Regulators continue to dole out sanctions for alleged wrongdoings with alarming regularity, but what about cases where the authorities might be in the wrong?

When governments and the supranational bodies of which they are members attempt to use the mechanism of “sanctions” to drive foreign banks – including private banks such as the Iranian Sina Bank – out of business, they claim to be upholding the law. Few areas of law enforcement, however, are more beset by governmental lawlessness and mendacity.

One such case, recently resolved in the bank's favour, is that of Bank Saderat. This bank is partly, but not mainly, owned by the Iranian government (although the EU's sanctions people wrongly claimed that it was 94 per cent government-owned) and has private banking facilities. On 26 July the European Union included it in Annex II to Council Decision 2010/413/CFSP which, among other things, froze the assets of entities presumed to be involved in Iran’s nuclear proliferation programme. Bank Saderat was one of several Iranian banks thus treated. It has recently won its appeal against this action in the EU's General Court in Luxembourg.

The case centres around the actions of a body called the Council of the European Union, which has a hand in the EU legislative process. It claimed in 2010 that the Iranian bank provided financial services for entities that “procured” (the judgment does not say what) on behalf of Iran’s nuclear and ballistic missile programmes, including entities “designated” (the judgment never says what as) under United Nations Security Council Resolution 1737. It claimed that it was handling payments and letters of credit for UN-blacklisted entities (Defence Industries Organisation and Iran Electronics Industries) as recently as March 2009. The reasons for its interest in the EU sanctioning process are not mentioned in the judgment.

The right to see files

Somebody – the judgment does not say who but one imagines the bank – asked the council for the bank's file. The council went through some odd twists and turns in its attempts to avoid handing the file over. One of these manoeuvres consisted of asking some EU countries to give it permission to give the bank some information, a seemingly unnecessary and irrelevant “wild goose chase”. The court, at para 77, found this unacceptable: “Where the council intends to rely on information submitted by a member-state in order to adopt restrictive measures affecting an entity, it is obliged to ensure, before the adoption of those measures, that the entity concerned can be notified of the information in question in good time so that it is able effectively to make known its point of view.”

Reasons for sanctions

The council was also remiss in stating the reasons for wanting sanctions against Saderat. The court found that one of its reasons was obscure, although the wording of the judgment implies (but does not overtly state) that if it had stated that that reason was dependent on all the other reasons, that would have done in the absence of a legal challenge (para 70).

This case, however, was indeed a legal challenge by the bank, so the court had to evaluate the council's reasons for their validity. The court added at para 108: “the fact that part of the applicant’s share capital is owned by the Iranian State does not imply, by itself, that the applicant is providing support to nuclear proliferation.” This removed another of the council's reasons for a sanction listing.

Other reasons tumbled for lack of evidence. The council said that the bank was servicing Mesbah Energy Company, which it claimed was “nuclear-related”. The bank claimed at the time that it never had provided such services and the court chided the council for producing no evidence otherwise (para 109). It did the same for the council's unfounded allegation (110) that the bank helped Sanam Industrial Group after restrictive measures had been imposed on that business.

The bank admitted (at para 111) that it handled letters of credit for  Defence Industries Organisation and Iran Electronics Industries, but jibbed at the suggestion that its services were anything more than ordinary banking services that had nothing to do with the proliferation of nuclear weapons. The court asked the council to come up with some evidence to refute this, but instead the council merely asserted that it was for Bank Saderat to prove its innocence here. This was an untruth.

At para 115 the court stated: “As is clear from the case-law...it is not for the entity which is the subject of the restrictive measures, but for the council, to produce, in the event of challenge, the evidence and information.” The court wondered where those famous letters of credit that the council knew about could have got to.

Human rights, bureaucratic wrongs

For the benefit of lawyers who might be reading this with a view to acting for other sanctioned banks, and there are plenty of them, it is worth noting that Saderat also entered a claim of an infringement of its right to property and of the principle of proportionality. The court made no mention of the former point, although it is a point that other banks have raised in their appeals against sanctions and seems to emanate from Article 1 of Protocol I to the European Convention on Human Rights, corporations enjoying the status of humans for this purpose. On the latter point, which appeals to a concept in European as well as common law, the court thought that the EU organs were wrong rather than acting “out of proportion”. The court, lastly, thought that the EU authorities' argument that the bank could “not rely on fundamental rights protection and guarantees...as an emanation of the Iranian State” was something of a try-on. Indeed, the case-law that the council craftily cited – Tay Za v Council [2010] ECR II‑1965 – had been overturned on appeal long before and was “no longer part of the legal order of the European Union”.

Whose law is it anyway?

The tardiness with which the EU's officials have obeyed the ruling speaks volumes about their respect for their own laws. The February judgment says: “The council [one of the EU's organs] has a period of two months, extended on account of distance by 10 days, as from the notification of this judgment, to remedy the infringements established by adopting, if appropriate, new restrictive measures with respect to the applicant.” On 19 April, the last possible date on which sanctions should have applied, not only were there no new restrictions; the old ones were still in place.

Pieter Bekker, a lawyer at the Brussels office of Steptoe & Johnson, told WealthBriefing: “The delay is remarkable. The wheels of the EU bureaucracy don't spin too fast. It's not usual that the decision is implemented in days. They'd study and review the ruling before deciding what to do – a delay of a couple of months is usual. They can't have appealed because an appeal would have taken longer than the four-to-five months.”

The wheels of EU justice do indeed turn very slowly; the February judgment states that Bank Saderat (Iran) “brought the present action” on 7 October 2010. The bank had to wait more than two-and-a-half years for a resolution to its troubles.

A private bank is freed

This decision follows a similar ruling by the General Court on 11 December 2012, which removed Sina Bank (an Iranian private bank) from the EU’s sanctions list. It was sanctioned on the same date as Bank Saderat by means of a “council regulation,” a “council decision” and a “council implementing regulation” which led to the freezing of its funds. The council, in this case, is the same EU organ as the one that persecuted Bank Saderat. One of the sanction-related documents contained the following laconic justification for it: “This bank is closely linked to the interests of the ‘Daftar’ (Leader’s office: administration of around 500 officers). It thus contributes to the financing of the regime’s special interests.” The Daftar is the office of the leader of the revolution. The Mostaz’afan Foundation of the Islamic Republic of Iran was also mentioned. The council wanted to assert that the leader indirectly controlled the bank, through the intermediary of the foundation. The court, at paragraph 62, was not impressed.

Again, an atmosphere of official disorganisation and delay pervaded the proceedings. One letter that the council sent the bank was written on 28 October 2010 and did not arrive until 5 December (see para 10). No letter of 2010 was precise enough to let the bank know the complaints against it. It denied all involvement in nuclear proliferation. It, too, asked for access to its file but did not get it. It started court proceedings in January 2011. In the age-old tradition of Roman law, written assertions, replies and rejoinders flew back and forth until the court, in its own words, “opened the oral procedure.”

After much tortuous wrangling involving case-law, the court allowed the bank's action to go forward (para 49) on the understanding that the only thing at issue was its inclusion on the EU sanctions lists. It rejected the bank's (twofold) pleas that its inclusion on the list was itself illegal but allowed a motion for annulment.

The court found, in paragraphs 71-2, that “the grounds [for sanctions] communicated to the applicant...are not sufficiently specific and concrete...the concept of being 'linked to the interests of' a third party is, in itself, vague and imprecise. The council has not mentioned any precise and concrete element attesting to any control exercised by the leader's office over the applicant.” It noted that the “leader's office” did not appear on any sanctions list at issue.

Grounds for sanctions

The first set of reasons the council gave for sanctioning the bank revolved around the Daftar and the Foundation. The bank admitted that the foundation owned and still owned part of it and that the leader controlled the foundation. This, however, did not feature in the council's laconic justification. The council mentioned only the leader's office and not the leader, and therefore any mention of a direct link between the leader himself and the foundation could only form the basis of a new accusation and it was therefore making its point, according to paragraph 74, “out of time.”

Secondly, the court found that the council did not provide any specific and concrete evidence that the bank financed the spread of nuclear weapons in any way. It did not, for example, bother to describe the nature, amount or destination of the supposed financing. On the basis of the council's infringement of its duty to state reasons, the court annulled the sanctions without looking at the bank's other pleas (para 83). It ordered the council to bear two-thirds of the costs it incurred and two-thirds of the costs that the bank incurred; it ordered the bank to pay one-third of the same. It resisted a “winner takes all” award because neither party succeeded in all its claims.

The council that had “sanctioned” the bank had made the error of not getting its story straight, if it ever had one to start with. This appears to be a recurring theme in the rash of successful appeals that Iranian banks are making.

Another such appeal came in January from Bank Mellat. On 29 January, a European Union court in Luxembourg annulled EU sanctions that had been in place against Bank Mellat since 2010 on the spurious grounds that the bank had supported Iran's nuclear and missile programmes. The court's reason was that the bank's basic rights had been flouted and that no evidence supported the grounds for the sanctions. The EU's authorities are appealing against the decision in a higher EU court; meanwhile, Bank Mellat intends to sue for damages.

An overweening zeal for secrecy

On the heels of this decision, a related action then took place in the Supreme Court of the UK on 19-21 March, during which the court – in line with the prime minister's well-publicised fondness for secret trials – decided to hold a closed hearing for the first time. In June, during that case's second leg (the first being convened to establish the legality of secret evidence and secret verdicts), the Supreme Court ruled that HM Government's sanctions against the bank had been unlawful.

Once again, the sanctioned bank won. This case, however, turned on some truly arcane reasoning. The British part of the sanction was conducted under Schedule 7 of the Counter-Terrorism Act 2008, which itself was activated by s62. HM Treasury can use this procedure to ask Parliament to issue a restrictive order in 25 days but only if three conditions are satisfied:

·        The Financial Action Task Force must allow it;

·        HM Treasury must reasonably believe that there is a risk that money-laundering is taking place in the country; and

·        It must also reasonably believe that that country's acquisition of nuclear weapons would embody a significant risk to the UK's national interests.

The second hurdle proved problematic to the Treasury's case. The story it came out with when the case went to appeal in the High Court kept changing and was not consistent with its first reason for sanctioning the bank. The entitlement of Bank Mellat to be allowed to make representations before Parliament made the order was also, moreover, held to be vital under the common-law doctrine of fairness. As in other cases, the sanctioning authority's refusal to communicate properly with its quarry was a factor. As in other cases, an overweening official zeal for secrecy rebounded on the authorities.

Another common-law doctrine – that of proportionality, which was only a peripheral issue in the Saderat judgment – was central to this case. At the time of Bank Mellat's sanctioning, there were many other Iranian banks operating in the City of London. The Supreme Court therefore concluded that it was disproportionate for the Treasury to go after Bank Mellat in order to achieve a statutory objective that other banks were, to its knowledge, satisfying merely by having good sanction and anti-terrorist controls. (Bank Mellat had, in any case, good due diligence controls according to the trial judge.) Anybody who wanted to spread nuclear weapons could merely switch to using the banks that were not being sanctioned. The dissenting speech of Lord Reid is a good source of factual information about proportionality and might be of help in future cases.

An upward trend

Western governments used to justify invasions, sanctions and other types of aggression by reference to secret information, gleaned from unknown sources, that they did not feel at ease divulging to their taxpayers. The turn of events in the run-up to the Iraq war killed all public trust in such talk stone dead. These judicial results suggest that any attempt to revive such arguments might lead to further embarrassment. Cases such as those of Bank Saderat, Bank Sari and Bank Mellat are on the increase.