European Sanctions Regime set-back

March 2013

The EU General Court annulled the EU targeted financial sanctions regime in so far as it applied to Bank Mellat. In one of a growing number of similar cases, the European Council (the Council) was unable to satisfy the court that it had sufficient reasons and evidence against Bank Mellat on which to justify its decision to impose sanctions. This decision, and other similar cases, may have major consequences for the European sanctions regime.

Bank Mellat v Council of the European Union (T496/10), EU General Court

Background

The Council claimed, inter alia, that Bank Mellat, although purporting to be a privately owned Iranian commercial bank, was actually an Iranian state owned bank that supported and facilitated Iran’s nuclear and ballistic missile programmes, and that provided services for or on behalf of entities listed by the UN and EU as supporting those programmes.

Consequently, on 26 July 2010, Bank Mellat was added to the list of entities involved in Iranian nuclear proliferation (Council Decision 2010/413/CFSP). As a result, Bank Mellat’s funds and economic resources were frozen in accordance with the asset freezing regime provided for in Council Regulation (EC) No 423/2007.

Bank Mellat brought an action against the Council, requesting that the relevant European legislation be annulled, in so far as it applied to Bank Mellat. The European Commission was granted permission to intervene in support of the Council.

The Facts

Bank Mellat made three separate pleas which alleged that the Council had: (i) breached its obligation to give reasons for naming Bank Mellat, and infringed the Bank’s rights to a defence and effective judicial protection; (ii) made a manifest error of assessment by imposing restrictive measures on the Bank; and (iii) infringed the Bank’s right to property and breached the principle of proportionality.

Fundamental rights protection

As a preliminary point, the court considered the Council’s argument that, as an emanation of the Iranian State, Bank Mellat could not rely on fundamental rights protection and guarantees. The court held that there was no such provision in European law, and that, in any event, the Council had not provided sufficient evidence to demonstrate that the Bank was in fact an emanation of the Iranian State.

Obligation to state reasons, rights of defence and right to effective judicial protection

In a lengthy review of European law, the court stated that the Council was under an obligation to give the Bank sufficient information for it to be able to: (i) determine whether or not the Council had made a mistake; and (ii) review the legality of the Council’s decision. In the absence of compelling security or diplomatic reasons to the contrary, the Council was also under an obligation to give the Bank sufficient information to understand the scope of the measures against it. The court also stated that a right of defence, particularly to be heard in proceedings relating to a measure which will negatively affect a party, is a fundamental principle of European law.

The court identified seven reasons on which the Council based its decision to impose sanctions on Bank Mellat:

Bank Mellat is a state owned bank;

the Bank engages in a pattern of conduct which supports and facilitates Iran’s nuclear and ballistic missile programmes;
the Bank provided banking services for or on behalf of UN and EU listed entities;
the Bank is the parent of First East Export Bank (FEE), which is a UN designated entity;
the Bank provides banking services to the Atomic Energy Organisation of Iran (AEOI) and the Novin Energy Company;
the Bank manages the accounts of certain officials of the Aerospace Industries Organisation and an Iranian Procurement Agent; and
the Bank facilitated the movement of millions of dollars for the Iranian nuclear programme.

The court held that the second, third, sixth and seventh reasons were too vague, and consequently infringed the Bank’s right to effective judicial protection. As a result, the second, third, sixth and seventh reasons were not considered adequate reasons and so could not be relied upon to justify the sanctions. The Council had therefore breached its obligation to state reasons and to disclose the evidence adduced against it.

Manifest error of assessment

The bank argued that the Council had made a manifest error because the reasons it relied on did not satisfy the conditions laid out in the EU Regulations for the imposition of restrictive measures. Given its findings above, the court only dealt with the first, fourth and fifth reasons. The court readily accepted the Bank’s argument that the first reason was based on a false factual premise, which is to say that Bank Mellat was not in fact a state owned entity. It also rejected the fourth reason, which was dependent on separate UN sanctions imposed against FEE on the grounds of its involvement in Iran’s nuclear programme, which the court dismissed as based on mere allegations (and, in any case, identical to reason seven which it had already dismissed). Finally, the court dismissed the fifth reason. The Council produced no evidence to support its claim that the Bank had supported the AEOI, and the Bank was able to demonstrate that it had taken sufficient action to cease supplying banking services to Novin once restrictive measures were imposed against it.

The court therefore held that the remaining reasons relied on by the Council, being the first, fourth and fifth reasons, were not sufficient to justify sanctions being imposed against Bank Mellat. Having found against the Council on the first and second pleas, the court did not deem it necessary to address the third (infringement of its right to property and of the principle of proportionality). The court therefore annulled the various legislative measures in so far as they applied to Bank Mellat.

Comment

The Bank Mellat decision is one of a number of similar cases currently before the European courts. Sina Bank and Bank Saderat have also recently been successful in challenging the sanctions regime imposed upon them by the European Council. In addition, according to Reuters, Bank Mellat are considering suing the EU for damages. The danger of a substantial damages award, and the reminder by the General Court that the Commission is bound by substantive European law when implementing sanctions (even as against a non-EU entity), suggest that the EU will be forced to be more selective in its approach to targeted financial and asset freezing sanctions. By contrast, in February, the court upheld EU sanctions against Melli Bank (another Iranian owned bank), accepting the Council’s designation and evidence in that case.

However, whilst Bank Mellat has been successful in having its name removed from Annex IX of Council Regulation 267/2012, the decision underlines the multilayered nature of international sanctions. Any sanctions implemented by an EU member state which do not derive their authority from the annulled European legislation will remain in force. Further, the decision does not have any impact on U.S. or other non-EU UN Member State sanctions regimes against Bank Mellat.

The case also shows the extent to which the advantage lies with the party challenging the Commission’s decision. The court made it clear that the onus is on the Council to prove that it had sufficient evidence on which to base its decision. Absent such evidence, the General Court is bound to overturn the Council’s decision. This is in direct contrast to the position vis-à-vis UN sanctions, where the burden of proof lies with the party challenging the UN’s decision. This may encourage parties who wish to challenge the imposition of global UN sanctions against them to choose to do so in the EU.

In a separate case (Bank Mellat v HM Treasury) which is due to be heard in March 2013 before the UK Supreme Court, the court will consider whether directions made by the Treasury under Schedule 7 of the Counter-Terrorism Act 2008 were in breach of, inter alia, the rules of natural justice, and/or Article 6 ECHR, and/or the procedural obligation in A1P1 ECHR. In that case, unlike the Bank Mellat case before the General Court in which the EU did not raise the issue, the court is likely to consider whether or not to accept classified information (which would not be made available to Bank Mellat) as evidence against the bank.