The General Court of the European Union dismissed last week an action brought by Middle East Bank, Munich Branch, seeking annulment of two Commission decisions authorizing Clearstream Banking AG to comply with US Iran-related sanctions under the EU’s Blocking Statute (Article 5 of Council Regulation (EC) 2271/96). Through its application, Middle East Bank had sought to force the release to its benefit of securities held by Clearstream (T-518/23 Middle East Bank, Munich Branch v. European Commission supported by Clearstream Banking AG).
In 2018, the U.S. withdrew from the Iran nuclear deal (known as the Joint Comprehensive Plan of Action or JCPOA) and reimposed nuclear-related secondary sanctions against Iran. The Office of Foreign Assets Control (“OFAC”) also readded over 400 individuals and entities to the Specially Designated Nationals and Blocked Persons List (the “SDN list”), including against Middle East Bank (MEB), an Iranian bank. These U.S. sanctions prohibit persons subject to U.S. jurisdiction (primary sanctions) and those outside of that jurisdiction (secondary sanctions), such as natural or legal persons of the European Union (“EU”), from doing business with persons on the SDN list. MEB has been on the U.S.’s SDN list since 2018 as regards primary sanctions and since October 2020 as regards secondary sanctions.
Following the reintroduction of U.S. sanctions in 2018, the EU updated its long-standing Blocking Statute to protect EU operators from the extra-territorial application of certain third countries laws, including these renewed Iranian sanctions. Under Article 5(1) of the Blocking Statute, EU persons cannot comply with the laws listed in an Annex, which includes the U.S. sanctions against Iran. Article 5(2) of the Blocking Statute allows the Commission to authorize EU operators to comply, fully and partially, where non-compliance would seriously damage their interests or those of the Union.
In this context a conflict arose between Clearstream Banking AG and the German-branch of MEB. MEB held bonds in custody with Clearstream Banking AG, the sole German central security depositary, which was responsible for safekeeping MEB’s securities. Following MEB’s designation on the SDN list, Clearstream Banking AG blocked MEB’s securities, preventing the execution of a sell order given in January 2020. Subsequently, MEB brought civil proceedings before the Regional Court and then the Higher Regional Court in Frankfurt against Clearstream Banking AG, while, in parallel, the latter sought authorization from the Commission under Article 5(2) of the Blocking Statute to comply with U.S. sanctions.
By two decisions of April 2023 and June 2024, the Commission granted Clearstream Banking AG authorizations to comply with the U.S. sanctions listed in the Annex of the Blocking Statute, specifically as regards freezing certain assets and refusing certain operations on MEB’s securities and funds. MEB challenged those decisions before the General Court, relying on several pleas, including alleged infringement of the principle of non-retroactivity, infringement of its procedural rights, errors of facts and an erroneous exercise of the Commission’s discretion.
Infringement of procedural rights
On the alleged infringement of procedural rights, MEB essentially claimed that the Commission should have communicated the full text of the contested decisions, and its underlying reasoning. The Court held, however, that the Blocking Statute and Regulation (EU) 2018/2011 laying down the criteria for the application of Article 5(2) of the Blocking Statute, did not require the Commission to communicate such decisions to third parties targeted by the foreign restrictive measures, and that only the authorization applicant (meaning Clearstream Banking AG) was the addressee to be notified. Therefore, third parties have no procedural status in that procedure. The Court emphasized that the EU legislature chose to establish a system in which the interests of third parties are not to be considered. The fact for the Commission to have voluntarily heard MEB and provided a description of the scope of the first decision did not create new procedural rights or an obligation to notify the full decisions to MEB.
Alleged error of facts
On the alleged error of facts regarding MEB’s ownership, the General Court accepted that the Commission’s description of MEB as being owned by the Islamic Republic of Iran was not supported by the facts of the file, since MEB is a private bank listed on the Tehran Stock Exchange. However, the Court considered this to be immaterial because the decisions were based on MEB’s inclusion on the SDN list and the risk of serious harm from non-compliance with U.S. sanctions, not on whether MEB was a public or private bank.
Retroactivity
On the retroactive effect of the contested decisions, MEB argued that the authorizations were unlawfully retroactive, since the first decision authorized compliance with the U.S. sanctions from the date of the authorization application (February 2021) and the second from the date of expiry of the first authorization, rather than from the dates of notification in April 2023 and June 2024, respectively.
MEB relied on the principle of legal certainty and on the Commission’s Guidance Note to the Blocking Statute, which stated that application for authorization had no suspensive effect and that applicants must comply with Article 5(1) until authorization is granted.
According to the Court, the principle of legal certainty, as a rule, precludes an EU measure from taking effect before its publication or notification, but it may exceptionally be otherwise when two conditions are met: (i) the objective pursued so requires and (ii) the legitimate expectations of those concerned are duly respected.
The Court held first that the Commission had expressly set out in the recitals the reasons justifying retroactive effect: for the first decision, the administrative procedure had been delayed for policy reasons independent of Clearstream Banking AG, and for the second decision, retroactivity was granted to ensure continuity between the two authorizations.
As regards legitimate expectations, the Court acknowledged that the Guidance Note, which purports to guide the application of certain provisions of the Blocking Statute, may be perceived as rules indicating the practice which the Commission proposes to follow in the application of that regulation capable of giving rise to a legitimate expectation.
However, it found that the guidance merely reminds applicants that they must comply with Article 5(1) pending a decision, without addressing or excluding the possibility that the effective date of authorization may be fixed earlier, not per se coinciding with the date when the decision is notified. Thus, the Guidance Note cannot be understood as a self-imposed limitation on the Commission’s power to confer retroactive effect on authorizations under Article 5(2).
Scope, proportionality and misuse of discretion
Finally, MEB claimed that the Commission exercised its discretion incorrectly and disproportionately, arguing that its funds were used exclusively for humanitarian operations, which were not covered by U.S. sanctions and that the Commission should have determined which sanctions MEB was exposed to and which transactions fell within their scope. MEB also claimed that the Commission should have concluded that EU interests could not be seriously harmed by operations in the humanitarian field and that Clearstream Banking AG should not be left to determine which operations were covered.
The Court rejected those arguments, finding that the decisions expressly limited the authorizations to “complying” with U.S. sanctions, and clarified that any operations exempted under those laws, including humanitarian operations, fell outside the authorizations’ scope. It further held that the Commission’s task is to assess the risk of serious harm to the authorization applicant or the Union where the applicant does not comply with those laws, and not to classify each individual operations or assets of the targeted third party under US law or to identify all exempt transactions.
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