In an open letter published by Brussels-based EUalive, Solomon Passy, former Bulgarian Minister of Foreign Affairs, proposed decoupling Andora from San Marino under the Association Agreement with entry into force for San Marino conditional on resolving the issue currently blocking the EU association of the small republic –  the case with the failed Bulgarian investment in Banca di San Marino (the so-called “bank heist”) in which the funds of a Bulgarian investor disappeared from his bank account that led to allegations for a breach of the Bilateral Investment Treaty (BIT) with Bulgaria and an international arbitration proceedings against San Marino in Washington at the amount of EUR 150 million.

Passy, Founding President of the Atlantic Club of Bulgaria, served as Foreign Minister in the Government of Simeon Saxe-Coburg-Gotha (2001–2005). He was a signatory to Bulgaria’s democratic Constitution (1991) and to the country’s EU and NATO Accession Treaties. Among the high-level positions he has held are Chairman of the UN Security Council and OSCE Chairman-in-Office.

Here is Passi’s open letter:

Dear Sirs,

I am following with deep interest recent developments on an issue linked to the regulatory system in the financial services sector in San Marino (SM). A reputable Bulgarian investor suffered material injury due to untransparent arbitrary decisions taken by the authorities in SM.

In short, a preliminary deal was reached for the acquisition of 51% stake in the Banca di San Marino, and the Bulgarian company made the necessary transfer of funds withdrawn from a subsidiary of one of the leading banks in the EU and one of Europe’s premier financial institutions, headquartered in Milan, Italy.  Moreover, as the newest member of the Eurozone, the Bulgarian banking system is under daily scrutiny of the European Central Bank.

Nevertheless, the authorities of SM reconsidered and terminated the transaction without proven legal basis through refusal of authorization and a cascade of coercive measures.

Most striking in this case is that the SM authorities seized the funds lodged by the investor – which had passed all anti-money laundering checks – to an account in Banca di San Marino.

These actions are, among others, a gross breach of the Bilateral Investment Treaty (BIT) signed by Bulgaria and San Marino and duly ratified by both sides in 2007. Under the Agreement the parties committed to ensure full legal protection and investment security to the other party.  There are also the classical provisions featuring in any BIT: fair and equitable treatment and protection from any arbitrary or discriminatory actions aimed at the investment of the other party on its territory; protection against expropriation; free transfer of funds; national treatment, insuring investors are treated at least as favorably as domestic or third country investors.

Violations of the Bilateral Investment Treaty tempted me to search deeper into the consequences in view of the pending signature of the Association Agreement between the EU and Andora and San Marino. Under EU legislation BIT’s concluded before 2009 become part of EU common commercial policy. Accordingly, the Bulgarian BIT with San Marino was duly notified to the European Commission.

It is also noteworthy that a future Association Agreement with Andora and San Marino constitutes a significant step towards deeper economic and political integration with the EU and is essential for strengthening economic ties. It is designed to allow access to the EU Internal Market, including in the banking and financial services sector. Existing agreements will be replaced and superseded by their entry into force.

Since the afore mentioned case is indicative for non-observance of basic requirements on Investment protection and arbitrary actions, it is questionable whether the regulatory framework in San Marino is compatible with EU standards.

Moreover, in view of substantial interests of partners from France, Italy and Spain for speedy completion of the process, it would be regrettable if signature and ratification of the Association Agreement were delayed due to non-resolved cases

No strong feelings, but any problems in the regulatory and legal system signal concern on the integrity of the banking and financial services sector.  Several Member States have also raised reservations during the ten-year negotiating period. Furthermore, not to forget that in June 2023 the Chairpersons of the European Surveillance Authorities[i] wrote  to the European Commission flagging “strong concern” about ongoing negotiations for the association  with the EU of the so called micro states, including San Marino, suggesting that to allow these microstates to participate fully in the EU Internal market, posed a “fundamental risk”  to the integrity of the market.

Similar concerns on legal certainty were reportedly expressed by the EFTA countries when considering whether these microstates could be parties to the European Economic area granting the EFTA countries full access to the EU Internal market.

I wish also to refer to the European Parliament Resolution on the Association Agreement highlighting the fact that, in cases where the regulatory or supervisory frameworks of an associated state show deficiencies, the EU has the option of suspending market access. May be MEPs will need to explore further these matters questioning the European Commission.

Progress in overcoming deficiencies is important, and, in this regard, the European Parliament makes a distinction with Andora commending it for the important reforms undertaken and progressive alignment with EU legislation in the area of financial regulation.

As the case of the Bulgarian investor was crafted in the interim period between conclusion of negotiations in 2023 and planned signature of the Association Agreement in 2026, the Bulgarian side is derived from making use of the provisions protecting the interests of a European investor in a non- EU partner from arbitrary actions. Nor can it refer for scrutiny to the European Supervisory Authority for compliance with the regulatory and supervisory frameworks as established in the Protocol on financial services to the Association Agreement with Andora and San Marino.

In a situation of legal uncertainty, the only option for the investor is to bring its claims against the host state to international arbitration.

The opposition parties in San Marino have in the meantime initiated a Notice of Dispute before the National Parliament in view of the threat of international dispute settlement before the International Center for Settlement of Investment Disputes in Washington with claims for compensation of damages amounting to at least 150 million Euro. Their main concern is linked to the impact of this development on the international credibility of the country, on the banking system and the ability of the country to attract foreign investors.

Based on all my experience with the accession of Bulgaria to the EU, NATO, Schengen, Eurozone, I can share that lack of pro-active government involvement in such cases is counterproductive to national interest.

In Summery

• The Association Agreement with Andora and San Marino, once entered into force, will be beneficial for Bulgaria alongside the EU Member States;
• However, an unfortunate experience of a Bulgarian investor with the banking system of San Marino resulted in material injury for that investor;
• The arbitrary actions against the investor took place in the interim period between conclusion of negotiations and approval for signature;
• It is regrettable that non-resolved case with San Marino would delay signature and ratification of the Association Agreement in view of unanimity procedures in the Union
• There are no reservations or concerns regarding the financial services sector in Andora;
• It is also regrettable that a long international arbitration to settle the dispute will cause reputational but also financial damages to San Marino;

One possible solution would be decoupling of Andora and San Marino under the Association Agreement with entry into force for San Marino conditional on resolving the case for the European investor (from Bulgaria) with the banking system of the country

While I do not recommend at this stage a radical approach, compensation for the damages suffered by the Bulgarian investor could be envisaged by the Sammarinese authorities.

Speedy resolution of the dispute would be beneficial for future cooperation

Yours sincerely,

Dr Solomon Passy