Derains & Gharavi International

Noticias

December 2021

Derains & Gharavi obtains a EUR +200 million award for leading Iranian banks against the Kingdom of Bahrain

Derains & Gharavi obtained a EUR +200 million award on November 9, 2021, against the Kingdom of Bahrain for leading Iranian banks for illegal pretextual and politically driven expropriation of their shares in Future Bank by Bahrain in PCA Case No. 2017-25, Bank Melli Iran (Iran) and Bank Saderat Iran (Iran) v. The Kingdom of Bahrain see

  • Global Arbitration Review (GAR), November 22, 2021: Bahrain held liable for political expropriationin the following terms:“Bahrain has been ordered to pay over €200 million damages plus costs to two Iranian state-owned banks for the unlawful expropriation of their banking venture in Manama in an act of “political retribution” in the wake of the 2015 Iran nuclear deal – but the state says a set-off means the financial value of the award could be eroded to nothing.

    On 9 November, a tribunal presided over by Swiss arbitrator Gabrielle Kaufmann-Kohler upheld the claims of Banks Melli and Saderat that Bahrain had indirectly expropriated Future Bank by placing it under the administration of its central bank and subsequently in liquidation – in breach of Article 6 of the Bahrain-Iran bilateral investment treaty. It found it did this in the context of Saudi Arabian-led hostility to Iran in the wake of the nuclear deal.

    In a 235-page award, which GAR has seen, the tribunal said it based its ruling on the “staggering” lack of evidence of reasons why Future Bank was put into administration, combined with the political context. These led it to believe that the justifications Bahrain afterwards gave for its action were “merely pretextual“.

    It said it considered it “significant” that another Iranian company operating in Bahrain, the Iran Insurance Company, was put into administration on the very same day as Future Bank – and during the same meeting of the central bank’s crisis management committee.

    It also noted the severity of the decision to put Future Bank into administration, normally an action of “last resort“, and the failure to consider alternative ways of dealing with it.

    Other claims brought by Banks Melli and Saderat, including claims for moral and reputational damages, were rejected. So too were Bahrain’s admissibility objections based on the Iranian banks alleged “unclean hands“, breaches of international public policy and failure to exhaust local remedies.

    The case was under the 1976 UNCITRAL rules and administered by the Permanent Court of Arbitration in The Hague. Filed in 2017, it was originally presided over by German arbitrator Rudolf Dolzer, with French arbitrator Emmanuel Gaillard as the banks’ appointee to the tribunal and former UK Supreme Court judge Lord Collins as Bahrain’s appointee.

    Dolzer died suddenly on 3 April 2020 and Gaillard almost exactly a year later, on 1 April 2021, with the pair being replaced by Kaufmann-Kohler and Belgian arbitrator Bernard Hanotiau, respectively.

    Although neither of the replacement arbitrators had been there for the hearing in the offices of Shearman & Sterling in Paris in May 2019, they were able to issue the award with Collins after hearing oral summaries of the evidence (in Kaufmann-Kohler’s case) and reviewing the evidence and transcripts of the hearing (in Hanotiau’s case).

    It was Bank Melli’s and Saderat’s case in the arbitration that Bahrain’s expropriation of Future Bank was part of a Saudi-led, politically motivated campaign against Iranian businesses that also saw it target the Iran Insurance Company and Iranian central bank.

    Bahrain defended the claims by alleging that Future Bank had failed to comply with Bahraini banking regulations and engaged in substantial illegal conduct, including money laundering and circumventing economic sanctions against Iran. This justified the actions taken against it, Bahrain argued.

    Details of the alleged illegal conduct were leaked to The Washington Post in April 2018, with Bahraini officials telling the newspaper that Iran had introduced Future Bank into the kingdom as “a Trojan horse” to dodge sanctions and help finance terrorism.

    More recently, Bahrain held a series of well-publicised trials in which Future Bank and Banks Melli and Saderat (together with other Iranian banks) were convicted of sanction-dodging and fined millions of Bahraini dinars. Officials of the banks were also convicted in their absence and sentenced to lengthy terms of imprisonment.

    In August, an Iranian foreign ministry spokesman vehemently denounced these trials, alleging that they were “driven by political ends” and that the defendants had not been notified of the proceedings or allowed to defend themselves.

    In the award, the tribunal accepted there was “limited” evidence of illegal activities by Future Bank but said this only emerged after it was placed into the administration of Bahrain’s central bank on 30 April 2015, on the recommendation of the crisis management committee. The committee did not have evidence of illegality before it and accordingly did not consider it, the tribunal said.

    In fact, the tribunal said the decision to put Future Bank into administration was taken by the committee “without any substantial deliberation or consideration of reasons“. The minutes of its meeting merely recorded that the bank’s continued operation would “cause harm to the production of financial services and the general interest in the kingdom“.

    Giving evidence, the governor of the central bank – who was on the committee – could not recall any reasons for the decision and there was no “paper trail” of discussions at earlier meetings that led to it, the tribunal said.

    The tribunal said the “manifest” lack of reasons suggested that the decision was “not a legitimate law enforcement measure” on Bahrain’s part. If it had been, it said it was confident there would have been “a full documentary record of internal correspondence, reports and minutes of meetings discussing the reasons justifying such an extreme measure.“

    It was “striking” that there was only one document, the minutes of the committee meeting, that shed any light on Bahrain’s decision, it said – and this had been disclosed only following a production order.

    The tribunal said that Bahrain’s central bank did not appear to have raised significant concerns about Future Bank’s non-compliance with regulations before 30 April 2015 or sought up-to-date evidence of non-compliance.

    Asked during the hearing why he had not issued Future Bank with fines or warnings before, the governor of the central bank said he was “a very patient man” but offered no explanation as to why his patience had suddenly run out.

    There was also no evidence of the central bank considering “less restrictive measures” to punish the non-compliance, the tribunal said. The governor testified that only administration and liquidation were discussed and gave “no credible reason” why the suspension of Future Bank’s licence would not have sufficed.

    Combined with all this, the tribunal said it could not ignore the “wider political context” at the time that Future Bank was put into administration.

    It noted that just a few weeks before, on 2 April 2015, Iran had agreed with China, France, Germany, Russia, the UK and the US to accept constraints on its nuclear programme in exchange for some relief from the economic sanctions that had long been imposed on the state. This agreement led to the signing of the Joint Comprehensive Plan of Action on 14 July 2015.

    It also noted reports that Saudi Arabia was strongly opposed to the nuclear deal and had put pressure on neighbouring and other states to sever ties with Iran, as well as Bahrain’s “strong ties” with and economic dependence on Saudi Arabia.

    The tribunal said it did not think there was sufficient evidence before it to show “nationality-based discrimination” on Bahrain’s part but “the political context and…absence of…reasons” for putting both Future Bank and the Iran Insurance Company into administration on the same day were “strong circumstantial evidence” that the state’s motivation was “political retribution“.

    The only apparent similarity between the two entities was that both were Iranian-owned businesses, it said.

    A statement made by an official of Bahrain’s central bank that it had been “a sovereign decision” to put Future Bank into administration supported the finding that the action was politically-motivated, the tribunal held. Although Bahrain argued that any decision of a central bank or government agency is “sovereign” in nature, the tribunal said the “natural meaning of the expression” and context suggested that the decision was “dictated by a political agenda as opposed to regulatory considerations“.

    From all this, the tribunal concluded that Bahrain’s “ex post facto” reasons for putting Future Bank into administration were not the real ones and the decision was “a political one… not a result of the bank’s alleged shortcomings.”

    Bahrain had acted, it said, not in “bona fide” response to criminality or regulatory breaches and to stabilise its financial sector, but “with a contrived agenda of political retribution against the claimants’ investment.“

    The state’s actions amounted to indirect expropriation because, although Banks Melli and Saderat retained formal ownership of their shares in Future Bank, they had been prevented from exercising their rights as shareholders for six years, the tribunal said.

    It considered that this expropriation had become permanent as the banks had “no realistic prospect” of recovering their rights as shareholders; “nor is it clear, more than six years from Future Bank’s placement in administration, whether and to what extent the claimants will receive proceeds from the bank’s liquidation.”

    As well as awarding damages of over €200 million (the exact figure is unclear for reasons that will emerge), the tribunal ordered Bahrain to pay the Iranian banks simple interest in 5-year US Treasury bonds from the date of expropriation to the date of payment of the award.

    It said these damages could be set off in the liquidation process, in light of debts Banks Melli and Saderat owe to Future Bank, but the position would depend on the chronology of the collections.

    “If the claimants collect under this award before liquidation proceeds are paid out…it would be up to the competent Bahraini authorities to consider the amounts at issue and avoid the materialisation of the risk of double recovery,” the tribunal said.

    “If, by contrast, the claimants receive liquidation proceeds before they collect on the award, then the tribunal sees no reason why the liquidation payment could not come in deduction of the amounts of damages owed hereunder.”

    A request by the banks that they should be given advance immunity to any set-off was refused.

    With respect to the banks’ request for €10 million moral and reputational damages, the tribunal said that the burden of proof rested on them as claimants to prove they had suffered damage caused by Bahrain’s BIT breaches and that they had failed to offer evidence of this.

    The banks had argued that their professional reputation was affected by “the sensational claims raised for the first time in this arbitration” and the leak to The Washington Post, while Bahrain countered that any such damage flowed from their own conduct “as longstanding and notorious participants in sanctions evasion and financial crime“.

    Claims under other articles of the BIT were rejected as the facts relied on were the same as those in the unlawful expropriation claim and they would not “would not alter or add to the remedies already available to the claimants“.

    With respect to costs, Bahrain was ordered to pay nearly 88% of the banks’ share of the €1.8 million costs of the tribunal and PCA, around €722,000. The tribunal said that neither party should alone bear the extra costs caused by the “sad and unforeseen” deaths of Dolzer and Gaillard, which required two reconstitutions of the tribunal and the re-hearing of oral submissions.

    Summarising its findings in the costs section of the award, the tribunal said that the banks had “largely prevailed on the preliminary objections, as well as on liability and quantum” but “did not succeed with respect to their argumentation on valuation methodology, interest rate and moral damages“.

    It said both sides had conducted the proceedings efficiently and professionally and, while each made unsuccessful applications – for interim measures in the claimants’ case and security for costs in Bahrain’s case – these were not abusive.

    Banks Melli and Saderat were represented in the case by a team from Derains & Gharavi, led by the firm’s founder Hamid Gharavi, who is a French-Iranian dual national. Gharavi – who has also won a treaty case against South Korea for Iranian claimants – served Bahrain with a notice of dispute on behalf of the Iranian Insurance Company in 2017 but GAR understands that the case was stayed by agreement of the parties pending the outcome of the arbitration over Future Bank.

    Gharavi is also behind a US$1 billion claim against Bahrain brought by Iran’s central bank, also relating to investments allegedly lost in the wake of the 2015 nuclear deal. The central bank is among those that have been convicted of sanction-dodging in Bahrain.

    Approached by GAR for comment, Gharavi paid tribute to Dolzer and Gaillard, praising their “human qualities and contributions to international law.“

    Gharavi declined to comment on the award in his clients’ favour save to say that “the ex post facto defences advanced by Bahrain were not only phony but dirty and increased costs for the banks and Bahrain.”

    As a citizen of Iran himself, he said he found it “regrettable that Bahrain unnecessarily broadened and aggravated the dispute by leaking these ex post facto, dirty allegations to a large mainstream media outlet such as The Washington Post and then initiating a string of rogue local criminal proceedings in Bahrain that targeted not only the claimants but also other Iranian entities and private individuals.“

    Gharavi went on to convey his hope that “now that its political taking has been set down in history by a unanimous international tribunal applying an international law instrument, Bahrain will engage in mitigation, limit its own costs and exposure to further awards and return all other Iranian assets taken on its territory over the same period“.

    Bahrain was represented in the arbitration by Jan Paulsson, who secured a famous win for the state at the International Court of Justice in a case against Qatar. He worked with a team of lawyers from Three Crowns, the firm he founded and retired from earlier this year.

    A source from the Bahraini side tells GAR that although Banks Melli and Saderat are “putting on a brave face“, the reality is that the liquidation of Future Bank extinguishes their claim because it is set off against the admitted debts they owe to that bank, which the source said are close to 140 million Bahraini dinars (€329 million).

    The Bahraini criminal proceedings – which the source says followed a lengthy and painstaking investigation by financial fraud experts, including a former executive director of the Bank of England – have furthermore resulted in judgments for more than US$1.4 billion against the Iranian banks.

    The source adds that Bahrain was punctilious about putting the Iranian defendants on notice of these proceedings, in a number of ways and in compliance with legal requirements applying to out-of-country defendants – because it predicted Iran’s likely disparagement of the court actions. The defendants chose not to appear because “they had been caught red-handed and had no defence and know the Iranian courts will protect them from enforcement of any judgments,” the source says.

    Although confident that the award will be extinguished by set-off, the Bahraini source nevertheless challenges the award’s findings, telling GAR, “the tribunal’s treatment of sanctions and violations by the Iranian banks raises more questions than it answers; it is therefore unacceptable in principle and Bahrain is entitled to seek its set aside by the courts of the Netherlands“.

    Among the questions that are said to concern Bahrain are how states can prevent suspected criminal activities by banks if they have to provide full evidence of carefully concealed misdeeds before they are able to halt their operations and investigate; and how the leniency to the Iranian banks sits with the sanctioning of Western banks fined billions in criminal penalties.

    Asked whether the Iranian banks agree that the damages may be subject to set-off, Gharavi says that Bahrain declared during proceedings that it did not plan any set-off based on local findings of liability.

    Gharavi adds: “It is regrettable that Bahrain has suggested to GAR that it could reply on criminal judgments and other findings in proceedings in Bahrain – staged without proper notice, against unrepresented defendants and on the basis of the very allegations dismissed by this tribunal under international law – to provide an alternative basis for set-off against the award. A unanimous BIT award rendered by a first-tier tribunal after years of adversarial process under international law is enforceable worldwide, whereas ex parte motions and findings in Bahrain based on charges that were held by the tribunal to be phony and political are not worth the paper they are written on.”

    GAR’s attention has, meanwhile, been drawn to a currency mix-up in the award, which states in one place that the claimants’ expert calculated the asset-based value of the Iranian banks’ shares in Future Bank as “US$243 million, which converts to 91,366,000 Bahraini dinars” and goes on to set the fair market value at the date of expropriation (and the compensation due) as “91,368,000 Bahraini dinars“. In euros, this would be €215 million.

    Later, in the “operative” final section of the award, the compensation due is stated in euros, as €243 million.

    As the sums in euros are nearly €30 million apart, the arbitral tribunal has been approached to correct the award, as permitted by the UNCITRAL rules.”