KEY POINTS Feature Targeted sanctions are only lawful if they comply with the “fundamental principles” of European law, and are subject to judicial review by the European Court. Some Iranian banks have been successful in challenging their designations in the European Courts, on the basis that the Council’s reasons for listing them are too vague and unsupported by evidence. Th e European Council has recently imposed more far-reaching and less “targeted” sanctions on ’s fi nancial sector. A number of important issues are likely to arise in the numerous applications and appeals now pending before the European Courts.

Authors Maya Lester and Fred Hobson Targeted sanctions and sanctions targeted: Iranian banks in the European Court

TARGETED SANCTIONS AND SANCTIONS TARGETED The (EU) has imposed restrictive measures on the Iranian banking above €10,000 to and from an Iranian sector, as part of its sanctions regime directed at Iran’s nuclear programme. A person or entity must be subject to number of Iranian banks have brought challenges in the General Court of the EU to notifi cation and authorisation procedures. their designation in European targeted sanctions measures. The European Council has Th e Regulation also placed EU banks lodged appeals against those judgments and imposed more far-reaching and less under reporting obligations in respect of “targeted” sanctions on Iran’s fi nancial sector. This article summarises the scope of Iran-related transactions, and prevented EU ’s banking sector, analyses the European Court’s approach to them from establishing a correspondent sanctions challenges, and identifi es the issues that are likely to arise in the future. banking relationship with an Iranian bank. Th ese measures have become more far- reaching. In December 2012, Regulation EUROPEAN UNION SANCTIONS funds or economic resources from being 1263/2012 imposed a general prohibition AGAINST THE IRANIAN BANKING made available to them. Th e European on the transfer of funds between EU SECTOR Council has since then added to the list of banks and Iranian and fi nancial Th e United Nations Security Council designated entities, banks and individuals. institutions (including subsidiaries and ■has imposed sanctions on Iran since Iranian banks (along with other entities banks controlled by persons or entities 2008. It has called on UN member states and individuals) may be added to the domiciled in Iran). In principle, there are to “exercise vigilance” over the activities sanctions list if they have been “identifi ed” exceptions to this prohibition (for example, of Iranian banks operating in their by the Council as being “engaged in, for personal remittances and transfers territories, and has required its member directly associated with or providing regarding healthcare or foodstuff s) that are states to impose asset freezes on Bank support for” Iran’s nuclear proliferation subject to notifi cation and authorisation Sepha and East Export Bank. activities or if they are “owned or obligations depending on the size of Th e European Union’s sanctions controlled by” an entity in that category. the transfer. For example, a healthcare- against Iran go further than the UN. Th e Th ere are now approximately 15 related transfer above €10,000 requires EU’s sanctions programmes consist of a Iranian banks subject to asset freezing notifi cation to the competent authority number of legal instruments (Decisions measures as a result of EU listings, plus of the member state and a transfer above and Implementing Regulations that are their subsidiaries. Th ese are principally €100,000 requires prior authorisation. directly applicable in member states) commercial banks, and banks in which Th ese general prohibitions bring EU that impose asset freezes and travel bans the Council considers the Iranian State sanctions closer to the US sanctions throughout the EU, and more general has a shareholding (eg Bank Saderat and regime, which imposes a prohibition on restrictions on certain types of trade and ). In January 2012 the Council transactions by US banks (and other US transactions. Th e objective of the EU’s designated the of Iran. Th e persons), and non-US banks owned or sanctions against Iran is to apply pressure Council may now add entities simply if controlled by US entities, with Iranian on the Iranian Government to end its they provide “support” to the Government fi nancial institutions. Certain banks nuclear proliferation and ballistic missiles of Iran. (including Bank Saderat and Bank Melli programme. In addition to these “targeted” Iran) have been designated as “Specially In June 2008, the European Council sanctions measures, EU sanctions also Designated Nationals”, and any non US (the institution responsible for EU impose fi nancial restrictions that are of company that provides signifi cant fi nancial sanctions) froze all funds and economic general application rather than targeted or other support for the benefi t of those resources owned, held or controlled by a against identifi ed banks. In October entities may itself be made subject to US list of designated Iranian entities within 2010, Regulation 961/2010 imposed a sanctions, which purport to have extra- the territory of the EU, and prevented requirement that all transfers of funds territorial eff ect outside the US.

278 May 2013 Butterworths Journal of International Banking and Financial Law TARGETED SANCTIONS AND SANCTIONS TARGETED SANCTIONS AND SANCTIONS TARGETED Feature

CHALLENGING SANCTIONS company is listed, because of the im- reason for each designation in the annex. DESIGNATIONS IN THE EUROPEAN portance of maintaining the “surprise Some applicants have won and some have COURTS effect” and avoiding asset dissipation, lost their cases in Luxembourg, depending Individuals and entities listed in EU but applies to subsequent decisions to principally on the quality of the Council’s restrictive measures are entitled to re-list, where there is no need for a sur- reasons and evidence. challenge their designation in the European prise because assets are already frozen. Courts; the General Court of the European Third, the Council must respect a tar- APPLICATION OF PRINCIPLES IN Union (which used to be called the get’s “rights of defence”, which means IRANIAN BANKING CASES Court of First Instance), with an appeal his/her/its right to know the case In part because of the signifi cant expansion to the European Court of Justice. Th ese against them and to have an opportuni- of the EU’s sanctions programmes, in “applications for annulment” are European ty to comment on it. particular against Iran, there have been judicial review proceedings; the Court Fourth, the Council must not com- a large number of challenges by Iranian will review the inclusion of an individual mit a “manifest error of assessment” banks, entities, and individuals, and a or company in a sanctions measure, and in deciding whether the evidence is number are currently pending before the annul it (in so far as the measure applies to sufficient to justify listing an individ- Court. that individual or company) if its inclusion ual or company and whether he/she/it Many cases brought on behalf of Iranian breaches European law. falls within the listing criteria relevant companies have so far been successful. Th e European Courts developed the to the sanctions regime in question Applying the principles summarised relevant principles in a series of cases (whether they can be said to be “provid- above, the General Court has annulled concerning the procedural fairness of ing support for nuclear proliferation”, the designations HTTS Hanseatic Trade designations in counter-terrorist sanctions for example). In more recent cases, the Trust & Shipping, Fulmen, Manufacturing measures; in Kadi (a challenge to EU Court has said that the Council must Support & Procurement Kala Naft Co, CF measures implementing a UN Security check the relevance and validity of the Sharp Shipping Agencies Pte Ltd, Oil Turbo Council Resolution that included Mr Kadi evidence. Compressor, Qualitest FZE and Turbo on the grounds of alleged connections to Fifth, restrictive measures must not Compressor Manufacturer. In those cases, Al Qaida) and in three cases concerning be an unjustified or disproportionate the Court found the reasons given to be too the designation of the People’s Mojehadin restriction on the fundamental rights vague to justify the Council’s conclusion of Iran, also in the EU’s counter-terrorist of an individual or entity, including that the entities were supporting Iran’s sanctions measures. the right to respect for property and proliferation programme (eg an assertion Th e Court’s starting point in these cases reputation. that the entity is “involved in procurement” is that targeted sanctions are decisions Sixth, applicants have the right to of prohibited goods, is a “front company”, made by European institutions that impose “effective judicial protection”. Judicial or “acts on support of” a company, with no restrictive measures on individuals and review of designations in sanctions explanation of how or in what respects), companies. Th ey are therefore only lawful measures extends to the matters of fact that the allegations were factually incorrect if they comply with the “fundamental and law relied on by the Council, and (and the Council had not checked the principles” of European law, and are subject to the evidence and information on correct position), or because the applicant to judicial review by the European Court. which a listing decision is based. had refuted the Council’s reasons and the Th is means the following: Council had not provided any evidence to First, the Council must give adequate Th e Court found in favour of the support its position. “reasons” for designating an individual People’s Mojehadin of Iran and Kadi, since A number of banks have brought similar or company at the time of designation; both were initially designated in counter- challenges. Some have won, some have lost. ie reasons that are not “excessively terrorist sanctions measures without being Examples of banks whose de- vague” but which permit the person or given any reasons, evidence, or opportunity designation cases have not succeeded are as entity to understand why he, she or it for comment. Both were subsequently re- follows. has been included. listed, and both challenged their re-listings Th e Court upheld the designation of Second, the Council must not rely on in applications for annulment (PMOI (fi nding that the grounds unsupported allegations against an in- eventually won its case, and Kadi II is still on which it was alleged to have facilitated dividual or company, but must provide pending before the ECJ, although both have purchases of goods for Iran’s nuclear evidence (including any incriminating now been de-listed by the EU in any event programme were suffi ciently specifi c) and evidence) in support of a designation. and, in Mr Kadi’s case by the UN). its UK subsidiary Melli Bank Plc. Th e This may not be a requirement for the Since those early cases (ie since 2008), Court upheld the Council’s approach of first occasion on which a person or the Council always gives some kind of presuming that wholly owned subsidiaries

Butterworths Journal of International Banking and Financial Law May 2013 279 Biog box Feature Maya Lester is a barrister at Brick Court Chambers specialising in European law, public law, and competition law. She has a particular expertise in European sanctions, and has acted in a large number of sanctions cases in the English and European Courts. She co-writes a blog on European sanctions law at www.europeansanctions.com with updates on cases, comments and amendments to sanctions regimes. Email: [email protected] Fred Hobson is a barrister at Brick Court Chambers with a wide-ranging practice focused on commercial and banking law. Email: [email protected]

of designated Iranian companies may be ANALYSIS Advocate General Bot has recently subject to pressure to circumvent sanctions A number of important issues are likely expressed the view in his opinion in on their parent, although in the case of to arise in the numerous applications and Kadi II that, at least as regards EU less than wholly owned subsidiaries, the appeals now pending before the European sanctions that implement designations Council must perform a case by case Courts. in United Nations Security Coun- analysis of whether that is so. First, the European Court will have cil resolutions, the Court of Justice A number of Iranian banks have to consider what approach to apply to should apply a less intrusive review of recently won their cases in the Fourth challenges to the less “targeted” form the “merits” of a designation decision Chamber of the General Court (the of sanctions increasingly imposed (as opposed to its procedural fairness). Chamber to which most Iran sanctions by the Council in respect of Iranian Fourth, remedies and procedural is- cases have so far been assigned) . Th e banks. Bank Mellat has brought an ap- sues are the subject of ongoing debate. TARGETED SANCTIONS AND SANCTIONS TARGETED following are three examples. plication to annul the comprehensive Applications for damages against the In ’s case, the Court held prohibition on the transfer of funds EU institutions for wrongful list- that the assertion that the bank was between EU banks and Iranian banks ings are pending. Where applicants “closely linked to the ” of the introduced in December 2012. The are de-listed by the Council before Iranian leadership was too vague and has challenged the Court gives judgment on their imprecise, and that the Council had failed the Council’s ability to list banks on annulment applications, the Court’s to specify the means by which the bank the grounds that they provide support approach of finding that they have was alleged to provide support for nuclear to the Government of Iran, and the no continuing in having their proliferation. proportionality of listing a country’s designations annulled may change In Bank Mellat, the Court held that Central Bank. (following an opinion by Advocate some of the Council’s reasons were again Second, the Court will have to con- General Bot in Abdulrahim). too vague (eg that the bank had “engaged sider the extent of the Council’s duty in a pattern of conduct which supported to provide evidence and to verify its Th ese cases raise diffi cult issues, and facilitated Iran’s nuclear programme”). relevance and accuracy. The Council concerning as they do both the rights Interestingly, the Court also held that the has said that some evidence it receives of defence of the sanction’s targets, the Council had failed to assess the accuracy from member states and from non-EU important foreign policy goals of the of evidence justifying its assertion that the countries, in particular concerning EU, and questions about the true impact bank is owned by the Iranian State; the Iranian financial institutions, is con- and eff ect of sanctions against Iran, its Court held that the Council had acted on fidential or national security sensitive Government and its people. a mistaken factual premise. Th e Bank had and cannot be disclosed. The Court Th e Iranian banking cases analysed disputed the accuracy of a number of the will have to consider how to approach above have attracted some controversy; Council’s reasons, and the Council had not the issue of classified evidence. If the the Court has been criticised by some responded. Court were to diverge from its current (including by some in the US Government) Th e Court took a similar approach in approach that a designation may not for annulling politically sensitive . Th e Council alleged be justified on the basis of evidence designations of Iranian banks and for that the bank had processed letters of that the Council will not disclose, second guessing the Council’s judgment credit on behalf of two entities that were there may be significant implications as regards discretionary matters of foreign the subject of restrictive measures. Th e for rights of defence. policy. Court held that one of the reasons given Third, the meaning of “effective It remains crucial that the Court should was too vague (although others were not), judicial review” and the standard uphold the rule of law and due process in the Council had produced no evidence of review. The Court of Justice will the face of a designation process that is not from which to conclude that the relevant have to decide whether the General transparent, and which has far reaching transactions were linked to nuclear Court’s approach to judicial review eff ects on the businesses, reputations and proliferation, and had not checked the is correct, and whether to apply the lives of designated entities. Th e Court has relevance and validity of the evidence it same principles and standard of review refused to uphold designations where the relied on in response to evidence from to sanctions regimes with different bank in question has not been shown the the Bank challenging the accuracy of the purposes (non-proliferation sanctions, case against it or given an opportunity to Council’s reasons. counter-terrorist sanctions, regime respond. In its sanctions jurisprudence, the Th e Council has appealed to the ECJ sanctions) and to sanctions that Luxembourg Court protects fundamental against these judgments. Th e banks remain derive from the United Nations or are rights just as robustly as the European listed while these appeals are pending. imposed “autonomously” by the EU. Court of Human Rights in Strasbourg. 

280 May 2013 Butterworths Journal of International Banking and Financial Law