On February 18, 2016, the Fifth Chamber of the European Court of Justice (ECJ) rendered a judgment in the matter of Council of the European Union v Bank Mellat (Case C-176/13 P) that could pave the way for Bank Mellat to recover damages based on its designation for sanctions by EU and UK authorities, and could prompt other previously sanctioned Iranian banks to follow suit.
This matter concerns the European Council’s (Council) appeal to set aside the judgment of the Fourth Chamber of General Court (General Court) of the European Union issued on January 29, 2013 in Bank Mellat v Council (Case T‑496/10), whereby the General Court annulled certain sanctions against Bank Mellat.
Background to the Imposition of Sanctions on Bank Mellat
The Council (the EU institution representing the Member States) first introduced sanctions against Iran in February 2007 through its adoption of Common Position 2007/140/CFSP, and later through its promulgation of Council Regulation (EC) No 423/2007, which implemented UN Security Council Resolution 1737 (2006). Resolution 1737 imposed sanctions on persons involved in Iran’s proliferation-sensitive nuclear activities and the development of nuclear weapon delivery systems.
Under UN Security Council Resolution 1929 (2010), stricter measures were subsequently adopted, including a decision to freeze the funds of various financial entities. Annex I to the Resolution designated First East Export Bank plc (FEE) for asset freezing, setting out the following grounds for its designation: “[FEE] is owned or controlled by, or acts on behalf of, Bank Mellat. Over the last seven years, Bank Mellat has facilitated hundreds of millions of dollars in transactions for Iranian nuclear, missile, and defence entities.”
Thereafter, on July 26, 2010, the Council decided to sanction Bank Mellat by including it in Annex II to Council Decision 2010/413/CFSP, which, inter alia, froze the assets of entities presumed to be involved in Iran’s nuclear proliferation program. Bank Mellat was one of several Iranian banks to be included in Annex II, and its funds and economic resources were frozen thereafter. This decision was implemented by Council Implementing Regulation (EU) No. 668/2010 of July 26, 2010, which amended Annex V of Council Regulation No. 423/2007 to include Bank Mellat and the other new sanctions targets.
The Council’s reasoning for listing Bank Mellat are at point 4 of Part I.B of Annex II to Council Decision 2010/413/CFSP, which states that: “Bank Mellat is a State-owned Iranian bank. Bank Mellat engages in a pattern of conduct which supports and facilitates Iran’s nuclear and ballistic missile programmes. It has provided banking services to UN and EU listed entities or to entities acting on their behalf or at their direction, or to entities owned or controlled by them. It is the parent bank of [FEE] which is designated under UNSCR 1929 …”
On October 25, 2010, Council Regulation (EU) No. 961/2010 repealed Council Regulation No. 423/2007, broadening sanctions against Iran and continuing Bank Mellat’s designation in Annex VII thereto. On March 23, 2012, Council Regulation (EU) No. 267/2012 repealed Council Regulation (EU) No. 961/2010, which clarified and further broadened sanctions against Iran and continued Bank Mellat’s designation in Annex IX thereto.
Overview of the January 2013 Judgment
In October 2010, Bank Mellat lodged an appeal against its designation, requesting that its name be removed from the EU sanctions list on three pleas in law:
- (1) A claim of infringements of the Council’s obligation to state reasons for its actions, of Bank Mellat’s rights of defense, and of Bank Mellat’s right to effective judicial protection.
- (2) A claim of a manifest error of assessment regarding the adoption of restrictive measures against Bank Mellat.
- (3) A claim of an infringement of Bank Mellat’s right to property and of the principle of proportionality.
The General Court rendered its judgment on January 29, 2013, ruling that the EU should lift its sanctions against Bank Mellat because the EU had failed to provide sufficient evidence that Bank Mellat was involved in the Iranian nuclear proliferation program when the EU targeted it with sanctions in July 2010. Furthermore, the General Court noted that the Council had not verified the accuracy of the shareholding held by the State of Iran, and the fact that the State of Iran held shares in Bank Mellat did not imply, in itself, that Bank Mellat was facilitating nuclear proliferation.
The General Court noted that the Council had failed to present any evidence that Bank Mellat was providing illicit services to entities that were engaged in proliferation. When asked by the General Court to submit evidence to support its claims, the Council failed to do so. The Council in fact argued that the burden was on Bank Mellat to produce evidence that it was not involved in facilitating nuclear proliferation. This argument was dismissed by the General Court, which held that the burden of proof was upon the Council, and that the absence of evidence should not be held against Bank Mellat. In light of these findings, the General Court ordered the annulment of the measures put in place against Bank Mellat, and it did not go on to examine Bank Mellat’s third claim.
The Council appealed this decision in April 2013.
The ECJ’s Judgment of February 18, 2016
In the ECJ’s judgment of February 18, 2016 (which cannot be appealed), the ECJ dismissed the Council’s appeal, holding that the sanctions imposed on Bank Mellat in 2010 by the European Union under Council Decision 2010/413/CFSP were wrongly imposed and that the Council had made an “error of law”.
The ECJ found that there was no evidence to back up the Council’s contention that Bank Mellat was involved in Iran’s nuclear and ballistic missile programs because it was the parent company of FEE (which, as noted above, was sanctioned under the UN Security Council Resolution 1929). The ECJ stated that this was a “circular argument” raised by the Council and the mere reference to Bank Mellat within Resolution 1929 (2010) did not constitute sufficient justification for the designation of Bank Mellat by the EU.
The ECJ also rejected the Council’s contention that it could not provide evidence of Bank Mellat’s support for Iran’s nuclear activities because the evidence came from confidential sources whose safety could be compromised if they were identified. The ECJ noted that this was the first time the Council had relied upon this argument and it was therefore inadmissible at the appeal stage.
The ECJ ordered the Council to bear its own legal costs and to pay Bank Mellat’s costs in both sets of proceedings.
An ECJ press release of February 18, 2016 explains that “[s]ince all the measures concerning Bank Mellat have been annulled, its funds are deemed not to have been frozen between 26 July 2010 (date of first freezing measure) and 16 January 2016 (date on which the freeze was lifted).”
It is notable that this is the first decision to be rendered by the ECJ following the recent lifting of some of the EU’s sanctions against Iran under the Joint Comprehensive Plan of Action (JCPOA). As part of the JCPOA, the EU lifted sanctions against Bank Mellat on January 16, 2016 and Bank Mellat’s assets were unfrozen. And now the ECJ’s judgment means that Bank Mellat’s assets are deemed not to have been frozen between 2010 and January 2016.
This decision can be viewed as another significant legal success for an Iranian entity challenging the EU sanctions regime, and Bank Mellat’s lawyers have stated in recent news articles that Bank Mellat could consider suing the Council for losses it has suffered as a result of its wrongful designation by the EU. This seems likely to pave the way for other Iranian banks (who were the entities primarily affected by the EU’s sanctions and who have been the most prolific in their challenges against the Council) to seek damages claims against the Council.
Other litigants have begun to bring damages claims against the EU following successful efforts to achieve de-listing from sanctions lists. The General Court first upheld the possibility of damages for improper sanctions in Safa Nicu Sepahan Co. v. Council (Case T-384/11). In Safa Nicu Sepahan, the applicant was an Iranian company, which was included in the EU’s 2011 sanctions against Iran. The Court allowed part of Safa Nicu Sepahan’s damages claim, finding that the Council’s error had been sufficiently serious, had caused damaged to Safa Nicu Sepahan’s reputation and the annulment of the EU sanctions lifting was not enough to compensate it for the damage caused to its reputation. The Court awarded Safa Nicu Sepahan €50,000, plus default interest from the date of judgment until full payment of compensation.
And earlier this month, in the case of Jannatian v. Council (Case T-328/14), the General Court dismissed a claim for damages under the EU Iran sanctions, but held that damages arising from an asset freeze were in principle available if there were a sufficiently serious breach of EU law causing damage (similar to the Court’s findings in Safa Nicu Sepahan). In Mr. Jannatian’s case, the General Court found that he had not suffered damages from the asset freeze, as there was no evidence that he could not carry out bank transfers, and he had not claimed in time damage to reputation. The General Court also stated, for the first time, that it had no jurisdiction to rule on damages resulting from a travel ban, as opposed to an asset freeze, given that it was an act relating purely to EU Common Foreign and Security Policy (see paragraphs 30 and 31 of that judgment).
In sum, in cases like Safa Nicu Sepahan and Jannatian, the General Court has established the possibility of damages for improper sanctions, but has also established a high bar for award of significant damages. Thus, it remains rather uncertain whether significant damages decisions will join the numerous ECJ and General Court decisions overturning EU sanctions designations.
In this regard, Bank Mellat is currently awaiting a decision from the UK courts in relation to a $4 billion damages claim against Her Majesty’s Treasury, with a hearing on the matter scheduled for the fall of 2016. By way of background, Bank Mellat is suing the UK government for losses it has suffered after Bank Mellat succeeded in its challenge of a 2009 Treasury Order (under Schedule 7 of the Counter-Terrorism Act 2008), which prohibited UK financial institutions from have any commercial dealings with Bank Mellat. Bank Mellat was singled out by the 2009 Treasury Order due to its alleged links to Iran’s nuclear and ballistic missile programme, while subsequent instruments such as the Financial Restrictions (Iran) Order 2011 and the Financial Restrictions (Iran) Order 2012 applied to all Iranian banks. Bank Mellat’s claim included an argument that the UK designation breached its rights under Article 1 of the First Protocol to the European Convention on Human Rights, and hence was unlawful under Section 6(1) of the Human Rights Act 1998, thereby allowing a damages claim under Section 8 of the Act.
The ECJ’s judgment is unlikely to have any direct implications on Bank Mellat’s suit against the UK government, because that suit does not relate to any EU designations; it dealt merely with the UK’s designation of Bank Mellat. Furthermore, since the UK Supreme Court quashed the Treasury’s sanctions against Bank Mellat in June 2013, the UK courts’ focus is likely to be on the damages sustained against Bank Mellat within the EU itself. However, if Bank Mellat does sue the Council, the EU courts might take into account any damages decision rendered by the UK courts.