Iranian banks take to the courts

As attention focuses once more on the prospect of a deal between the US and Iran which could end sanctions, an intriguing subplot is at work: Iranian banks suing western governments that have banned them.

In February, Bank Mellat sued the UK government for £2.3 billion in compensation for losses it claims to have incurred as a result of sanctions imposed in 2009. This follows a Supreme Court ruling in 2013 that the ban imposed on the bank was inappropriate; the same bank has also successfully had its place on the EU’s sanctions list quashed by the General Court of the European Union, as too has fellow Iranian Bank Saderat, although in both cases the bans are still in place as appeal processes run their course.

Mellat’s case in the UK is unique. In 2009, the UK Treasury alleged that Mellat had financed companies and individuals involved in Iran’s nuclear weapons programme, and banned it from business in the UK. In this respect, it was singled out, rather than being subject to an overall sanctions regime. The case itself caused quite a stir in legal circles, since at several levels of the court system the Treasury asked the court to go into secret session, which marked the first time the Supreme Court had ever done so.

‘Arbitrary and irrational’

The Supreme Court eventually ruled that the decision to ban Mellat was “arbitrary and irrational”, and took a considered swipe at the Treasury for insisting on the secret session in the first place.

“In my opinion, there was no point in our seeing the closed judgment,” said Lord Neuberger in his written judgment. “There was nothing in it which could have affected our reasoning in relation to the substantive appeal, let alone which could have influenced the outcome of that appeal. So far as it was said to have included relevant findings, the most that could be said of the closed judgment is that it put some evidential flesh on some fairly bare bones embodying some of the conclusions of fact reached in the open judgment.”

And so to Mellat’s action against the UK. “Under English law, there is a legal duty to put innocent victims in the same position as they would have been in had the wrong not been committed,” Sarosh Zaiwalla, Mellat’s lawyer in the UK case, tells Euromoney. “We think the bank’s real loss is £2.3 billion.” Mellat hired a forensic accounting firm to come up with that figure – tellingly, it has not named the firm, knowing that association with an Iranian client can be so damaging, except to say it’s a top five firm – and a UK judge was due to decide the actual loss and compensation as Euromoney went to press.

How much should be read into this? It’s hard to be sure. Five of Iran’s leading commercial banks at that time were represented in the UK – the others being Melli, Sepah, Saderat and Tejarat (plus Persia International Bank, a joint venture between Mellat and Tejarat) – and over the following years they all ended up being frozen under somebody or other’s sanctions, mainly the EU. But they wouldn’t have the same recourse against the UK, because it was only in Mellat’s case that the UK Treasury banned them, rather than some other broad international sanctions programme. 

One reason Mellat was cleared by the Supreme Court was because it found that in the specific instances it was accused of providing funding and services, it either hadn’t done so or had terminated the relationship as soon as it had become aware of any suspicion. 

Still, even if the Mellat case in the UK is unique, it’s possible that those who successfully overturn EU bans might try to seek redress there. Since sanctions began being applied against Iran in 2006, starting with the UN, Iranian banks have lost billions of dollars of business, and if those are found to have been imposed incorrectly, they are likely to look for compensation.

But as any Iranian banker will tell you, getting a ban lifted is barely half the issue. Even Iranian banks that were never covered by any sanctions have routinely found themselves unable to trade with western counterparts as those western banks were so scared of attracting the attention of, in particular, US regulators. One Iranian bank tells Euromoney that it was completely unable to bank a tax refund from Britain’s tax office because no UK bank was prepared to handle it – despite it being issued by Her Majesty’s Revenue and Customs. Another recalls winning a legal case for an Iranian man who had been incorrectly linked with an arms business, but discovering that he, too, was unable to bank the compensation cheque for the same reason, despite being a UK resident. Even when Iranian banks win in court or are exempted from sanctions, the mud is going to stick to them until, at the very least, US sanctions on Iranian financial services are removed. 

Zaiwalla says a great many small businesses have gone under in Iran because of sanctions, which, in turn, has placed a greater burden on the banking sector. 

 “Sanctions are legitimate weapons to use to bring an errant government to toe the line,” he says. “But they must not damage innocent citizens.”