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Iran's Legal Challenge to Sanctions: Another Hurdle for Talks?

RUSI Analysis, 3 Apr 2013

While all eyes are on Almaty and Istanbul, what happens in Luxembourg and London might also affect nuclear talks with Iran. Sanctions are coming under successful legal challenge.

By Javier Serrat for RUSI.org

Bank Saderat

Iran flagOfficials from Iran and the P5+1 have made few public comments after the latest nuclear negotiations in Almaty and Istanbul over the last month. Press reports indicate that the group of six powers has offered to ease restrictions on trade in gold and precious metals, petroleum-related commerce, and some banking activities, and Iran is mulling a temporary suspension of enrichment at 20 per cent. But what happens when the parties meet again this weekend might also be influenced by events in London and Luxembourg.

Late last month, the justices of the UK's highest court held an unprecedented secret session to review HM Treasury's evidence in its designation of Iran's Bank Mellat as an agent of proliferation. The ongoing legal process in London follows Mellat's recent victory in a case challenging the EU Council's sanctions against the bank. Mellat was one of more than forty Iranian firms and financial institutions that have sought judicial review against the European Council's designations, and the second bank this year whose designation has been annulled by the EU General Court in Luxembourg, the other one being Bank Saderat.

Implications

Mellat and Saderat are partially state-owned large commercial banks with considerable presence overseas. Mellat, for instance, has branches in Turkey and South Korea, while Saderat has branches in a dozen countries.  While neither bank has been designated by the UN Security Council for proliferation activities, transactions involving Bank Saderat are subject to more stringent financial monitoring. The European Council sanctioned Saderat in 2010 for providing services to two UN-designated entities. The body has also noted that Mellat 'has facilitated hundreds of millions of dollars in transactions for Iranian nuclear, missile, and defense entities.' And, according to press reports, Mellat's Seoul branch is suspected of funneling payments for arms transfers to North Korea.

Policymakers are rightly worried about the practical consequences of the court's decisions. For instance, the banks would be able to once again move funds for proliferation transactions through the SWIFT network. SWIFT (the Society for Worldwide Interbank Financial Telecommunication) is a cooperative that enables secure interbank communications as well as the transfers of funds and securities. Almost all banking transactions go through the SWIFT system, and in 2011, twenty Iranian banks and twenty-nine firms exchanged more than 2 million messages.

But the access of EU-designated banks like Mellat and Saderat was curtailed last year when, following an EC directive, SWIFT announced that it would be disconnecting Iranian designated entities from its network. Non-designated banks, however, have continued to use the system. Thus, the lifting of the restrictions might allow Iran to, once again, easily transfer funds through Saderat and Mellat for purchases of nuclear wares and other UN-prohibited goods.

Yet, the rulings in Luxembourg - and the series of potentially similar rulings that might partially lift the restrictions on Iranian shipping, oil, and financial entities, including the central bank - present a much more immediate challenge to the current negotiations in Almaty. The annulments could in fact influence Iran's willingness to accept the modest sanctions relief package that has been reported, if Tehran judges that the EU court might offer a more substantial easing of the restrictions.

Strengthening Iran's Hand

Since the beginning of the nuclear dispute, Tehran has consistently demanded that the international community recognise what it sees as its right to enrich uranium and that the sanctions be lifted. Instead, since 2006 the Security Council has imposed three rounds of trade, financial, and other restrictions against individuals and companies believed to be involved in Iran's nuclear and ballistic missile technology procurement activities. The United States and a coalition of like-minded countries, like the twenty-seven members of the European Council, have put in place a panoply of unilateral penalties, some targeted at proliferators and their abettors and some directed at important sectors of Iran's economy, particularly its oil industry. Meanwhile, before Almaty, the P5+1 had previously offered spare parts for Iran's decrepit fleet of 727 and 747 Boeings - an offer Tehran dismissed as pathetic.

In order to understand how the legal victories of Saderat and Mellat could influence this new round of talks, one must consider the role sanctions play in the P5+1's diplomatic approach. Sanctions have been seen as supporting the objectives of the international community in two fundamental ways: by creating hurdles to Iran's illicit procurements (through targeted measures) and by imposing intense pressure on Iran's economy (through restrictions on key industries). Iran's leadership, the logic goes, will be compelled to accept greater transparency and limitations on its nuclear activities in order to rid itself from its economic misery.

Conversely, a potential dismantlement of some of the harshest sanctions could undermine this strategy. To be sure, the EU court's decisions might be reversed on appeal or a similar victory may not be granted to the other plaintiffs; likewise, the UK Supreme Court might rule against Bank Mellat. But the danger for nuclear diplomacy lies in the possible perception, in the eyes of Iranian decision-makers, that the courts might offer more substantial sanctions relief than the negotiators in Almaty are willing to put on the table. This modus of easing the economic restrictions would have the additional advantage of not requiring any concessions on the part of Iran, and Iran's leaders would not have to pay the political costs at home for acquiescing to international demands.

Of course, such a judgment would be shortsighted. Iran would still be subject to the formidable measures imposed by the United States, so a string of legal victories for Iranian companies might not substantially alter Tehran's predicament of growing economic isolation. The US sanctions, both those imposed by executive order of the president and those imposed by Congress, are the most far-reaching and hard-hitting restrictions Iran faces.

Gridlock

What the court decisions might change, however, is the leadership's calculus at the margin, and its willingness to accept the P5+1's latest offer. At the very least, Iran's negotiators might sense a weakness in the sanctions regime and try to extract more concessions from the P5+1. This would compound the likelihood of deadlock in the talks.

Given Iran's political calendar, there has been a general consensus that the timeframe for negotiations this year is limited. In Almaty, the P5+1 refreshed the diplomatic process, hopeful that they could achieve some modicum of progress before Iran's presidential campaign begins in earnest. But a series of little-noticed lawsuits might thwart a resolution to the impasse.

Javier Serrat is a Research Associate and former Scoville Fellow at the James Martin Center for Nonproliferation Studies of the Monterey Institute of International Studies. A longer description of these legal cases appeared in an earlier article for Arms Control and Regional Security for the Middle East.



Further Analysis: Iran, Middle East and North Africa, European Union, International Institutions, Nuclear Non-Proliferation and Strategy, Global Security Issues

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