Symposium on International Investment Law & Contemporary Crises: Divergent Approaches to the Nationality of Corporate Claimants in Banking and Finance Investor-State Arbitration

[Francis Xavier, SC, PBM, FCIArb, C.Arb, is Rajah & Tann’s Regional Head of Disputes Group and is recognised as a leading disputes lawyer.  He is a past global President of the Chartered Institute of Arbitrators (2020) and also a Past President of the Inter-Pacific Bar Association (2019).

Matthew Koh is a partner at Rajah & Tann, based in Singapore. Matthew practices primarily in the sphere of international arbitration and construction law.]

Issues of jurisdiction are rarely straightforward in investor-state arbitration, and this holds true for matters of jurisdiction ratione personae. Whether a tribunal has jurisdiction over a claimant who is a juridical person (i.e., a corporation or company) can be deeply impacted by the nationality of the controlling interests behind the claimant. 

This article will consider two broad situations where a tribunal may have jurisdiction even where the nationalities of the claimant and its controlling interests vary. These hinge on the specific language used in the investment treaties in question. This article also observes that although claimants in global banking and finance (“GBF”) disputes originate from a relatively small number of states, the nationalities of claimants and their controlling interests are less likely to be the same in GBF investor-state arbitration cases compared to other cases generally.

This article adopts the Report’s categorisation of GBF disputes as being those relating to investments in: 

1. institutions, such as banking or insurance institutions, or other institutions such as pension funds or investment management companies; or
2. instruments, such as loans, bonds or other financial instruments (e.g., derivatives).

Claimants in investor-state arbitration cases originate from a relatively small number of home states

The Report’s authors note that over 50% of claims in GBF investor-state arbitration cases were brought by investors located in just six states (Netherlands, United States, United Kingdom, Austria, Switzerland and France). This reflects the unsurprising fact that companies in certain countries are more likely to be used as vehicles for investment. In particular, these are likely to be countries that are net-capital exporters whose nationals, in turn, are more likely to be claimants in investor-state arbitration proceedings. These countries are often also conducive to the registration of companies and establishment of businesses, for example, because of attractive corporate tax regimes. Indeed, the authors observe that a number of GBF cases have involved claimants from offshore jurisdictions within the above six states, such as the Turks and Caicos (part of the United Kingdom) and Curaçao (part of the Netherlands) (p. 26). 

The concentration of more than 50% of claimants in just six states also underscores the reality that certain countries have concluded more investment treaties than others and their investors are more likely to resort to investor-state arbitration as a mode of recourse; these countries are therefore often the originators of treaty claims. It would not have escaped notice that the six states mentioned above are the United States and five western European nations. This is consistent with the fact that, historically, more BITs have been signed with capital-exporting nations in the West (although this trend may be gradually changing.

The authors of the Report, when examining the nationality of controlling interests behind claimants, also observe that the six most common nationalities of controlling interests made up only around 40% of all cases (the six nationalities being the United States, Netherlands, Austria, Russian Federation, Switzerland and United Kingdom: (p. 27)). This reinforces the observation that investors are likely to gravitate towards certain jurisdictions to incorporate investment vehicles. Claimants in investor-state arbitrations are therefore more likely to originate from these jurisdictions.

Differing perspectives on claimant nationality requirement

For uniformity of terminology, we will be discussing situations where the bilateral investment treaty (“BIT”) is entered into between States A and B, and where the dispute is brought against State B as the respondent. Where there is a state other than State A or B involved, it will be termed a third-party state.

Broadly speaking, in an investment treaty arbitration, situations of claimant nationality fall into two broad categories:

1. the claimant is incorporated in State A (“Category 1”); or
2. the claimant is either incorporated in State B or in a third-party state, and not in State A, but its controlling interest has the nationality of State A (“Category 2”).

Under Category 1, there are three sub-categories:

1. the claimant and its controlling interest are both nationals of State A (“Sub-category 1A”);
2. the controlling interest is a national of State B (“Sub-category 1B”); and
3. the controlling interest is a national of a third-party state (“Sub-category 1C”).

These three sub-categories arise from differing perspectives adopted in the treaty wording on the issue of claimant nationality. 

Sub-category 1A is the straightforward and uncontroversial situation where the claimant and its controlling interest both have the nationality of State A. In that situation, jurisdiction ratione personae is clearly established.

Sub-category 1B is made possible by language in treaties, such as the Netherlands-Kazakhstan BIT, which provides that for legal persons to be considered nationals of a state party they only have to be “constituted under the law of that [state party]”. This allows an investor to qualify as a claimant even if the claimant’s controlling interest is a national of the respondent state. An example of a case concerning this BIT is KT Asia Investment Group B.V. v. Republic of Kazakhstan, ICSID Case No. ARB/09/8. There, the claimant was a company incorporated in the Netherlands, which brought proceedings against Kazakhstan. The tribunal held that it had jurisdiction, notwithstanding that the ultimate beneficial owner of the claimant was a certain private businessman who was a national of Kazakhstan. Indeed, with reference to this case, the Report observes that:

“a number of tribunals in banking and finance disputes have refused to examine the ‘real’ nationality of the investor based on alleged investment planning and, instead, have confirmed that ‘the only requirement is that the legal person is constituted under the law of one of the Contracting Parties.’”

(p. 29)

An example of a case in Sub-category 1C is Saluka Investments B.V. v. The Czech Republic, where the claimant was incorporated in the Netherlands, and brought claims against the Czech Republic under the Czech Republic-Netherlands BIT, where the definition of ‘investor’ at Article 1(b) includes “legal persons constituted under the law of one of the Contracting Parties”. It was not disputed that the claimant was a subsidiary of the Nomura group, a major banking and financial services group headquartered in Japan. Despite the absence of an investment treaty between the Czech Republic and Japan, the Nomura group, through the claimant incorporated in the Netherlands, could validly commence proceedings against the Czech Republic (p. 26).  

Sub-Categories 1B and 1C are in a similar domain in the sense that the only prerequisite is that the claimant be incorporated in State A.

We turn now to Category 2 which consists of:

1. the unusual situation where the claimant has the nationality of State B and its controlling interest has the nationality of State A (“Sub-category 2A”); and
2. the claimant is incorporated in a third-party state and its controlling interest is a national of State A (“Sub-category 2B”).

In Sub-category 2A, some unusual investment treaties have express language providing for companies to claim against State B, even though they are themselves incorporated in State B, if these companies are controlled by nationals of State A. Article 25(2)(b) of the ICSID Convention caters for this situation by providing that a juridical person, which has:

“the nationality of the Contracting State party to the dispute” but “because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention”

may bring claims against the state in which it is registered. 

An example of a case falling in Sub-category 2A is that of Raiffeisen Bank International AG and Raiffeisenbank Austria d.d. v. Republic of Croatia (I), ICSID Case No. ARB/17/34. The dispute concerned the Austria-Croatia BIT. The claimants were the Austrian parent bank and its Croatian subsidiary. It appeared to not have been disputed that the Tribunal had jurisdiction over the Croatian subsidiary of Raiffeisen, notwithstanding that it was incorporated in Croatia, as the second claimant in the arbitration. This comes as no surprise as the Austria-Croatia BIT provides at Article 1(2)(b) and (c) that an investor includes:

“(b) legal entities […] constituted in accordance with one Contracting Party’s legislation, having their seat and performing real business activities on the territory of the same Contracting Party and making an investment in the other Contracting Party’s territory; [and]

(c) any legal entity, or partnership, constituted in accordance with the legislation of a Contracting Party or of a third Party in which the investor referred to in [(b)] exercises a dominant influence.”

In this case, the Austrian parent bank was an entity which would have fallen within Article 1(2)(b) and the Croatian subsidiary would have fallen within Article 1(2)(c).

As for Sub-category 2B, in that situation, the claimant, depending on the language of the investment treaty in question, may be considered as an investor by virtue of its controlling interest, notwithstanding that it is incorporated in a state not party to the investment treaty. For example, the Netherlands-Kazakhstan BIT (considered above) also provides that legal persons may also be considered nationals of a state party, notwithstanding that they are not constituted under the law of the state party, if they are “controlled, directly or indirectly” by nationals of that state party. In addition, the controlling interest itself may be a claimant in the arbitration, and its investment framed as being an indirect interest through the first claimant (the company incorporated in any other third-party state) of the investment in the respondent state.

Ultimately, as the treaties and cases above demonstrate, where claimants and controlling interests behind the claimants have different nationalities, the language of treaties is key in determining whether a tribunal will have jurisdiction. The last section of this article will return to the implications of the choice between narrower and broader definitions of who qualifies as a claimant for purposes of investor-state proceedings.

Nationalities of investors and their controlling interests are less likely to be the same in GBF investor-state arbitration cases as compared to other cases generally

The authors of the Report have observed that:

“in more than a quarter of all [GBF] cases (43 out of the 149 cases considered), the home State of the investor was different from that of the entity or person that owned or controlled the investor”.

(p. 27)

In other words, the claimant and the controlling interest have the same nationalities in more than 70% of GBF cases which the Report considered; correspondingly, in almost 29% of these  cases, the controlling interest’s nationality differed from the claimant’s nationality. Interestingly, this is higher than in investor-state arbitration cases in general, where in only approximately 17% of the cases from 2015 to 2025, the controlling interest’s nationality differed from the claimant’s nationality. 

The increased divergence in GBF cases, between the nationality of the claimants and the nationality of controlling interests in claimants, may stem from the fact that the GBF industry stretches across borders and many players in the GBF space (for example, banks or other financial institutions) have complex corporate structures spanning multiple jurisdictions to reflect the reach of their global operations. A transnational corporate structure often results in different nationalities across different layers of the structure, for example, when key jurisdictions host global or regional headquarters which in turn hold shares in and control subsidiaries in other countries. 

The authors of the Report also theorize that some of this divergence:

“may result from investment treaty planning—a corporate structuring and tax planning process designed to obtain protection from investment treaties”.

(p.28)

While this can give rise to concerns about nationality shopping, the authors observe that jurisdictional objections arising from corporate restructuring have generally been dismissed by tribunals unless the restructuring took place after crystallization of the dispute (p. 29). In addition, greater awareness of states to the risks of nationality shopping has led to more recent investment treaties seeking to address such risks with more detailed requirements for a claimant to be considered a qualifying investor. This may help strike some balance between legitimate corporate restructuring objectives and the interests of states. 

For completeness, it is worth emphasizing that any potential complications arising from a divergence between the nationality of the claimants and the nationality of controlling interests in claimants only relates to a minority of investor-state arbitration cases. As mentioned above, the claimant and the controlling interest have the same nationalities in more than 70% of GBF cases and approximately 83% of investor-state arbitration cases generally. Thus, in the majority of cases, issues of nationality are far more straightforward.

Lessons for states in relation to investor nationality

In conclusion, it is worthwhile considering two lessons for states that can be drawn from the Report and the discussion above. 

First, states must bear in mind that the language of the investment treaties that they enter into should reflect their policy priorities. Selecting narrower definitions of who constitutes an “investor” for purposes of investor-state arbitration can reduce a state’s exposure to potential claims. On the other hand, selecting broader language could send a message to the wider GBF community that a state is more open to foreign investment. 

Countries with large finance sectors, and which depend heavily on foreign businesses setting up local subsidiaries for trading or commercial purposes, may prefer to eschew extensive denial of benefits language in their treaties in favour of simpler definitions of nationality that focus on the immediate country of incorporation (such as in the Netherlands-Kazakhstan BIT mentioned above).  This may make such countries more attractive places for the incorporation of investment vehicles. On the other hand, states may also be more deliberate and systematic about socializing in advance new financial or economic regulations with foreign investors who may be adversely affected by such regulations. This may reduce the risk of eventually being exposed to claims from disgruntled investors. 

Second, states ought to continue to be mindful of the requirements for nationality that are incorporated into investment treaties, in light of the continued importance of investor-state arbitration as a mode of resolving GBF disputes. The Report observes that there is a general increase in the frequency of GBF disputes, with higher frequencies associated with distinct external events (such as financial crises); other commentators have observed an increase in GBF disputes as a result of regulation and intervention by states. Further, the authors of the Report observe that a wider variety of states have participated in GBF disputes, whether as respondents or as the home states of claimants or the controlling interests behind claimants. The authors opine that:

“[t]his broader set of stakeholders (in GBF disputes) reflects the global nature of the finance and banking industry, where investments and actors can be spread across many different countries.” 

(p. 21)

In either case, the increased frequency of GBF disputes and the variety of stakeholders involved suggest that there will be an increased usage of investor-state dispute settlement by investors as a tool to protect their rights. This points towards the continued significance of GBF related disputes as a distinct area of investor-state dispute settlement, in which the discussion on issues of nationality is likely to continue to deserve close attention in time to come. To this end, the Report serves as a useful starting point for understanding the key issues and interests at stake.