Huyen Nhu – VietinBank and the test to secure private interests

April 2014 | EXPERT BRIEFING | BANKING & FINANCE

financierworldwide.com

The court case of Huynh Thi Huyen Nhu and VietinBank recently ended at the first stage, with a relatively uncontroversial verdict on criminal penalties imposed against Huyen Nhu and other accused members.However, the claim for exemption from indemnification obligations by VietinBank, the related party in this case, has stirred much unsettled debate in both the legal field and banking environment. Setting aside the legal nuances of the case and assuming that the verdict was delivered based on the grounding of sufficient evidence, the question that remains is whether the judgment creates good ‘judicial precedent’for Vietnam from an economic and legal perspective – particularly in light of assessing economic efficiency when the relevant laws are applied socioeconomically.

In this article, the author addresses the legal issues on the likelihood of the case giving rise to vicarious liability against the Vietnamese government in its undertakings in order to protect the private sector, especially foreign investors at a time when Vietnam is exploiting the advantages of the regional economic integration.

VietinBank to be exempt from liability – an implication that the law is flawed?

On the basis of “making four disclaimers”, innocence must be pronounced – that was the argument ofthe representatives of VietinBank as they emphasised the proverb: ‘Don’t know, don’t see, don’t hear, don’t be held responsible”. Huyen Nhu was accused of wrongfully determining high interest rates and striking the ‘hunger’ of suffering customers. The corporate seal of the bank was forged, agreements were self-arranged and transactions were carried out by Huyen Nhu and customers outside VietinBank’s headquarters. Further, VietinBank denied all management responsibility over the customers’ accounts by referring to Decision No. 1284/202/QD-NHNN of the State Bank of Vietnam (SBV), arguing that “in account management, all documents do not define or stipulate account management and therefore, there is no basis to prosecute responsibility for account management”.

In a nutshell, the bank considered Huyen Nhu’s offence constituted individual behaviour – acting alone, she neither represented nor acted on behalf of VietinBank.

Testing the confidence of the investors

Among the plaintiffs was a foreign investor, Berjaya Berhad Corporation (Malaysia). The owner of SaigonBank – Berjaya Securities Joint Stock Company (SBBS) – allegedly suffered damages to the tune of VND 220bn (around US$10.3m). Speaking to the court, Ms Yei Pheck Joo, SBBS’ general director, stated that she was “veryshocked when an employee of VietinBank appropriated major amounts and that VietinBank refused to compensate their clients. Our company opened an account at VietinBank because we trusted the bank as the state-owned bank – the bank of the State”.

Ms Joo’s statement properly reflects two sentiments. Firstly, they had entrusted huge investment assets into one of the ‘State-owned banks’ (in the case of VietinBank, the State holds a stake exceeding 80 percent). Secondly, the issue now is not only one of confronting the existing laws, but also opposing this ‘bank of the State’.

Commitment of a Member State?

This case is perhaps a good test for the Vietnamese judicial system dipping its toes into high-profile international matters. In recent years, there have been a number of cases where government-affiliated agencies grappled with ‘windfall’ international lawsuits related to administrative relationships, commercial disputes, bilateral investment relations between the parties in administration, economic and commerce – disputes which were commonly settled through competent administrative authorities, courts and arbitral institutions such as the Vietnam International Arbitration Centre (VIAC) and the International Chamber of Commerce (ICC). Now, the risk of disputes between foreign investors and government bodies being brought through investment dispute settlement mechanisms, such as the WTO, ICC, ICSID or UNCITRAL under bilateral (BTA) or multilateral (WTO, ACFTA and the TPP currently in negotiation) trade agreements to which Vietnam is a signatory, has arisen.

In the case of Huyen Nhu, a foreign investor such as SBBS may launch civil action against the government through the 1992 BTA signed between Vietnam and Malaysia (BTA).

The general principle of this BTA prohibits ‘requisitioning’, meaning that a contracting party is not allowed to apply any measures to request the stripping of ownership or any other requests leading to similar consequences such as nationalisation of capital investors of other contracting parties. Accordingly, when investors are contracting parties, their investment will always be entitled to fair treatment and be guaranteed safety in the other contracting party’s territory (Article 2.2 and Article 5 of the BTA). VietinBank, with the State as its major stakeholder, was exempt from responsibility as stipulated in the verdict. This leads us to question whether Vietnam unfairly treated – or rather ‘requisitioned’ or ‘nationalised’ – the assets of foreign investors in its own territory.

Article 7 of the BTA allows investors of each State party to pursue action against the nation through arbitration under the UNCITRAL Arbitration Rules to preserve their legitimate rights. Similar international actions have the potential to damage the attraction of Vietnam to investors.

Furthermore, while Vietnam is not yet an official member of the ICSID Convention, surveys have been in the works to try and create a workable mechanism that will allow the country to implement the Convention. However, in practice Vietnam has been the subject of threats of being brought to action with regard to international investment protections under UNCITRAL, ICSID and ICC Rules through its BTAs with nations including the United States (2001), Japan (2003) and Singapore (1992). Therefore, when Vietnam is involved as a defendant in an international dispute such as in the Huyen Nhu – VietinBank case, the issue becomes a major concern.

The laws affecting ‘judicial precedent’ must be changed

The plaintiffs have currently appealed the exemption against vicarious liability granted to VietinBank. Therefore, a more well-reasoned judgment is expected to be passed down by the Supreme People’s Court in time.

From a general perspective, there is a need to cautiously assess whether the ‘unfettering’ of VND 4 trillion (around US$188m) for VietinBank would impact public finances and fledgling banks in Vietnam. When taking into account enacted economic and legal policies and individual judgments, the side-effects of these decisions must be duly considered. VietinBank’s ‘immunity’ from compensation obligations over the damages caused by its employees when conducting assigned tasks may not be resolvable through internal mechanisms such as via the Vietnamese judiciary.

One of the key mysteries surrounding the launch of legal action by investors outside Vietnam might be the vicarious responsibilities of VietinBank with the responsibilities of the SBV as a major shareholder of VietinBank. Particularly, since the legal basis for the exemption was cited as being based on related credit policies issued by the SBV, if further denials of responsibilities of other banks (in the same way as VietinBank under Decision No. 1284) are accepted, the regulations of this sector will be defective and create a ‘loophole’.

In the case of the repudiation of VietinBank’s responsibility, if the judgment is fairly and correctly held, then the applicable laws might have been incorrect and will be publicly challenged. Therefore, despite the final judgment in appeal and taking into account what appears to be ‘emotional-justice’ rendered by the Court of Appeal, VietinBank may be held innocent and exempt from vicarious liability in order to minimise adverse long term socioeconomic impacts.

A stable solution would likely be in the form of ongoing efforts by the government to encourage comprehensive equitisation of state enterprises, especially in the credit banking sector. This would reduce the State’s dominance in the commercial banking system. More importantly, it would reduce the likelihood of a court judgment granted based on assumptions as a result of ‘challenging’ regulations, producing an inefficient and poor ‘judicial precedent case’ as a result. It is these provisions that should be consequently repealed.

Chau Huy Quang is a managing partner at Rajah & Tann LCT Lawyers. He can be contacted on +848 3 8212 382 or by email: quang.chau@lctlawyers.vn.

Chau Huy Quang

Rajah & Tann LCT Lawyers