ICSID Tribunal Finds Argentina Liable for Unlawful Expropriation Based on Provincial Gaming Regulator's Decision

By Diego Luis Alonso Massa, 15 November 2021

The Tribunal found that Salta’s provincial gaming regulator ENREJA acted in bad faith, favoured local gaming operators and increased its own gaming revenues when it revoked ENJASA's 30 year licence. This article traces the dispute’s background and highlights the central arguments presented in the proceedings before ICSID.

On 27 October 2021, an International Centre for Settlement of Investment Disputes ("ICSID") tribunal ordered Argentina to pay two Austrian registered casinos – Casinos Austria International GmbH and Casinos Austria Aktiengesellschaft – more than USD 35 million in compensation following the August 2013 decision by Salta’s provincial gaming regulator, ENREJA, to revoke of their Argentinian subsidiary’s gaming licence.

The award, which was announced just a few days before crucial federal elections took place, is expected to entail important political and administrative consequences in the province of Salta, notes local press reports.

Background

The company Entretenimientos y Juegos de Azar S.A. (ENJASA) was established by provincial decree in 1998 to manage, commercialise and operate gaming in the Province of Salta. About a year later, the Executive Power of Salta granted ENJASA an exclusive 30-year licence to operate gaming facilities in the province. 

The licence established several grounds for its expiry or termination, including the non-payment of the fee, the breach of the obligations imposed by Article 5 of Act No. 7020, the exploitation of any gaming without the prior authorisation of gaming regulator ENREJA, the assignment or transfer (total or partial) of the operations covered by the licence without the prior authorisation of the Executive Power and the bankruptcy of the licensee.

In January 2000 a Joint Venture ("UTE"), consisting of Casinos Austria International Holding GmbH ("CAIH") (5%), Boldt S.A. ("Boldt") (5%) and Iberlux International S.A. ("Iberlux"), was established. 

Boldt and Iberlux International S.A. ("Iberlux") acquired 90% of ENJASA's shares by tender. The other 10% was held by the Province of Salta as part of an equity ownership programme for former employees of the Banco de Préstamos y Asistencia Social (BPAS).

Subsequently, the UTE transferred all of its shares in ENJASA to L&E, an Argentinean corporation formed by the same members of the UTE, which was approved by ENREJA.

On 15 November 2013, Casinos Austria International GmbH (CAI), which already held 60 % of the shares in L&E, purchased the remaining 40 % from Iberlux and became L&E's sole shareholder. It then sold 2% of its shares to Casinos Austria International Holding GmbH (CAIH), which was its holding company, itself controlled by the main Casinos Austria Aktiengesellschaft (CASAG). As a result, CASAG indirectly controlled 100 % of L&E. In turn, through L&E, CAI and CASAG indirectly held 99.94% of ENJASA's shares.

Revocation of ENJASA's Licence

Between 2007 and August 2013, ENREJA initiated several administrative inquiries into ENJASA's failure to comply with various regulatory rules and imposed 13 administrative sanctions on ENJASA.

In December 2012, ENREJA started three separate proceedings against ENJASA for violations of gaming regulations in the Province of Salta.

The first of these involved the violation of anti-money laundering rules in the administration of a lottery game by ENJASA, on account of the failure to record the payment of a prize and the failure to properly identify a prizewinner.

The second allegation related to the violation of anti-money laundering rules in the operation of one of ENJASA's casinos following the payment of prize money in cash rather than by cheque.

The third allegation concerned the violation of the prohibition on contracting operators without ENREJA authorisation after the operation of several slot machine parlours was sublicenced to third party operators.

On 13 August 2013, ENREJA issued Resolution No 240/13 which concluded that the allegations against ENJASA had been duly substantiated and that ENJASA had failed to comply with the anti-money laundering rules and had breached obligations against unauthorised sublicensing. 

Therefore, having determined that ENJASA had breached its obligations under the regulatory framework, ENREJA decided to revoke ENJASA’s licence.

The provincial government’s decision took final form with Decree No. 2348/2013 whereby Governor Urtubey ordered ENREJA to transfer its operations and employees to new operators. Interestingly, the decree highlighted the possibility that the revocation of ENJASA's licence could mean a higher income for the Province.

In this regard, not only did the decision lead to gambling in the Province of Salta becoming operated by several private operators (each with 10-year licences) but, according to local media, the operating fee grew from $58 million in 2013 (the year ENJASA’s licence was revoked) to $120 million the following year and kept increasing. According to estimates, by 2021 the fee was around $477 million.      

As stated by the general manager of Casinos Austria, Bettina Glatz-Kremsner, the revocation of its licence appeared to be a politically motivated measure aimed at benefiting local gaming operators and increasing the Province's gaming revenues. Further, as Casinos Austria subsequently pointed out in its Reply on the Merits before the ICSID Tribunal, after Mr. Juan Manuel Urtubey took office as the new Governor of the Province of Salta, replacing his political rival, former Governor Juan Carlos Romero, there were already indications that the Province intended to get rid of "the Austrians."

According to the recitals of the award rendered by the Tribunal, Video Drome – one of the companies that finally took over ENJASA's gaming license – submitted a note to ENREJA  dated 23 November 2012 suggesting that it could operate gaming facilities in Salta on more favourable terms than those agreed with ENJASA, offering it a 20 % royalty. And in the end, this was precisely what the Province finally obtained from all the new operators.  

The ICSID Proceedings

Following the revocation of ENJASA's licence on 4 December 2014, Casinos Austria International GmbH and Casinos Austria Aktiengesellschaft’s shareholders, represented by KNOETZL HAUGENEDER NETAL Rechtsanwälte GmbH, lodged a request for arbitration against the Argentine Republic before ICSID, claiming compensation in the amount of USD 51,919,998 [Casinos Austria International GmbH and Casinos Austria Aktiengesellschaft v. Argentine Republic (ICSID Case No. ARB/14/32)].

The Claimants argued that the revocation of their exclusive licence, followed by the transfer of their operations and employees to new operators, effectively wiped out their investment in the Argentine Republic, without the payment of compensation. 

The Claimants submitted that this constituted an unlawful indirect expropriation within the meaning of Article 4 of the Agreement between the Republic of Argentina and the Republic of Austria for the Promotion and Protection of Investments (BIT) and violated the host state's obligation to provide fair and equitable treatment under Article 2(1) of that treaty, for which they were entitled to compensation for the damages suffered. 

Furthermore, the Claimants asserted that they were entitled to damages under Article 4(3) of the BIT because the revocation of ENJASA's licence qualified as a direct taking of an asset (the License) that belonged to ENJASA, an Argentine company in which the Claimants held a shareholding. 

Moreover, the Claimants alleged that the revocation of ENJASA's licence was arbitrary and disproportionate. They argued that the revocation was not a regular exercise of ENREJA’s supervisory powers under Law Nº 7020, but instead was done “in bad faith, with the specific purpose of transferring ENJASA’s gaming operations to local Argentine companies by fabricating and exaggerating factually incorrect accusations of non-compliance with gaming regulations.” The Claimants accordingly argued that the revocation of the License was politically orchestrated, unlawful, arbitrary and in breach of due process.

In turn, Argentina argued that ENREJA had, by virtue of Article 13 of Law No. 7020, the disciplinary power to revoke licences and therefore the revocation was fully justified. 

In this regard, it argued that Article 13 authorised ENREJA to sanction ENJASA for violations or breaches of Article 5, Resolutions Nos 26/00 and 90/12 and the licence contract and that revocation of a licence was an express sanction. Article 13 required that any such sanction be proportionate to the non-compliance. 

Furthermore, the Respondent also pointed to the importance of the subject matter protected (anti-money laundering) by the measure and noted that the sanctions previously imposed on ENJASA during the term of the licence did not have a deterrent effect. It therefore argued that the revocation of the licence was fair, just and proportionate.

In its decision issued on 5 November 2021, the majority of the Tribunal composed of Prof. Dr. Hans van Houtte (Belgian national, President of the Tribunal) and Prof. Dr. Stephan W. Schill (German national, Claimants' appointee) concluded that the ENREJA's decision to revoke the licence was manifestly unfounded and arbitrary as a matter of international law. 

They found the same regarding the obligation to pay prizes in excess of AR$10,000 by cheque – an obligation that only came into force after the date of the alleged breaches. Moreover, the Tribunal found that ENREJA improperly dismissed the statute of limitations period for the infringements (1 year, according to Article 49 of Law No. 7020) raised by ENJASA. 

Finally, as regards the alleged contracting of third-party operators without ENREJA's authorisation, the Tribunal held that of the seven allegedly unauthorised operators, four clearly did not operate gaming in the Province of Salta, but only leased facilities, provided hardware and software or supplied slot machines to ENJASA, and the other three had been authorised by BPAS to operate gaming at a certain point in time before ENJASA obtained the licence.

Thus, the Tribunal held that:

[t]he revocation of ENJASA’s license, which inappropriately under international law ended what was left of ENJASA’s 30-year exclusive gaming license, destroying both ENJASA’s business operations and Claimants’ investment in ENJASA and L&E, cannot be considered as a regular exercise of ENREJA’s regulatory and supervisory powers […]. Consequently, the revocation and the subsequent transfer of its operation to third operators qualify as an indirect expropriation of Claimants’ shareholding in L&E and its indirect shareholding in ENJASA”. The Tribunal further finds that this indirect expropriation was unlawful as the revocation of ENJASA’s license did not comply with the requirements international law sets for an internationally lawful exercise of the host State’s police power. Such a measure does not fulfil the criteria Article 4(2) of the BIT sets up for a lawful expropriation, that is, the existence of a public purpose, the implementation of an expropriation in accordance with due process of law, and the payment of compensation”.

Therefore, the Tribunal held Argentina “internationally responsible for breach of Article 4(1) and (2) of the BIT on the basis that the revocation of ENJASA’s operating license and the subsequent transfer of ENJASA’s business to new operators constituted an unlawful expropriation of the Claimants’ investment under the BIT.

In setting the amount of compensation due to Casinos Austria, the Tribunal found that the use of the discounted cash flow ("DCF") method was the most appropriate method to determine the losses sustained by the Claimants. On this basis, the Tribunal decided that Argentina should compensate Casinos Austria in the amount of USD 21,660,000 plus interest at a rate of 4% per annum compounded annually as of 13 August 2013, the date on which its licence was revoked. This means that as of 13 August 2021 the interest due has grown to USD 7,116,804.96.

Moreover, Argentina was also ordered to pay USD 5.461.265,99 in costs and expenses of the proceedings, bringing the final amount to be paid to the claimants to more than USD 35.000.000.

Commenting on the award, former governor of the Province of Salta, Juan Manuel Urtubey justified the decision taken by his Administration on the grounds of "a series of non-compliances" and explained that the renegotiation allowed Salta to collect more than 100 million dollars, as reported by local news.

URL: https://taobserver.com/news/64/icsid-tribunal-finds-argentina-liable-for-unlawful-expropriation-based-on-provincial-gaming-regulators-decision

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