In September 2013, the EU General Court annulled a series of asset freeze sanctions imposed by the Council of the European Union on a number of Iranian entities and one person. The General Court requires the EU regulators to adduce stronger evidence to justify the imposition of sanctions. Failure to do so risks undermining the European Union’s efforts to constrain Iran’s alleged efforts to develop its nuclear and missile programme.

Introduction

In a bid to persuade the Islamic Republic of Iran to comply with its international obligations, and to constrain its development of technologies in support of its nuclear and missile programmes, the Council of the European Union, which represents the EU Member States, has adopted a whole swathe of financial sanctions against Iran. These measures include the imposition of restrictions on transfers of funds to and from Iran, restrictions on dealings with the Iranian banking sector, restrictions on the provision of insurance and re-insurance and restrictions on the financing of certain Iranian enterprises.

One instrumental aspect of the European Union’s financial sanctions is the freezing of funds and economic resources of persons, entities and bodies that are specifically designated, i.e., listed, in the EU sanctions regulations. As the number of persons and entities subject to such sanctions has grown, so has the number of legal challenges to strike down such measures.

On 6 and 16 September 2013, the EU General Court annulled asset freezing measures imposed on a number of companies active in shipping, banking and insurance, as well as one natural person, for alleged links to Iran’s nuclear proliferation activities. A common denominator underpinning the annulment of the asset freezes is that insufficient evidence was adduced to justify their imposition.

The judgments, though laudable inasmuch as they seek to instil increased transparency and fairness into the EU sanctions regime, may lead to an increased number of persons and entities bringing cases before the EU courts, and may also lead to companies seeking damages for their losses. This raises the underlying policy question of whether targeted sanctions (blacklists) are workable, or whether a wider, more inclusive, regime may be more appropriate. This creates difficult issues for EU regulators, who will seek to prevent further erosion of financial sanctions on Iran. The difficulty is particularly acute given that the EU rulings come at a time when the United States continues to expand its sanctions against Iran.

Background

Citing links to Iran’s nuclear proliferation programme, the Council subjected the following entities and person to asset freeze sanctions:

• Bank Melli Iran (an Iranian commercial bank owned by the Iranian State) for having provided, or at least having attempted to provide, financial support for companies that are involved in or procure goods for Iran’s nuclear and missile programmes.

• Post Bank Iran (an entity providing post office banking services) for, inter alia, having acted on behalf of the designated entity Bank Sepah, carrying out Bank Sepah’s transactions and hiding Bank Sepah’s connection with transactions to circumvent sanctions.

• Iran Insurance Company (an Iranian insurance company) for having insured the purchase of items such as helicopter spare parts, electronics and computers with applications in aircraft and missile navigation.

• Islamic Republic of Iran Shipping Lines (IRISL) (an Iranian shipping line) for, among other things, having been involved in the shipment of military-related cargo, including proscribed cargo from Iran.

• Good Luck Shipping LLC (a shipping agent based in Dubai) for, inter alia, having acted on behalf of and issuing false transport documents to the designated IRISL.

• Export Development Bank of Iran (an Iranian bank) for having, inter alia, provided financial services to companies linked to nuclear proliferation activities.

• Persia International Bank plc (a public limited company incorporated and having its registered office in the United Kingdom, with 60 per cent of its share capital owned by Bank Mellat, an Iranian bank) on the basis that Bank Mellat had engaged in a pattern of conduct that supported and facilitated Iran’s nuclear and ballistic missile programmes.

• Iranian Offshore Engineering and Construction Co. (an Iranian company that operates as an offshore general contractor for petroleum, gas and petrochemical industries in Iran and internationally) for being an energy company involved in the construction of Quom/Fardow uranium enrichment sites, and being subject to export restrictions placed on it by Italy, Spain and the United Kingdom.

• Bank Refah Kargaran (an Iranian bank) for having taken over on-going operations from Bank Melli in the wake of the sanctions imposed on Bank Melli.

• Europäisch-Iranische Handelsbank (a German bank specialising in services and businesses relating to or in Iran) for, inter alia, having played a key role in assisting a number of Iranian banks with alternative options for completing transactions disrupted by EU sanctions against Iran.

• Mr Naser Bateni (an Iranian citizen living in Germany who, in 2009, founded HTTS Hanseatic Trade Trust & Shipping GmbH, of which he is the director) for being the former director of IRISL, the director of HTTS and director of the front company NHL Basic Ltd.

The General Court’s Judgments

Each of the above-mentioned entities and Mr Naser Bateni appealed the asset freezes imposed on them. On 6 and 16 September 2013, the EU General Court annulled nearly all of the acts of the Council in their entirety. However, the General Court upheld sanction measures imposed on Bank Melli and partially upheld the measures imposed on Europäisch-Iranische Handelsbank.

Although each case stands alone, the common theme is that the Council did not adduce sufficient evidence to warrant the imposition of sanctions.

• The General Court dismissed the action of Bank Melli Iran (Cases T-35/10 and T-7/11). In particular, the General Court held that the fact that Bank Melli had made payments in respect of scholarships and education-related expenses on behalf of the Atomic Energy Organization of Iran (AEOI) after the adoption by the United Nations Security Council of the restrictive measures concerning that entity, constituted support for nuclear proliferation, which justified the restrictive measures against the bank.

• With respect to Post Bank Iran (Case T-13/11), Iran Insurance Company (Case T-12/11), Good Luck Shipping (Case T-57/12) andExport Development Bank of Iran (Cases T-4/11 and T-5/11), the acts underpinning the asset freeze were annulled on the basis that the Council had not proved the facts of its accusations against these entities.

• With respect to Persia International Bank (Case T-493/10), Iranian Offshore Engineering & Construction Co (Case T-110/12) and Mr Naser Bateni (Cases T-42/12 and T-181/12), the General Court held that the reasons underpinning the asset freeze sanctions were insufficient to justify their imposition. In particular, it was held with respect to Persia International Bank plc that Bank Mellat’s ownership of 60 per cent of its share capital does not, by itself, justify the adoption and maintenance of the asset freeze.

  Interestingly, although it was not a decisive issue, the General Court held in the Persia International Bank case that diplomatic cables that were illegally disclosed by a third party and contained information in an applicant’s favour could be relied upon by the Council when evaluating the evidence before it for the purposes of deciding whether or not to impose a sanction.

  With respect to Iranian Offshore Engineering & Construction Co, it was held that the mere fact that it was subject to three export refusals and in the absence of any indication permitting a presumption that the company was directly involved in nuclear proliferation activities, or connected to a person or entity directly involved therein, was insufficient to impose and maintain an asset freeze.

  With regard to Mr Bateni, it was held, inter alia, that the Council had not established to the requisite level that his position as director of HTTS was sufficient to justify the imposition of an asset freeze.

• As far as Bank Refah Kargaran was concerned, the General Court in Case T-24/11 held that the single reason put forward by the Council for the imposition of the asset freeze was not sufficiently detailed. In this way, the Council had breached the obligation to state reasons, a finding that on its own justifies the annulment of the asset freeze sanction.

• In relation to IRISL, the General Court in Case T-489/10 held that the Council’s evidence that IRISL had illegally transported military material on three occasions was insufficient to establish that IRISL had provided support for nuclear proliferation. In other words, the Court held that the Council’s assertion that if IRISL transported military material it necessarily also transported material linked to nuclear proliferation, was not supported by any specific information or evidence. Furthermore, the existence of a risk that material linked to nuclear proliferation was being transported was insufficient to justify the sanctions in this case. A corollary of the finding that IRISL had not been properly identified as providing support for nuclear proliferation was that the freezes imposed on the 17 companies held to be owned or controlled by IRISL or acting on its behalf, and which had also appealed in the same case, were also struck down.

• Finally, with respect to Europäisch-Iranische Handelsbank, the General Court in Case T-434/11 assessed the imposition of two sets of measures, those of 23 May 2011 and of 1 December 2011. The General Court annulled the measures pertaining to May 2011 on the basis that the Council merely adopted a Member State’s proposal that Europäisch-Iranische Handelsbank be listed without evaluating such proposal. The Council did not commit the same error with respect to the 1 December 2011 measures, so the asset freeze remains in force.

These General Court decisions can be appealed to the European Union’s highest court, the Court of Justice of the European Union, within two months of the parties being notified of their respective judgments. The asset freezes will remain in place at least until the expiry of the period for bringing an appeal. In the event of further appeals, the sanctions will remain in place at least until any such appeals are dismissed.

Comment

The annulment of asset freeze sanctions by the General Court is becoming a more frequent occurrence. The September judgments follow the General Court’s ruling in January 2013 (Case T-496/10) striking down an asset freeze against Bank Mellat, citing insufficient evidence to warrant its imposition. The UK Supreme Court also struck down UK sanctions targeting Bank Mellat on the basis that they were “irrational” and “disproportionate.” Bank Mellat is currently seeking GBP 500 million in damages from the UK Treasury.

The recent spate of judgments shows that the reasons for the imposition of asset freezes must be real and verifiable, backed up by sufficient and credible evidence. Failure to fulfil these criteria risks not only undermining the credibility of the sanctions regime, but also risks massive damages claims being brought against EU governments for the wrongful imposition of financially devastating asset freezes. Bank Mellat’s claim of GBP 500 million is an example of such a case. Fundamentally, however, the increased number of cases brought against the Council raises the question of whether or not blacklists for individuals and entities are the optimal solution for an efficient and effective sanctions regime.

Moreover, the recent decisions reveal a continuing erosion of the European Union’s targeted financial sanctions, while at the same time the United States, for example, is expanding its use of targeted financial sanctions concerning Iran. It is plausible that the EU institutions, and their Member States, may seek to make changes to the EU financial sanctions regulations imposed on Iran to make them better able to withstand court scrutiny. A move away from the current blacklist approach will, however, have to be carefully crafted. A wider sectoral approach, for example, risks choking legitimate trade in products that have nothing to do with Iran’s alleged attempts to proliferate its nuclear activities.

While possible reforms may certainly be considered a top priority, EU regulators may have some latitude to consider the path forward. The General Court’s annulment of the asset freeze sanctions may not produce significant immediate effects, apart from the possible lodging of additional challenges by persons targeted by the EU sanctions. As already noted, the asset freezes will remain in effect pending appeals, if any are lodged.

If the asset freeze sanctions are ultimately lifted, European companies—particularly those operating globally—may still be reluctant to deal with any entities that are sanctioned under the US rules. Thus, while the General Court’s decisions deliver another significant blow to EU financial sanctions, there may be a delayed impact, during which the EU regulators can consider whether or not and how to reform the European Union’s approach to imposing financial sanctions.

Accordingly, companies doing business in the European Union are well advised to monitor these sanctions developments closely, and to maintain as part of their ongoing trade compliance practices a robust party screening protocol that takes account of possible designated parties’ additions to and removals from the sanctions lists.