September 11, embassy bombing victims cannot seize Afghan bank assets, US appeals court rules

The 2nd U.S. Circuit Court of Appeals ruled that victims of the 9/11 and 1998 embassy attacks cannot seize $3.5 billion of Afghanistan central bank (DAB) assets frozen at the Federal Reserve Bank of New York. The court determined DAB is shielded by the Foreign Sovereign Immunities Act (FSIA) as an agency of Afghanistan, and victims failed to prove it was a Taliban instrumentality at the time the assets were blocked in August 2021. This decision represents a significant setback for victim groups seeking to attach these funds, reinforcing legal protections for sovereign assets and impacting the potential distribution of the total $7 billion in frozen Afghan central bank reserves.

Analysis

The 2nd U.S. Circuit Court of Appeals has ruled that $3.5 billion in Afghanistan's central bank (DAB) assets, frozen at the Federal Reserve Bank of New York, cannot be seized by victims of the 9/11 and 1998 embassy bombing attacks. The 2-1 decision establishes that Da Afghanistan Bank is protected by the Foreign Sovereign Immunities Act (FSIA), as the court found no evidence that the Taliban controlled the bank at the time the assets were frozen on August 15, 2021. This ruling represents a significant legal setback for plaintiffs seeking to enforce judgments against the Taliban, affirming a high legal threshold for piercing sovereign immunity. The decision also highlights a crucial legal distinction between a nation's sovereign assets and the actions of its governing regime, a principle underscored by the dissenting judge's concern that this outcome may undermine the objectives of the Terrorism Risk Insurance Act (TRIA). This event solidifies the legal status of half of the $7 billion in frozen Afghan funds, with the other half having been previously designated by the U.S. government for humanitarian aid to the Afghan people.

Key Decisions for Investors

• Investors in emerging market sovereign debt should note this ruling as it reinforces the strong legal protections afforded to central bank assets under the Foreign Sovereign Immunities Act, even following a significant regime change.
• This decision serves as a key indicator of the U.S. legal system's approach to sanctioned states, suggesting that established legal principles of sovereign immunity may take precedence over political considerations or claims from terror victims.
• Given the event's negligible market impact score and its focus on international law rather than corporate performance, no immediate portfolio action is warranted for investors not directly involved in sovereign litigation or claims.