LONDON— Western government sanctions against Iran suffered a big setback on Wednesday when Britain's top court ruled that the government was wrong to have imposed sanctions on the biggest Iranian private bank over alleged links to Tehran's nuclear program.
The Bank Mellat case and 50 more like it pending at the European Union's General Court have cast a cloud over the future of EU sanctions and alarmed Washington, which relies on European support to throttle Iran's links to the global economy in hopes of getting it to curb its disputed pursuit of nuclear power.
The British Supreme Court decision on Wednesday echoed a January ruling by the EU's General Court, which overturned sanctions imposed in 2010, and paves the way for Bank Mellat to sue Britain for damages.
A bank spokesman told Reuters on Wednesday that it is considering launching a claim against Britain that “could exceed 500 million pounds.”
Supreme Court Judge Jonathan Sumption ruled that the British government had been “arbitrary,” “irrational,” and “disproportionate” to single out Bank Mellat for sanctions.
A British government spokeswoman said it was “disappointed” with the decision and was “considering the judgment and its implications for any future orders (for sanctions).”
Some in diplomatic and legal circles have suggested the EU adopt less targeted sanctions to avoid litigation, but such a course risks threatening commercial interests that governments may not want to give up.
Bank Mellat has long denied allegations that it has aided the nuclear program and argued that it had not been consulted before sanctions were imposed.
Europe and The United States have imposed sanctions against specific Iranian people, state institutions or companies in so far unavailing efforts to persuade Tehran to rein in enrichment of uranium and open up to U.N. inspectors in exchange for phased relief from the tightening noose of financial isolation.
Western nations believe the Islamic Republic is attempting to develop the means to build atomic bombs, though it says the program is for domestic power generation and medical purposes.
Sanctions have severely affected Iran's ability to export oil, nearly halving crude revenues in 2012 to around $50-$60 billion, and have largely severed the country off from the global financial network.
However, the Islamic Republic has found some resourceful ways of working around sanctions to keep some exports flowing and prevent a catastrophic drain of foreign exchange reserves.
Shipping sources say Iran has made ship-to-ship transfers of oil onto foreign tankers to conceal deals from sanctions enforcers, while also using discreet locations in Asia to make covert sales that are harder to track.
Still, sanctions have struck hard enough to trigger a free fall in the rial currency's value and a jump in inflation and unemployment, with businesses in the sprawling country of 75 million people struggling to adapt.
Iranians now pay up to three times more for staple foods than they did 12 months ago.
The issue of how to revive the Iranian economy loomed large in the June 14 presidential election. Moderate Hassan Rohani won in a landslide, vowing to rehabilitate Iran's foreign relations and ease its isolation. He will succeed Mahmoud Ahmadinejad, whose confrontational outbursts and poor fiscal management alienated many abroad and compounded Iran's economic plight.
Bank Mellat on Wednesday also questioned the British Supreme Court's use of secret sessions for the first time, excluding the bank from parts of the proceedings, though a majority of the nine judges ruled that it was appropriate in this case.
The use of a so-called Closed Material Procedure in British courts marks a change in tack for the government, which along with France has been reluctant to share intelligence with courts that could support sanctions against particular targets.
Now EU and British institutions are looking into an overhaul of how pan-European courts function to make it easier for classified information to be considered in legal proceedings.
But authorities face much opposition to attempts to reform the courts. Civil rights group Liberty called the Supreme Court decision to allow a secret hearing in the Bank Mellat case “chilling.” Liberty said this laid bare the British government's willingness to overstate the importance of secrecy.
Sarosh Zaiwalla, a senior partner at Bank Mellat's law firm Zaiwalla & Co Solicitors, said Wednesday's ruling was a victory for the rule of law as much as it was for the bank.
“The judgment will put enormous confidence in the independence of the British judiciary and sets an example that even controversial disputes can be resolved by applying the principle of rule of law through the British courts.”
Wednesday's ruling is still just a moral victory for Bank Mellat since its European operations remain closed while the EU appeals the January decision to remove sanctions against it.
According to Zaiwalla, 183 million euros of the bank's assets held by its branch in London remain frozen.
The British government's sanctions on Bank Mellat prevented the whole of the UK's financial sector from having any business relationship with the bank. Sanctions imposed on the bank by the United States remain in place.
Iran's shipping industry has been pursuing a series of challenges at the EU General Court in Luxembourg and at Britain's High Court over sanctions designations, hoping that positive rulings for other Iranian firms will help their cases.
“In relation to the Bank Mellat case and other cases, the decisions have been very encouraging. These have been good decisions - all of which are supporting our case,” said Maryam Taher, a London-based lawyer representing all of the Iranian shipping related parties.
On May 30, 11 individuals who had formerly worked for subsidiaries of blacklisted company the Islamic Republic of Iran Shipping Lines (IRISL), the country's biggest private cargo shipping group, had a hearing in Luxembourg.
The same day, five in the group filed a separate appeal with Britain's High Court arguing they were wrongly blacklisted because they were said to hold jobs in companies that had been designated for being IRISL subsidiaries. A hearing is awaited.
A British Foreign Office spokesman said: “We have received notification of this legal challenge. It would not be appropriate to comment on ongoing proceedings.”
There are two further litigations that have been lodged at the European Court and are awaiting a hearing date relating to several subsidiary shipping companies, including those that were owned or controlled by IRISL.
The United States has raised concerns that the Iranian appeals to European courts could loosen sanctions against Tehran.
A campaign by U.S. pressure group United Against Nuclear Iran (UANI), whose board includes former U.S. ambassadors and former CIA and British intelligence chiefs, has led several foreign companies in sectors including shipping to exit Iran.
UANI chief executive Mark Wallace, a former U.S. ambassador to the UN, said the appeals “would set a troubling precedent.”
“The EU and its member countries and citizens must make clear that Iran business is unacceptable and illegal - that was the very point of the sanctions,” Wallace told Reuters.