JOINT EMLO AND MMLA SPRING SEMINAR

2014

EU Sanctions

- An update

FERGUS RANDOLPH QC

The EU courts and the rule of law

Preamble to the Charter of Fundamental Rights of the EU: the Union is based on the rule of law”

Firm recognition of that in the EU Courts’ rulings in sanctions cases

Different approach to other jurisdictions in which substantial judicial deference is given to the will of the legislature

In praise of awkwardness

Interesting recent article in the European Constitutional Law Review by Prof Gearty at the LSE

“Standing in the way of [the challenge to the rule of law] are a few unelected judges from an entity that cannot even call itself a state without risking terminal offence. It is an heroic story ...”

Ukraine/Russia

Most recent EU activity has been in relation to Ukraine and Russia

Well-oiled EU sanctions machine swung into action

Absence of UN resolution Aim as ever is to bring the “recalcitrant

State” to heel At present, that doesn’t appear to be

working but UK’s SFO obtained a £23 million restraint order against Ukrainian assets un the UK on 28 April 2014

Iranian sanctions

Long-running saga Focus has moved to the Geneva

process In the meantime, challenges

continue to be brought before the EU courts – many are won – but Council then moves the goalposts

Malta has a substantial number of companies affected by these sanctions

Melli Bank Commercial Court judgment

Judgment of Simon J of 31 July 2013 Iranian ship owning companies and

guarantors attempted to avoid their repayment liabilities under various loan facilities by asserting that the EU sanctions regime forbade payment

The Court dismissed the argument - “it is not the effect of the Regulations nor is it consonant with their broad intent.”

Recent UK proposals

FCO recently proposed contract sanctions

These would stop British courts from enforcing commercial agreements involving countries covered by sanctions

Unsurprisingly, substantial criticism from interested parties as such a scheme could threaten London’s role as global legal hub

UN / EU / UK Sanctions

UN: Imposed by UN Security Council

Resolution under Chapter VII of the UN Charter in order to maintain or restore international peace and security;

EU: Decisions of the Council /

Implementing Regulations

UK: Statutory Instrument / Counter-

Terrorism Act 2008

Target of sanctions

Typically governments Effects not confined to governments E.g. UN, EU and UK sanctions

targeting Iranian nuclear proliferation

Non-state entities and individuals E.g. Al Qaida, bin Laden and the

Taliban; other terrorist groups

Types of sanctions

Economic and financial sanctions (freezing of funds or economic resources, prohibition on financial transactions, restrictions on export credits or investment)

Trade sanctions (general or specific trade sanctions, arms embargoes)

Restrictions on admission Diplomatic sanctions Suspension of cooperation Boycotts of sporting or cultural events

Targeted financial sanctions

Asset freezing of designated / listed entities

Two core obligations: Obligation to freeze all funds Prohibition on making funds available

Broad definition of assets frozen and of prohibited conduct

“Funds”

means financial assets and benefits of every kind, including but not limited to:

(i) cash, cheques, claims on money, drafts, money orders and other payment instruments;

(ii) deposits with financial institutions or other entities, balances on accounts, debts and debt obligations;

“Funds” (cont)

(iii) publicly and privately traded securities and debt instruments, including stocks and shares, certificates representing securities, bonds, notes, warrants, debentures and derivatives contracts;

(iv) interest, dividends or other income on or value accruing from or generated by assets;

“Funds” (cont)

(v) credit, right of set-off, guarantees, performance bonds or other financial commitments;

(vi) letters of credit, bills of lading and bills of sale; and

(vii) documents evidencing an interest in funds or financial resources.

“Economic resources”

means assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but may be used to obtain funds, goods or services.

The obligation/prohibition

Must prevent any move, transfer, alteration, use of, access to, or dealing with funds in any way.

Must prevent the use of economic resources to obtain funds, goods or services in any way.

Broad prohibition on making available funds or economic resources

Position of subsidiaries

Asset freeze applies to subsidiaries of designated entities

Council “shall” freeze assets of entity “owned or controlled” by designated entities

Melli Bank plc v Council (T-246/08) Touchstone is control Presumption of control for 100% owned entities Ability to appoint directors was key

Melli Bank plc v. Council (C-380/09P) “the classification as a entity ‘owned or

controlled’ must be the substance of a case-by-case evaluation by the Council...”

Exemptions from the freeze

Basic needs Professional fees Service /maintenance charges for

funds/resources Funds subject to judicial

lien/judgment Certain credits to frozen accounts Certain payments from designated

entities/individuals

Breach of asset freezes

Member State responsibility E.g. The Iran (Asset-Freezing)

Regulations 2011 (SI 2011/1129) Criminalises breaches of obligation

to freeze and prohibition on making funds/economic resources available

Punishable by imprisonment

Restrictions on admission

EU frequently imposes a travel ban

Obligation on Member State to take all necessary measures to prevent entry

Key exception: own nationals

Kadi

The case of Kadi is the leading authority on the approach of the EU courts to sanctions legislation

It is one of the few cases to have been the subject of 2 appeals

Anyone involved in EU sanctions litigation will need to be acquainted with this line of authorities

Kadi – the facts

In 2001, Mr. Kadi was identified as being an individual associated with Usuma Bin Laden and the Al-Quaeda network – he was accordingly placed on an EU sanctions list

He sought annulment of that decision by an application to the General Court

That application was dismissed, with the GC holding that it was not for it to review indirectly whether UN Security Council Resolutions are compatible with fundamental principles protected by the EU legal order

It also held that the doctrine of jus cogens precluded an assessment by the Court as to whether there had been an error of assessment or whether the decision had been appropriate or proportionate

Kadi – the first appeal

The CJEU set aside the GC’s judgment, holding that obligations imposed by an international agreement could not have the effect of prejudicing the constitutional principles of the EU treaties, which include the principle that all EU acts must respect fundamental rights

The CJEU held specifically that the EU Courts must ensure the full review of the lawfulness of all EU acts and that the competent EU authority was bound to communicate the grounds for the contested listing to the person concerned and to permit that permit an opportunity to be heard

Kadi – Round 2

Following the CJEU’s judgment, the Chairman of the UN Sanctions Committee produced a detailed summary of reasons for listing Mr. Kadi on that committee’s consolidate list

That list was transmitted to the European Commission and to Mr. Kadi and he was asked to comment. Despite receiving those comments in which Mr. Kadi stated that the reasons were unfounded, the Commission adopted a regulation in which Mr. Kadi was sanctioned

Mr. Kadi sought the annulment of that decision before the General Court.

Kadi – CJEU2

The judgment of the GC was then appealed to the CJEU by the Commission and the Council

3 grounds of appeal were put forward re:

(i) Error of law arising from the jus cogens point

(ii) Intensity of judicial review

(iii) Errors in dealing with rights of defence and right to effective judicial protection

12 Member States intervened. In addition, the UK was an appellant in its own right and France was a repeat intervener from the first instance proceedings

The CJEU heard the appeal in Grand Chamber with 13 judges and Advocate General Bot sitting

Kadi – CJEU2(cont)

The CJEU’s judgment, dismissing the appeals, was handed down on 18 July 2013

As to the first ground – jus cogens – the Court reiterated that the Union was based on the rule of law and that the fact that EU institutions should pay due regard to the UN institutions did not mean that there should be no review of the lawfulness of relevant EU measures, in the light of the fundamental rights that were an integral part of the general principles of EU law.

Accordingly, the first ground was dismissed

Kadi - CJEU2(cont)

As to the second ground of appeal – intensity of review – the Court reiterated that the EU Courts had to ensure the review, in principle the full review, of the lawfulness of all EU acts in the light of the fundamental rights forming an integral part of the EU legal order

Those rights included respect for the rights of defence and the right to effective judicial protection

The question as to whether there has been an infringement of those rights must be examined in relation to the specific circumstances of each particular case

The effectiveness of the judicial review required a verification of the allegations relied on by the EU institutions

Kadi – CJEU2(cont)

The Court made clear that it was the task of the competent EU authority to establish in the event of a challenge that the reasons relied on against the person concerned were well founded and it was not the task of that person to adduce evidence of the negative

The Court did admit that overriding considerations of security or the conduct of international relations could preclude the disclosure of some information

The Court suggested in such circumstances that the EU Courts could adopt “techniques which accommodate ... legitimate security considerations ... and ... the need sufficiently to guarantee to an individual respect for his individual rights.”

Kadi – CJEU2(cont)

The Court held in the light of those principles that in the present case the competent EU authority had to (i) disclose to Mr. Kadi the summary of reasons provided by the Sanctions Committee; (ii) enable Mr. Kadi effectively to make known his observations thereon and (iii) examine whether the reasons were well founded in the light of the observations

The Court was also bound to examine whether the reasons themselves were sufficiently detailed and specific and where appropriate whether the accuracy of the facts relating to the reasons had been established

Kadi – CJEU2(cont)

In applying those points to its review of the GC’s judgment, the CJEU found that the GC had fallen into error in particular in relation to the consequences to be drawn from when the Commission did not have possession of certain information or evidence. In particular, the CJEU held that the GC was wrong to find that in such a situation, Mr. Kadi’s rights had been infringed

However, despite those errors, the CJEU nonetheless dismissed the appeal finding that none of the allegations presented against Mr. Kadi in the summary provided by the Sanctions Committee were such as to justify the adoption at EU level of restrictive measures against him

Other recent developmentsin the EU courts

Melli Bank plc: decision of the Grand Chamber CJEU of 13 March 2012

Fulmen: decision of 4th Chamber GC of 21 March 2012

Kala Naft: decision of 4th Chamber GC of 25 April 2012

CF Sharp Shipping: decision of 4th Chamber GC of 26 October 2012

Qualitest: decision of 4th Chamber GC of 5 December 2012

Sina Bank: decision of 4th Chamber GC of 11 December 2012

Bank Mellat: decision of 4th Chamber of 29 January 2013

Bank Sederat: decision of 4th Chamber of 5 February 2013

Other recent developments in the EU courts (2)

HTTS GmbH v. Council : decision of the 4th Chamber of the General Court 12 June 2013 -

Council v. Fulmen: decision of the 5th Chamber CJEU 28 November 2013

Council v. Kala Naft: decision of the 5th Chambers CJEU of 28 November 2013

Good Luck judgment

Judgment of 4th Chamber GC of 6 September 2013

The Court annulled EU provisions imposing restrictive measures on Good Luck Shipping LLC, a shipping agency based in Dubai. That company had been included on the list on the basis of an allegation that it acted on behalf of the Islamic Republic of Iran Shipping Lines (IRISL) and two other designated entities.

The Court held that it was wrong for the Council to have included Good Luck Shipping on the list. The reason given by the Council for doing so was that it acted on behalf of IRISL. the Council was ordered to pay the applicant's costs.

Good Luck judgment (cont)

The Court found that the Council had not provided any evidence to substantiate those allegations, and would not permit the Council to rely on additional unsubstantiated material read out from the internet at the oral hearing, without notice to the Court or the applicant. The only evidence provided by the Council further to specific requests from the applicant were proposals from two Member States requesting that Good Luck Shipping LLC be sanctioned, and reports of meetings of a Council working group and a note to Coreper which did not contain details or evidence relating to the applicant.

Good Luck judgment (cont)

The Court noted that in the course of proceedings, the Council had relied only on "unsubstantiated general statements" for the purpose of trying to rebut the applicant's submissions. The EU provisions imposing restrictions on Good Luck Shipping LLC were accordingly annulled and the Council was ordered to pay the applicant’s costs

Irisl judgment

Judgment of 4th Chamber GC of 16 September 2013

Islamic Republic of Iran Shipping Lines (IRISL) was included on the European Union's list of individuals and companies targeted by the EU's sanctions against Iran in 2010, along with a number of companies said to be "owned or controlled" by IRISL. The General Court of the European Union held that the European Council should not have included IRISL on its sanctions list ("restrictive measures") because its reasons for doing so were too vague and because it had no evidence to support its allegations.

Irisl judgment (cont)

The allegations against IRISL were that it supported nuclear proliferation in Iran by shipping "proscribed cargo", and that it assisted other companies to breach United Nations sanctions against Iran. The Court held that the latter reason was too vague to comply with the Council's obligation to give reasons, and therefore the Council could in principle only rely on the former reason (involvement in nuclear proliferation). But since IRISL denied any involvement in nuclear proliferation, and submitted evidence showing that the goods to which the Council referred were military goods, unrelated to nuclear proliferation, and since the Council had produced no evidence to substantiate its assertions to the contrary, its designation could not be sustained.

Irisl judgment (cont)

The Court emphasised that inference and speculation about future risks is insufficient, and that if the EU wishes to sanction a company on the grounds of involvement in proliferation, it has to present evidence of actual involvement. It also said that if the EU wishes to include different criteria for listing companies it will have to legislate to do so. Since IRISL's designation was unjustified, so too was the inclusion of companies on the grounds that IRISL "owns or controls" them. A number of challenges by those companies are currently pending before the General Court, with oral hearings having been held at the end of April 2014.

Council action following theIRISL judgment

The Council did not appeal the judgment Instead they amended the underlying

legislation so as to re-list IRISL and the other entities

That re-listing is the subject of two fresh challenges

10 days ago, the Council at another oral hearing sought to argue (for the first time) that it was not possible to rely on the IRISL judgment in other cases involving companies owned or controlled by IRISL as such reliance would constitute a fresh plea.

Conclusion(1)

EU Courts willing to annul sanctions decisions where they breach fundamental principles

Marked contrast to other jurisdictions

Possibility of consequential claims in domestic courts by parties adversely affected by the sanctions

Conclusion (2)

Malta is directly affected by sanctions legislation

Growing conflict in Ukraine will doubtless lead to expanded sanctions, domestic “freezing” actions and challenges before the EU courts