving other members of the García Armas family came to the opposite conclusion. In December 2019, the tribunal in Manuel García Armas v. Venezuela (PCA Case No. 2016-8) denied protection to the investments of the Spanish/Venezuelan claimants in that case based on a different interpretation of the nationality requirements of the Spain-Venezuela BIT.
Recognising that a second passport can present obstacles to investment protection, some investors have sought to renounce one of their nationalities. In Pey Casado v. Chile (ICSID Case No. ARB/98/2), Mr Pey Casado was a Spanish national who migrated to Chile and obtained Chilean nationality. He purchased the newspaper El Clarín, which became the largest newspaper in Chile.
After the Pinochet dictatorship began in 1973, El Clarín was shut down and Mr Pey Casado fled Chile. Twenty years after these events and one year before bringing his claim under the Spain-Chile BIT, Mr Pey Casado informed the Chilean Department of immigration that he had resided in Spain since 1974 and did not wish to use the Spain-Chile Convention on Double Nationality (which permitted the acquisition of one nationality without losing the other). According to Mr Pey Casado, this was a renunciation of his Chilean nationality. Chile disagreed. The tribunal deciding Mr Pey Casado claim for the expropriation of his newspaper held that Chile could not prove that it was impossible to renounce Chilean nationality and Mr Pey Casado had proved that his renunciation was effective at the relevant dates. The claim was allowed to proceed.
So what about Brexit and investment protection?
Acquiring another nationality might seem an attractive option while Brexit is unfolding with all of its challenges and uncertainties. However, British investors with international businesses and overseas interests should consider this carefully. It is clear that international tribunals will give careful consideration to investment protection claims brought by dual nationals against host states, especially where the second nationality is that of the host state itself. Before taking any steps to change their nationality, investors should consider a number of important questions.
What are the requirements to become a national of that state? Might they already be a national of that state even if they do not hold a passport? Will they lose one nationality as a result of acquiring another?
Might it be possible to renounce one or other nationality in the future? Are there any applicable international investment agreements that might protect the investor's foreign investments? What are their specific requirements on nationality?
The UK does not currently have many BITs with other EU countries which means that the consequences for those acquiring a second EU nationality may not be very clear today.
However, we could see the UK entering more investment protection agreements with EU countries post-Brexit if existing EU protections are no longer available to British investors. As events unfold, it is prudent for British investors with foreign investments who are considering acquiring a second nationality to seek advice before doing so to safeguard investment protection and futureproof their overseas interests as far as possible.
Emma Lindsay is a partner and Ruzin Dagli is an associate in the International Arbitration Group at Withers Worldwide.