Judicial Scrutiny in the Financial Services Sector:

The Supreme Court of UK quashed the Treasury’s restrictions against a major Iranian bank

Bank Mellat (Appellant) v Her Majesty’s Treasury (Respondent) (No 2) [2013] UKSC 39

Jonathan Roberts and Mahgol Sharili *1
Ronald Fletcher Baker LLP

Introduction

Since the Financial Restrictions (Iran) Order came into force on 12 October 2009 (“the Order”), on the same day that it was laid before Parliament, it was clear that the Order would come under close scrutiny by those affected in the Iranian financial services sector.

The Order required all persons operating in the UK financial market not to enter into or to continue to participate in any transaction or business relationship with two Iranian companies: (1) Bank Mellat and (2) Islamic Republic of Iran Shipping Lines (“IRISL”). In addition no transaction was allowed with any branch of either of those two companies. It was Bank Mellat that became the primary target of the Order. The Supreme Court recently quashed the Order both on substantive and procedural grounds. This article is a commentary on the procedural unfairness of the Order and briefly considers the remedies that Bank Mellat will be seeking post the Supreme Court judgment.

Bank Mellat

Bank Mellat (Farsi: “People’s bank”) is one of the largest banks of Iran providing financial services to both private and commercial clients. Following a merger of ten private banks in 1980, it expanded to over 1000 branches in Iran. Its London branch merged with Bank Tejarat on 29 April 2002 to form Persia International Bank Plc, which carries on business in the UK under the regulation of the Financial Conduct Authority. Prior to 2009, Bank Mellat had an estimated £250 million worth of business annually in the UK. The Order led, at least in the short term, to the shutdown of Bank Mellat’s UK services including its London branch, and at least in the foreseeable future, to the damaging of its goodwill in the UK and its international services.

The order

Apart from the Treasury’s hurry to implement the Order without prior consultation with the targeted companies, the Treasury was seeking under the Counter-Terrorism Act 2008 (“the 2008 Act”), to prevent harmful financial business with Iran. Schedule 7 of the 2008 Act enables the Treasury to “give a direction” to any “credit or financial institution”. A direction under Schedule 7 must be given in an order.

The Schedule 7 of the 2008 Act however, contains three procedural safeguards to the Treasury’s use of its power:

(i) Any direction must be laid before Parliament after being made and unless approved…within 28 days will cease to have effect thereafter (ii) The direction must be proportionate having regard to the risk to the national interest (iii) Any person affected by the direction may apply to the High Court to set it aside.

Bank Mellat thereafter applied to the High Court to set aside the Order on both procedural and substantive grounds.

Bank Mellat's application to set aside

The procedural ground on which Bank Mellat based its application on was that the Treasury had failed to give the Bank an opportunity to make representations prior to the passing of the Order. Whilst there was no provision within the 2008 Act, making such an opportunity obligatory, Bank Mellat invoked common law principles or Article 1 (right to peaceful enjoyment of property) and Article 6 of Protocol 1 (right to fair trial) of the European Convention on Human Rights; that required that it be given such an opportunity:

“In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Everyone charged with a criminal offence has the ...minimum rights ...to be informed promptly, in a language which he understands and in detail, of the nature and cause of the accusation against him; ...to have adequate time and facilities for the preparation of his defence.”2

The substantive grounds were that:

(i) The Order was irrational, disproportionate and discriminatory,

(ii) The Treasury failed to give adequate reasons for giving it,

(iii) The Treasury had made mistakes of fact and had considered irrelevant matters.

The case was dismissed in the High Court and the Court of Appeal dismissed the appeal by Bank Mellat.

Appeal to the Supreme Court – the majority decision

Following an appeal by Bank Mellat to the UK Supreme Court, it was held by a majority on 19 June 2013 that the Treasury had given no compelling reasons that the implementation of restrictions to protect the UK’s financial markets from suspicious financial dealings by Bank Mellat bore any rational connection to the 2008 Act. Lord Sumption expressed the majority view of the Supreme Court. The message that the Treasury gave to the Parliament was twofold:

a) That Bank Mellat was involved in transactions related to the Iranian government programmes, and

b) That it was using a poor judgment and lack of customer due diligence to monitor transactions with financial risk. At no point, did the Treasury provide evidence for these allegations.

The statements from various Treasury ministers highlighted a recurring problem in that there was no compelling evidence why Bank Mellat was targeted in the Order and distinguished from other Iranian banks.

On the procedural ground, Lord Sumption focused the attention of the court on one of the oldest principles of public law. This rule is of universal application originating from basic principles of justice. In the event of the implementation of a draconian statutory principle applied against an individual or body, “since the person affected usually cannot make worthwhile representations without knowing what factors may weigh against his interests fairness will very often require that he is informed of the gist of the case which he has to answer.”3 In this case, Bank Mellat was not given this opportunity. It was held that unless statute prohibits prior consultation, fairness required that a person specifically targeted by a direction ought to have prior notice of the direction, as well as the opportunity to make representations. At common law, the duty of prior consultation might therefore arise, depending on the particular circumstances of each direction. Bank Mellat had received no notice of the Treasury’s intention to make the direction, making the Order unlawful. It was not necessary to decide whether a duty of prior consultation arose under the ECHR.

Bank Mellat would no doubt have benefited from a prior consultation to put forward its denial of the allegations relied on by the Treasury of the relationship between the bank and the Iranian government programmes in conducting financial services with the UK and international markets.

On the substantive grounds, the Court held that:

(i) The Order was irrational, disproportionate and discriminatory. There was no compelling evidence why Bank Mellat had been singled out in the Order and other Iranian banks had been spared.

(ii) The Treasury had failed to give adequate reasons for giving the direction. It had provided no compelling reason why the implementation of restrictions on Bank Mellat and IRISL would protect the UK’s financial markets from ‘suspicious’ financial dealings

The 2011 and 2012 orders

In 2011 and 2012, the Treasury took the sanctions one step further. The UK credit and financial institutions were ordered to cease all transactions and business activities with Iranian banks and their subsidiaries with significant risks to the UK financial services market. In The Financial Restrictions (Iran) Order 2011 (“2011 Order”), the Treasury implemented a direction on a credit institution incorporated in Iran and the Central Bank of Iran, also known as Bank Markazi Jomhouri Islami Iran and its branch and subsidiaries wherever located.

The restriction was renewed in 2012 through The Financial Restrictions (Iran) Order 2012 (“2012 Order”) because an order ceases to have effect one year after it is made, in accordance with Schedule 7 of the 2008 Act.4 Once again the Iranian banks and credit institutions were excluded from the UK dealings; it now appears without any justifiable reason. It its explanatory memorandum, the Treasury admits that no formal consultation procedure was carried out. Only “Officials from the British Bankers’ Association were consulted on an informal basis”5 in a matter that concerned the freezing of Iranian financial services to the UK market.

Interestingly, on 31 January 2013 the Treasury revoked the 2012 Order6 to avoid confusion with similar provisions in EU Regulation No 1263/2012 (“Regulation”) which came into force on 21 December 2012.7 The Regulation is directly binding and must be applied in its entirety across the EU in all member states including the UK. The Regulation prohibits the transfer of funds between financial and credit institutions domiciled in Iran or controlled by persons, entities or bodies domiciled in Iran, any branches and subsidiaries domiciled in Iran subject to the exceptions in Article 30 of the Regulation. This Regulation remains in effect as at the date of writing.

On 29 January 2013, following a claim from Bank Mellat, the Court of Justice of the European Communities quashed the Council Decision 2010/413/CFSP (“Decision”) of 26 July 2010 insofar as the measures concerned Bank Mellat.8 The Decision implemented direct and indirect restrictions on Iran’s export and import relations with the EU including the provision of financial services by the EU to Iran. Bank Mellat was one of the targets of the Decision and was consequently listed in the Council’s annex as one of the institutions allegedly providing hundreds of millions of dollars in support of the government programmes. The Decision was implemented because the government owns shares in Bank Mellat and because Bank Mellat had provided services to Novin Energy Company. Bank Mellat based its defence on inter alia Article 41 (right to good administration) and Article 47 (right to an effective remedy and a fair trial) of the Charter of Fundamental Rights of the European Union (“Charter”). The court held that the provisions of the Charter relevant to the bank’s case, “guarantee the rights of ‘everyone’, wording which includes the legal persons such as the applicant.”

The next steps for Bank Mellat

It follows that from 2009 until the Supreme Court judgment in 2013 releasing Bank Mellat against the restrictions in the Order – the bank suffered a substantial loss of business in the UK. Not surprisingly, Bank Mellat now intends to bring proceedings against the UK government to claim a) for loss of earnings in the region of £250 million per year and b) for damage to its reputation both in the UK and on the international market comprising cross-border services of foreign exchange facilities and money transfers.

The Supreme Court case has paved the way for similar actions for relief from other Iranian banks and credit institutions affected by the orders made by the UK Treasury. It remains to be seen how much Bank Mellat and other Iranian banks can recover in damages and the duration it will take to return to status quo.

Both the Supreme Court and the Court of Justice of the European Communities have re-affirmed the importance of allowing effected parties to make representations before imposing sanctions which can have significant financial consequences. These decisions will be welcomed by other Iranian banks and financial institutions reinforcing the procedural safeguard and fundamental principles of UK common law and ECHR which have existed since time immemorial.



1. Jonathan Roberts is a Partner and Mahgol Sharili is a Fluent Farsi speaking Trainee Solicitor in the Firm’s City Office.
2. Article 6 (paragraphs 1-3) of Protocol 1 (right to fair trial) of the European Convention on Human Rights, as amended by Protocols Nos. 11 and 14 supplemented by Protocols Nos. 1, 4, 6, 7, 12 and 13.
3.  R v Secretary of State for the Home Department Ex parte Doody [1994] 1 AC 531, 560.
4.  Explanatory Memorandum to the Financial Restrictions (Iran) Order 2012 No. 2904.
5.  Ibid.
6.  Revocation of the Financial Restrictions (Iran) Order 2012, HM Treasury, CT Act 2008, 31 January 2013.
7.  COUNCIL REGULATION (EU) No 1263/2012 of 21 December 2012 amending Regulation (EU) No 267/2012 concerning restrictive measures against Iran.
8.  Judgment of the General Court of 29 January 2013 — Bank Mellat v Council (Case T-496/10).

Share this article

Submit to FacebookSubmit to TwitterSubmit to LinkedIn

City office

Ronald Fletcher Baker LLP
326 Old Street
London EC1V 9DR
DX: 137773 Finsbury 5

Telephone
020 7613 1402

Fax
020 7613 2711  

 

West End office

Ronald Fletcher Baker LLP
77A Baker Street
London W1U 6RF
DX: 42722 Oxford Circus North

Telephone
020 7467 5757

Fax
020 7467 5758

Manchester office

Ronald Fletcher Baker LLP
111 Piccadilly
Manchester M1 2HY

DX: 6967003 Manchester 94 M

Telephone
0161 694 4404

Fax
0161 638 0930

Istanbul Office

Ronald Fletcher Baker Danismanlik Hizmetleri Avukatlik Ortakligi
Tesvikiye Cadessi
No: 28 Alhambra Apartmani
K:2
Nisantasi, İstanbul

Telephone
07736 364222

Emergency number

07538 490647

Ronald Fletcher Baker LLP is authorised and regulated by the Solicitors Regulation Authority. Company number OC345891

City office ID 512598
West End office ID 523362.
Manchester office ID 630156

V.A.T. registration number: 2206798 63VAT

"Partner" denotes a senior member of the LLP or an employee with the equivalent standing.

PII cover - Maven Underwriters, Aon Uk Limited. For further details please contact Rakeebah Rahim

http://www.sra.org.uk/solicitors/handbook/welcome.page

Website design by coolgrey

Photography: Camilla Greenwell

 

Get a free conveyancing quote

 

View our privacy policy

We encourage you to contact us in the first instance if you are unhappy with the service you receive from us. Contact John O’Callaghan, the complaints partner at j.ocallaghan@rfblegal.co.uk; alternatively in some circumstances you may be able to make use of the ODR platform.