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Iranian banks notch win in dispute over sanctions enforcement

Part of the skyline of Manama, the capital of Bahrain, on Dec. 10, 2011. (Nikki Kahn/The Washington Post)

An arbitration panel has ruled in favor of two Iranian banks in a financial dispute over the 2015 closing of a Bahraini financial institution accused of helping Iran skirt U.S. and U.N. economic sanctions.

The Hague-based tribunal’s three arbitrators ordered the government of Bahrain to pay more than $270 million in compensation for losses and legal fees stemming from its decision to close Future Bank, an institution co-founded by Iranians and linked by Bahraini officials to money-laundering and other illicit practices.

While acknowledging that infractions had occurred, the panel concluded that Bahrain’s enforcement measures violated its own banking policies and regulations and were motivated primarily by politics — a “contrived agenda of political retribution” that reflected regional animosities against Iran, according to a copy of the panel’s ruling reviewed by The Washington Post.

Future Bank was established in Bahrain in 2004 with the backing of Bank Melli and Bank Saderat, two of Iran’s largest financial institutions, both of which, like Future Bank, have been previous targets of U.S. economic sanctions. Bahrain closed Future Bank in April 2015, just weeks after the Iran nuclear agreement was negotiated between Tehran on one side and the United States and five other world powers on the other.

Bahrain argued that closing the bank was necessary to protect investors against alleged corruption and sanctions violations by Future Bank’s senior managers, several of whom were subsequently convicted of financial crimes in Bahraini legal proceedings. Bahrain has announced plans to appeal the panel’s ruling before a Dutch court.

Bank helped Iran skirt sanctions, documents allege

Although the panel ordered Bahrain to pay the Iranians more than $270 million in compensation and legal fees, it said the damages could be offset by payments made as part of Future Bank’s still-pending liquidation. Legal experts familiar with the case said it is unclear how much money, if any, actually will change hands or when.

The tribunal rejected a demand for additional damages based on alleged harm to the Iranian banks’ reputations, according to the panel’s 235-page decision.

The arbitrators did not dispute Bahrain’s claim that Future Bank failed to comply with legal obligations on record-keeping, monitoring and reporting of suspicious transactions. Such conduct made it more difficult, Bahraini officials say, to fully document the scope of Iran’s circumvention of international sanctions imposed by the United States and the United Nations over Iran’s nuclear activities.

But the panel concluded that Bahrain’s actions against Future Bank “were not genuine regulatory measures aimed at addressing Future Bank’s illegal conduct,” according to the copy of the decision seen by The Post. Rather, the closing of the bank amounted to an “expropriation” of the Iranian banks’ money, without due consideration of less-punitive measures, the panel said. The arbitrators appeared skeptical over whether U.S. and U.N. sanctions against Iran were binding in all cases on Bahraini bank regulators.

“Not all international sanctions constitute fundamental rules of international law,” they wrote.

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Hamid Gharavi, an attorney for the Iranian banks, hailed the decision and called on Bahrain to compensate Iran for other cases in which Iranian assets were seized or frozen in sanctions-related disputes.

“I hope that Bahrain will now 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,” he said in an emailed statement.

Bank records and other documents presented by Bahraini officials during the proceedings detailed instances of alleged sanctions violations by Future Bank, including a 2009 case in which bank officials are accused of successfully helping Iran obtain an ultrafast speedboat that could be used in military operations. Sale of the vessel to Iran was prohibited under international sanctions.

“This award contains serious procedural, evidential and legal deficiencies,” the Bahraini government said of the panel’s ruling in a formal statement Friday. The statement noted “the context and history of the broader Future Bank case, which is the largest money-laundering case in Bahraini history.”

The arbitration panel’s decision is the result of a four-year effort by Bank Melli and Bank Saderat to recoup hundreds of millions of dollars in losses that occurred after Bahraini authorities placed Future Bank in administration amid investigations into alleged sanctions-busting activities. Established as a joint business venture by Iranian and Kuwaiti investors, with offices in the Bahraini capital, Future Bank quickly came under scrutiny at a time when Iran faced international pressure over its expanding nuclear program. The bank was placed under sanctions by the George W. Bush administration in 2008, four years after its founding.

Bahrain, an island nation in the western Persian Gulf connected by a causeway to Saudi Arabia, is a U.S. ally and home to the Navy’s Fifth Fleet.