General Court rulings on Iranian Banks threaten to torpedo EU’s foreign policy ambitions

In a series of recent judgments, the Fourth Chamber of the General Court of the European Union (“the General Court”) annulled the designation of some of the largest privately held commercial Iranian banks on the EU’s sanctions list. On 11 December 2012, sanctions against Sina Bank (Case T-15/11 Sina Bank v. Council) were annulled. Similarly, sanctions against Bank Mellat (Case T-496/10 Bank Mellat v. Council) were struck down on 29 January 2013. On 5 February, sanctions targeting Bank Saderat (Case T-494/10 Bank Saderat Iran v. Council) met the same fate, further illustrating the General Court’s willingness to annul sanctions if their adoption is not based on sufficient evidence and if the entity concerned is not given ample time to review and respond to the evidence against it.

The EU has significantly tightened its sanctions regime against Iran over the last two years in order to end the proliferation of sensitive nuclear activities and to halt the program the Western world fears is aimed at creating a nuclear bomb. To date, some 30 cases concerning EU sanctions against Iran are still pending before the General Court which include applications by the Central Bank of Iran and the National Iranian Oil Company.

Below, I discuss the Bank Mallat and Bank Saderat judgments before reflecting on the potential implications – if any – of the recent Opinion in Kadi II and the possible ramifications of the cases on the EU’s foreign policy agenda.

A later post proposes to discuss the Melli Bank judgment of 20 February 2013 (T-492/10 Melli Bank v. Council), which addressed the separate issue of automatic listing of subsidiaries of Iranian banks on the EU sanctions list.

Background

On 26 July 2010, the Council of the European Union (“the Council”) imposed sanctions on a number of Iranian banks, listing them in Annex II of Council Decision 2010/413/CFSP. The sanctions included, inter alia, the freezing of assets and economic resources of entities presumed to be linked to Iran’s nuclear proliferation program. Bank Saderat and Bank Mellat were two of several listed banks and their funds and assets were frozen across the EU.

In Decision 2010/413, the Council stated that “Bank Mellat is a state-owned Iranian bank [that] engages in a pattern of conduct which supports and facilitates Iran’s nuclear and ballistic missile programmes. “

As for Bank Saderat, the Council got a little bit more specific and held that “[it]… is an Iranian state-owned bank (94 %- owned by IRN government) [and] has provided financial services for entities procuring on behalf of Iran’s nuclear and ballistic missile programmes, including […] Iran Electronics [and] Mesbah Energy Company.”

In October 2010, both banks appealed against the Decision, arguing that the Council had not advanced any evidence in support of its claim. The banks thus argued that their fundamental rights of defence and their right to effective judicial protection were breached and that the Council violated its obligation to give reasons for their designation. Secondly, they claimed that the Council had committed a manifest error of assessment as regards the adoption of restrictive measures against them. Thirdly, the banks argued that the designation was an infringement of their right to property and of the principle of proportionality.

 The Judgments

In both cases, the Council argued that the banks were emanations of the Iranian state and therefore not entitled to rely on fundamental rights protection and safeguards under EU law. According to the Council, a “state is the guarantor of respect for fundamental rights in its territory but cannot qualify for such rights” (Bank Saderat para.37, Bank Mellat para.39).

The General Court firmly rejected this argument. It held that EU law contains no rule preventing legal persons, even if they were emanations of a non-Member state (which was not proven in this case), from relying on fundamental rights protection and guarantees. Moreover, the General Court held that: “the fact that a State is the guarantor of respect for fundamental rights in its own territory is of no relevance as regards the extent of the rights to which legal persons which are emanations of that same State may be entitled […]” (Bank Saderat para.38; Bank Mellat para.40).

1. Infringement of the obligation to state reasons, the banks’ rights of defence and their right to effective judicial protection

Turning to the substance of the case, the General Court held that the obligation to state reasons for an act adversely affecting a person constitutes an essential principle of EU law and may only be derogated from for compelling reasons touching upon the security of the Union or its Members. The Council is thus under an obligation to disclose the considerations which led to the adoption of the sanctions and the considerations must be sufficiently detailed and clear. Additionally, the Council must notify the designee in good time, so that he has ample time to review the Council’s file and to make known its own point of view

2. Manifest error of assessment in relation to the adoption of restrictive measures against the applicant

The banks also claimed that the reasoning for designation provided by the Council was not substantiated by evidence and, consequently, the Council made a manifest error of assessment by putting the two banks on the sanctions list.

The General Court largely agreed with this.

First, in the Bank Saderat case, the General Court established that the Council had acted on a mistaken factual premise by asserting that the bank was 94% held by the Iranian state, when in fact the state was only a minority shareholder.

Second, the General Court held in both cases that the fact that the Iranian state holds shares in the banks did not imply, in itself, that they were facilitating nuclear proliferation. Furthermore, the Council did not present any evidence that the banks were providing illicit services to entities that were engaged in proliferation.

Third, the General Court had asked the Council to submit evidence to support its claims, but the Council failed to do so. On the contrary, the Council argued that the burden was on the bank to produce evidence that it was not involved in facilitating nuclear proliferation. The General Court swiftly dismissed this argument: the burden of proof was upon the Council and the absence of evidence should not be held against the banks.

In the light of the foregoing, the General Court decided in both judgments that the sanctions had to be partially annulled, and that there was no need to further examine the banks’ claim concerning an infringement of the principle of proportionality and/or of their right to property.

The judgments raise a number of interesting issues. First, in both cases the General Court referred to the role of diplomatic cables (read “Wikileaks”) and the suggestion that some Member States, in particular the UK, were subject to American pressure to ensure the adoption of restrictive measures against Iran. The General Court, however, firmly rejected the banks’ allegation that this cast doubt on the lawfulness of the measures and of the procedure for their adoption. It held that the fact that Member States might be subject to diplomatic pressure – even if proven – did not imply, in itself, that such pressure had any effect on contested measures.

Second, the General Court confirmed that if the Council is going to rely on Member States’ information as evidence for including entities on EU sanctions lists, it is obliged to conduct its own assessment of the “relevance and validity” of the evidence. The incorrect statement in the Council Decision concerning the extent of the Iranian State’s holding in Bank Saderat indicated that no such checking took place.

Finally, the General Court’s judgments show that the Council does not have unfettered discretion to designate undertakings and persons on the sanctions list without providing sufficient evidence to support its claim and without giving the designatee ample chance to exercise its right to self defence.

Interestingly, neither the Council nor the Commission invoked confidentiality reasons for not presenting evidence against the banks to the General Court or the applicants. Rather, the General Court notes that the Council simply did not put forward any evidence even though the General Court requested the Council to do so. The General Court did thus not get a chance to rule on the legality of relying on classified information or how the Council could base its decisions on such information without infringing the defendant’s rights of defence.

Opinion in Kadi II

It remains to be seen whether Advocate General Bot’s recent Opinion in the Kadi II case (C-584/10 P Commission v. Kadi) – that is to say, should the Court of Justice follow his Opinion – could have any impact on the General Court’s jurisprudence concerning the Iran sanctions regime:

In a nutshell: the relevant jurisprudence concerning the applicable standard of review of intelligence sources and analysis was developed by the General Court in a series of judgments concerning the freezing of assets of the People’s Mojahedin Organization of Iran (“PMOI”) in connection with the EU’s fight against terrorism. (The judgments can be found here, here and here. A more comprehensive overview over the legal aspects of the EU’s counter-terrorism regime can be found here.) The General Court struck down the sanctions against PMOI in all three cases, because they were adopted in breach of PMOI’s rights of defence (see here for further information).

At this stage, it is important to note that the EU runs two different sanctions regimes: autonomous EU sanctions (e.g. against the Iranian banks and PMOI) and sanctions implementing UN lists of terrorist suspects issued by the UN Sanctions Committee (e.g. against Al-Quaeda affiliates and other terrorist outfits). The latter became infamous in EU law circles through the abundant discussion following the Court of Justice’s judgment in Kadi I.

In the judgment in Kadi II of 30 September 2010, the General Court extended the above-discussed PMOI standard of review for autonomous EU sanctions cases to UN sanctions cases. The General Court thus applied the same standard of review to both sanctions regimes alike.

In his Opinion in Kadi II the Advocate General, however, found that the General Court erred in applying the PMOI standard to the Kadi II proceedings. First, he found the PMOI standard of review was too strict and that the: “review of the internal lawfulness of the contested EU act should be limited to checking for manifest errors of assessment” (Opinion para.90).

If the Court of Justice were to follow this assessment, might the Iran sanctions jurisprudence also fall? Perhaps not. The AG carefully distinguished between the nature of the two different sanctions regimes. He thus argued that the PMOI standard of review should not apply in the context of the UN sanctions regime, but left the question open with regard tot he autonomous EU sanctions.

Nevertheless, he took the opportunity to elaborate on the PMOI standard of review and raised the question as to whether intelligence analyses and sources should be subject to the EU courts at all and “whether, in a system based largely on the confidence which the EU institutions place in the evaluation conducted by the competent national authorities of the seriousness of the evidence or clues to support a freezing measure, an intensive review of that evidence by the EU judicature is in fact appropriate” (Opinion para. 66).

Bank Saderat and Bank Mellat have not been appealed and the Court of Justice has not yet been asked directly to rule upon the intensity of the PMOI standard of review – thus, it remains to be seen how the Opinion in Kadi II will influence the Court of Justice’s future view on this issue. Will the Court of Justice adopt a “uniform” standard of review applicable to all sanctions cases in its judgment in Kadi II or will it follow the AG in varying the standard of review depending on the origin of the sanctions?

 Meanwhile in Kazakhstan…

The rulings against the three commercial Iranian banks came just weeks before the stalled negotiations between the P5 plus Germany and Iran on its nuclear program resumed in Kazahstan in February 2013, and surely did not go unnoticed by the Ayatollahs in Teheran.

Reuters reported that EU diplomats fear that the rulings could undermine the sanctions regime and that they face the challenge of providing sufficient justification while not compromising intelligence sources when drafting sanctions lists.

Thus, it remains to be seen, how Luxembourg will go about to effectively strike a balance between political interests to curb Iran’s nuclear ambitions and the individual rights of the sanctioned entities in the cases to come.

But regardless of the rulings, the EU will be utterly careful not to disclose or upset their intelligence sources. Without an EU-lead spy agency, Brussels relies fully on Member States’ support to obtain any such information. Opening up its information and sources to the public would probably dry them up for good.

But the sensitive issue of using intelligence as evidence in court has not only caused severe judicial headache in Luxembourg: On 21 March, the UK Supreme Court took the highly controversial decision and went into secret session for the first time ever to hear sensitive intelligence about Bank Mellat of Iran. If this practice will also find hold in the proceedings in Luxembourg remains in doubt (cf. Article 31, Statute of the Court of Justice), but the question as to how to deal with intelligence in court will soon have to be discussed very openly.