BRUSSELS (Reuters) - In the years-long campaign to tie a web of sanctions around Iran and stall its nuclear program, the European Union may just have met its biggest obstacle: its own law courts.
Fearing Tehran is seeking the means to make bombs, Europe’s governments have been combing through Iran’s political elites and businesses to find people and companies linked to the financing and technical aspects of its nuclear work.
They have frozen their assets, refused visas and banned companies in the European Union from doing business with them. But dozens of those targeted have challenged the restrictions in court and some are beginning to win, embarrassing Europe’s policymakers and causing alarm in the United States.
None of the court judgments are yet final. But with Israel brandishing threats against a nuclear program that Iran insists has no military purpose, Washington worries that any weakening of sanctions may raise the risk of war.
At the heart of the issue is the refusal by EU governments to disclose evidence linking their targets to Iran’s nuclear work. Doing so in court, they say, may expose confidential intelligence, undermining efforts to combat the program.
The courts have effectively rejected that argument, saying that if a case is to be made, evidence must be presented. Lawyers for the Iranians argue there simply is no evidence that proves any link to the nuclear program - a view supported by British judges who did review some secret material this year.
“It is very clear there is no evidence,” said Sarosh Zaiwalla, senior partner at Zaiwalla & Co, a London law firm which has successfully represented Iran’s Bank Mellat in litigation against sanctions imposed by the EU.
The bank, one of the biggest private lenders in Iran, won a case in January in the European Union’s Luxembourg-based second-highest court. It had challenged an EU move in 2010 to freeze its assets, saying the EU had failed to prove the bank provided banking services for the nuclear program. The court agreed.
“The chairman of the court asked the EU lawyers, ‘can you show me the evidence?’. And they said ‘no, it’s Iran, and you must presume there is evidence’,” Zaiwalla said.
“The judge was very upset and said ‘this is a court of law and you cannot assume things’.”
In its January 29 judgment, using dense legal language, the General Court said the council of EU governments was “in breach of the obligation to state reasons and the obligation to disclose to the applicant ... the evidence adduced against it”.
The lifting of sanctions against Bank Mellat is postponed for now, pending an appeal by EU governments to Europe’s highest court. But the case illustrates the dilemma facing the European Union in its push to stop Iran from advancing the atom work.
Government lawyers are telling the courts to trust them and the courts are refusing. To safeguard its sanctions policy and its economic pressure on Iran, the EU may have to present evidence - including sensitive intelligence - in court.
But because of rules governing pan-European courts, all evidence would then become public which may damage clandestine operations and unravel the process of devising sanctions.
“There is nothing in the current rules to enable us to consider sharing information without it becoming public,” said one European diplomat, speaking on condition of anonymity.
“This is the crux of the issue. We cannot just be handing information around.”
In Washington, anxiety over court rulings is mounting.
“It’s a real concern of ours that the EU is having difficulties sustaining some of its designations,” David Cohen, the U.S. Treasury Department’s Under Secretary for Terrorism and Financial Intelligence, told Reuters.
Lawyers for the Iranian plaintiffs paint the conflict as a human rights issue, praising the Luxembourg court for decisions they say amount to taking a stand against government abuse.
“It may be politically embarrassing,” said Maya Lester, a London-based lawyer who represents companies and individuals in litigation concerning European sanctions, including the Iranian central bank and the country’s main tanker company, NITC.
“But in terms of upholding the rule of law, what the European court has done is impressive and quite brave. It shows it to be a court upholding human rights ... which is not easy given how political Iranian sanctions are.”
The lawyers for Bank Mellat had asked EU governments to show them information linking the lender to the nuclear program and consider their complaint that sanctions were not justified, in a series of letters in 2010 and 2011.
In one, dated January 5, 2011, the lawyers had accused the European Union of having made a “cursory” review of their complaint. The review, they said, was “clearly ineffective, insufficient and incompatible with the Bank’s right of defense”.
“We got no response whatsoever,” said Zaiwalla. “We would ask every year for new material but they would ignore it.”
The court concluded in January this year that the European Union had, in fact, breached the bank’s right of defense.
It also said EU governments had not sufficiently checked the evidence they did offer, highlighting another dilemma facing Europe in how it targets the nuclear program.
Decisions on sanctions - taken unanimously by all European governments to ensure a level playing field for all EU companies - usually follow a proposal by one or two governments, often permanent U.N. Security Council members France or Britain. Other capitals have to trust their evidence.
Last month, Bank Mellat won another case, at Britain’s Supreme Court. Its judges, too, ruled the British government was wrong to have imposed sanctions on the lender but they also took their argument a step further than the EU court in Luxembourg.
Having had access to evidence under British rules allowing for a secret court session, the judges ruled that measures against the bank were “arbitrary” and “irrational” - exposing the possibility that even secret evidence governments may share with the courts might not be enough to justify sanctions.
While the net of sanctions may have only been cut in a few places at this stage, dozens of other cases are in the pipeline. The concern among EU officials is that if a few more knots are untied, the entire sanctions netting could start to unravel.
That may have consequences for security in the Middle East, especially if it allows Iran to step up its nuclear program.
Tehran says the work is aimed only at peaceful purposes, such energy supply and medical research. But the West has argued for years that it has military goals, pursuing diplomacy and sanctions in hopes of persuading Tehran to scale it back.
If such efforts fail, Israel has threatened to bomb nuclear sites, arguing that Tehran threatens its survival. Action by Israel - widely believed to be the only nuclear power in the Middle East - could easily spill into a new regional war.
In the minds of Western policymakers, Iran’s banks are a vital target for sanctions, and the fact that the banks appear to be winning in the courts is seen as particularly worrisome.
The Luxembourg ruling on Bank Mellat was followed by a similar decision in February in favor of Bank Saderat, one of the largest lenders in Iran. More will be on the docket soon.
Officials in Luxembourg say that in early September the court is due to rule on cases filed by Europaeisch-Iranische Handelsbank AG (EIH), Post Bank and Persia International Bank. The Iranian central bank also has a case pending, as do numerous companies linked to Iran’s vital shipping and oil industries.
Technical aspects of the nuclear work have also come into question. In May, the Luxembourg court ruled in favor of an Iranian maker of electrical transformers, Iran Transfo. It was accused of equipping the Fordow uranium enrichment facility, which Western states suspect could produce bomb-grade material.
“The council (of EU governments) hasn’t produced any element of proof that the company has participated in the construction of Fordow,” an EU lawyer said. “The court said ‘you haven’t produced anything, the file is empty, you have lost the case’.”
Several solutions to the conundrum are under discussion in Brussels and elsewhere in Europe. British officials, who have taken a lead in proposing targets for sanctions, as well as EU lawyers, are in contact with the Luxembourg courts to devise new rules for using confidential evidence in judicial hearings.
Giving some judges security clearance would go some way in addressing court concerns, lawyers say. But it may take time.
Overhauling how sanctions are designed would be another step. EU lawyers argue that targeting whole sectors of the Iranian economy would sidestep the necessity of proving in court a particular target’s role in nuclear arms proliferation.
The EU already has sweeping measures in place against the Iranian energy and shipping sectors. But moving further is likely to meet strong resistance in many European capitals.
Sanctions experts say, for example, that hundreds of small German businesses engage in legitimate trade with Iran that earned Germany some $250 million a month in exports last year.
While the EU’s main military powers, Britain and France, pursue sanctions, some partners prefer to maintain trade ties, under close supervision, creating tensions within the bloc.
As one EU lawyer put it: “The underlying economic interests of EU member states are different.”
Additional reporting by Steve Stecklow; Editing by Alastair Macdonald