Mellat v HM Treasury

The claimant Bank Mellat (“the Bank”) is a financial institution affected by the Financial Restrictions (Iran) Order 2011 (SI 2011/2775) and the Financial Restrictions (Iran) Order 2012 (SI 2012/2904). By Part 8 claims filed on 20^th February 2012 and 21^st February 2013, and subsequently consolidated, the Bank has applied pursuant to section 63 of the Counter-Terrorism Act 2008 to set aside the financial restrictions decisions by which it is affected. By an application notice issued on 11^th April 2014 pursuant to CPR 79.25, the defendant Her Majesty’s Treasury (“the Treasury”) has sought the permission of the court to withhold from disclosure certain closed material on which it relies in defence of the claim. In response to formal requests by the Bank, the Treasury has provided open gists of some of the closed material; but it is contended on behalf of the Bank that the gists do not provide sufficient open information to enable the Bank to know and meet the Treasury’s case. I therefore have to determine the Treasury’s application for permission to withhold closed material.

At a closed hearing (at which neither the legal representatives of the Bank, nor any officer of the Bank, were present), I heard submissions from Mr Kovats QC and Mr Blake on behalf of the Treasury, and from Mr Underhill QC who has been appointed as a Special Advocate for this purpose. I am grateful to them all for their written and oral submissions, and for the work which they have undertaken in narrowing the issues between them.

The issues which remain to be resolved require detailed consideration of closed material. It is therefore not possible to give details of the submissions, or of the reasons for my decision, in an open judgment. This judgment accordingly falls into two sections. In this open section, I set out the legal framework and the principles which I have applied. In a separate, closed, section I will summarise the arguments and explain the reasons for my decision.

The background to the present application can be summarised as follows. The Financial Restrictions (Iran) Order 2009 (SI 2009/2725) came into force on 9^th October 2009, with immediate effect. It specifically applied to the Bank. The Order had a severe impact on the Bank’s business both in the UK and internationally. It was challenged in proceedings brought by the Bank, and in June 2013 the Supreme Court determined that the 2009 Order was both procedurally and substantively unlawful. There are ongoing proceedings between the Bank and the Treasury in which the Bank claims damages for the financial loss which it suffered as a result of the 2009 Order.

The 2011 Order came into force on 21^st November 2011. The 2012 Order came into force a year later, on 20^th November 2012. It was revoked on 31^st January 2013, when new EU restrictions came into effect.

The 2011 and 2012 Orders are in materially identical terms. In contrast to the 2009 Order, they were aimed, not at a small number of specific financial institutions, but rather at all credit institutions incorporated in Iran and their subsidiaries, wherever located and wherever carrying on business.

The material which has been disclosed by the Treasury to the Bank includes gists of information submitted to the Chancellor in support of the making of each of the 2011 and 2012 Orders. In addition, a number of relevant documents have been exhibited to statements made by Mr Matthew Taylor, Deputy Director of the Sanctions and Illicit Finance Team in the International and EU Group of HM Treasury. He indicates that the objective of the 2011 Order was –

“to minimise the threat to the UK’s national interests posed by Iran’s proliferation-sensitive activities and reduce the risk of the UK financial sector being unwittingly used to facilitate Iran’s proliferation-sensitive activities.”

When the 2011 Order expired, it was replaced by the 2012 Order which had a similar objective. At the time the 2012 Order was made it was known that EU-wide measures with a similar effect would soon be introduced. The 2012 Order was therefore intended the bridge the gap before that happened. When Council Regulation EU 1263/2012 came into force (in December 2012), the 2012 Order was revoked with effect from 31^st January 2013 by the Financial Restrictions (Iran)(Revocation) Order 2013.

In the present proceedings, the Bank contends that both the 2011 and the 2012 Orders were unlawful. It contends that both Orders were irrational; were ultra vires the powers conferred on the Treasury by the Counter-Terrorism Act 2008; and were an unjustified interference with the Bank’s rights under Article 6 of, and Article 1, Protocol 1 to, the European Convention on Human Rights, and with the free movement of capital. It is alleged that both Orders were irrational, discriminatory and disproportionate; tainted by irrelevant considerations and material errors of fact; made for an improper purpose; and procedurally unfair and in breach of the principles of good administration. In its Defence, the Treasury denies all those allegations. It contends that the Orders were lawfully made, being proportionate to the risk to the national interests of the UK of activity in Iran facilitating the development or production of nuclear weapons. It further contends that the Orders were necessary because of the risk of Iranian banks being used to provide financial services to entities and persons involved in Iran’s nuclear and ballistic missiles programmes, and denies that they were vitiated by any of the errors and faults which the Bank alleges.

By section 62 of the Counter-Terrorism Act 2008, Schedule 7 to that Act confers on the Treasury powers to act against terrorist financing and money laundering. In essence, Schedule 7 empowers the Treasury to give a direction which imposes upon designated financial institutions requirements as to the circumstances in which they may carry on business with certain other persons, or prohibits them from carrying on business with those persons at all.

The conditions which must be met before such a direction can be given are set out as follows in paragraph 1 of Schedule 7:

“1.

Conditions for giving a direction

(1)

The Treasury may give a direction under this Schedule if one or more of the following conditions is met in relation to a country.

(2)

The first condition is that the Financial Action Task Force has advised that measures should be taken in relation to the country because of the risk of terrorist financing or money laundering being carried on –

a.

in the country,

b.

by the government of the country, or

c.

by persons resident or incorporated in the country.

(3)

The second condition is that the Treasury reasonably believe that there is a risk that terrorist financing or money laundering activities are being carried on –

a.

in the country,

b.

by the government of the country, or

c.

by persons resident or incorporated in the country,

and that this poses a significant risk to the national interests of the United Kingdom.

(4)

The third condition is that the Treasury reasonably believe that –

a.

the development or production of nuclear, radiological, biological or chemical weapons in the country, or

b.

the doing in the country of anything that facilitates the development or production of any such weapons,

poses a significant risk to the national interests of the United Kingdom.

(5)

The power to give a direction is not exercisable in relation to an EEA state.”

It may be noted that the recitals to both the 2011 Order and the 2012 Order stated that the first and third conditions were met.

The persons to whom a direction may be given are identified as follows in paragraph 3 of Schedule 7:

“3.

Persons to whom a direction may be given

(1)

A direction under this Schedule may be given to –

a.

a particular person operating in the financial sector,

b.

any description of persons operating in that sector, or

c.

all persons operating in that sector.

(2)

In this Schedule, “relevant person”, in relation to a direction, means any of the persons to whom the direction is given.

(3)

A direction may make different provision in relation to different description of relevant person.”

Both the 2011 Order and the 2012 Order gave a direction to “all persons operating in the financial sector”.

As to the requirements which may be imposed by a direction, paragraph 9 of Schedule 7, so far as is material for present purposes, provides as follows:

“9.

Requirements that may be imposed by a direction

(1)

A direction under this Schedule may impose requirements in relation to transactions or business relationships with –

a.

a person carrying on business in the country;

b.

the government of the country;

c.

a person resident or incorporated in the country;

d.

a company that is a subsidiary of a company within paragraph (a) or (c).

(2)

The direction may impose requirements in relation to –

a.

a particular person within sub-paragraph (1),

b.

any description of persons within that sub-paragraph, or

c.

all persons within that sub-paragraph.

(3)

In this Schedule “designated person”, in relation to a direction, means any of the persons in relation to whom the direction is given.

(4)

The kinds of requirement that may be imposed by a direction under this Schedule are specified in –

a.

paragraph 10 (customer due diligence);

b.

paragraph 11 (ongoing monitoring);

c.

paragraph 12 (systematic reporting);

d.

paragraph 13 (limiting or ceasing business).

(5)

A direction may make different provision –

a.

in relation to different descriptions of designated person, and

b.

in relation to different descriptions of transaction or business relationship.

…

(6)

The requirements imposed by a direction must be proportionate having regard to the advice mentioned in paragraph 1(2) or, as the case may be, the risk mentioned in paragraph 1(3) or (4) to the national interests of the United Kingdom.

…”

Under the 2011 and the 2012 Orders, the designated persons in respect of whom the direction was given were the Central Bank of Iran, any credit institution incorporated in Iran and any branch or subsidiary (wherever located) of such an institution.

Subsequent paragraphs of Schedule 7 give more detail of the four kinds of requirement which may be imposed. It is only necessary for me to quote paragraph 13:

“13.

Limiting or ceasing business

A direction may require a relevant person not to enter into or continue to participate in –

(a)

a specified transaction or business relationship with a designated person,

(b)

a specified description of transactions or business relationships with a designated person, or

(c)

any transaction or business relationship with a designated person.”

Both the 2011 Order and the 2012 Order imposed requirements pursuant to paragraph 13(c). In each of the Orders, the material paragraph is in these terms:

“Direction to cease business.

4.

The Treasury direct that a relevant person must not –

(a)

enter into, or

(b)

continue to participate in,

any transaction or business relationship with a designated person.”

By paragraph 30 of Schedule 7, failure to comply with a requirement imposed by a direction is a criminal offence, subject to a defence where the person accused had taken all reasonable steps, and exercised all due diligence, to ensure compliance with the requirement.

As I have indicated in paragraph 1 above, the Bank’s applications in the present proceedings have been made pursuant to section 63 of the Counter-Terrorism Act 2008, which so far as is material for present purposes provides as follows:

“Application to set aside financial restrictions decision

(1)

This section applies to any decision of the Treasury in connection with the exercise of any of their functions under

…

c)

Schedule 7 to this Act …

(2)

Any person affected by the decision may apply to the High Court … to set aside the decision.

(3)

In determining whether the decision should be set aside the court shall apply the principles applicable on an application for judicial review.

(4)

If the court decides that a decision should be set aside it may make any such order, or give any such relief, as may be made or given in proceeding for judicial review.

(5)

Without prejudice to the generality of subsection (4), if the court sets aside a decision of the Treasury –

…

c)

to give a direction or make an order under Schedule 7 to this Act,

the court must quash the relevant direction or order.

… ”

An application under section 63 comes within the definition, in section 65 of the 2008 Act, of “financial restrictions proceedings”. By sections 66 and 67, provision is made for rules of court relating to financial restrictions proceedings. By section 66(4) –

“(4)

Rules of court may make provision –

a.

enabling the proceedings to take place without full particulars of the reasons for the decisions to which the proceedings relate being given to a party to the proceedings (or to any legal representative of that party);

b.

enabling the court to conduct proceedings in the absence of any person, including a party to the proceedings (or any legal representative of that party);

c.

about the functions of a person appointed as a special advocate;

d.

enabling the court to give to a party to the proceedings a summary of evidence taken in the party’s absence.”

In relation to disclosure, section 67 provides as follows:

“67.

Rules of court about disclosure

(1)

The following provisions apply to rules of court relating to –

a.

financial restrictions proceedings, or

b.

proceedings on an appeal relating to financial restrictions proceedings.

(2)

Rules of court must secure that the Treasury are required to disclose –

a.

material on which they rely,

b.

material which adversely affects their case, and

c.

material which supports the case of a party to the proceedings.

This is subject to the following provisions of this section.

(3)

Rules of court must secure –

a.

that the Treasury have the opportunity to make an application to the court for permission not to disclose material otherwise than to –

i.

the court,

ii.

any person appointed as a special advocate;

b.

that such an application is always considered in the absence of every party to the proceedings (and every party’s legal representative);

c.

that the court is required to give permission for material not to be disclosed if it considers that the disclosure of the material would be contrary to the public interest;

d.

that, if permission is given by the court not to disclose material, it must consider requiring the Treasury to provide a summary of the material to every party to the proceedings (and to every party’s legal representative);

e.

that the court is required to ensure that such a summary does not contain material the disclosure of which would be contrary to the public interest.

(4)

Rules of court must secure that in cases where the Treasury –

a.

do not receive the court’s permission to withhold material, but elect not to disclose it, or

b.

are required to provide a party to the proceeding with a summary of material that is withheld, but elect not to provide the summary,

provision to the following effect applies.

(5)

The court must be authorised –

a.

if it considers that the material or anything that is required to be summarised might adversely affect the Treasury’s case or support the case of a party to the proceedings, to direct that the Treasury shall not rely on such points in their case, or shall make such concessions or take such other steps, as the court may specify, or

b.

in any other case, to ensure that the Treasury do not rely on the material or (as the case may be) on that which is required to be summarised.

(6)

Nothing in this section, or in rules of court made under it, is to be read as requiring the court to act in a manner inconsistent with Article 6 of the Human Rights Convention.

(7)

In this section –

a.

references to a party to the proceedings do not include the Treasury;

b.

references to a party’s legal representative do not include a person appointed as a special advocate; and

c.

“the Human Rights Convention” means the Convention with the meaning of the Human Rights Act 1998 (see section 21(1) of that Act).”

Those statutory requirements have been implemented by the provisions of CPR Part 79. CPR 79.2 modifies the overriding objective as follows:

“79.2(1) Where this Part applies, the overriding objective in Part 1, and so far as relevant any other rule, must be read and given effect in a way which is compatible with the duty set out in paragraph (2).

With specific reference to the present application by the Treasury to withhold closed material, CPR 79.25 makes provision for, inter alia, the appointment of a special advocate to represent the interests of the party from whom the Treasury seeks to withhold the material. The requirements of this rule have been met in this case.

CPR 79.26 makes provision for the consideration of an application of this nature by the Treasury. By 79.26(4), the hearing must take place in the absence of the specially represented party and that party’s legal representative. By 79.26(5), the court will give permission to the Treasury to withhold closed material where it considers that disclosure of that material would be contrary to the public interest. By 79.26(6), where permission is given to withhold closed material the court will consider whether to direct the Treasury to serve a summary of that material on the specially represented party or that party’s legal representative, but will ensure that such a summary does not contain material, the disclosure of which would be contrary to the public interest. Where the court does not give the Treasury permission to withhold closed material, or directs the Treasury to serve a summary of that material on the specially represented party or that party’s legal representative, 79.26(7) provides –

“(a)

the Treasury are not required to serve that material or summary, but

(b)

if they do not do so, at a hearing on notice, the court may –

(i)

where it considers that the material or anything that is required to be summarised might adversely affect the Treasury’s case or supports the case of the specially represented party, direct that the Treasury must not rely on such material in their case, or must make such concessions or take such other steps, as the court may specify; or

(ii)

in any other case, direct that the Treasury do not rely on the material or (as the case may be) on that which is required to be summarised.”

The principles to be applied:

Principles relating to the disclosure of closed material were set out by the House of Lords, in the context of a case concerned with control orders, in Secretary of State for the Home Department v AF (No. 3) [2009] UKHL 28, [2010] 2 AC 269 (“AF3”). At paragraph 59, Lord Phillips stated the position as follows:

“… the controlee must be given sufficient information about the allegations against him to enable him to give effective instructions in relation to those allegations. Provided that this requirement is satisfied there can be a fair trial notwithstanding that the controlee is not provided with the detail or the sources of the evidence forming the basis of the allegations. Where, however, the open material consists purely of general assertion and the case against the controlee is based solely or to a decisive degree on closed materials the requirements of a fair trial will not be satisfied, however cogent the case based on the closed materials may be”

Lord Scott at paragraph 96 made a point on which Mr Underwood particularly relied in his submissions:

“An essential requirement of a fair trial is that a party against whom relevant allegations are made is given the opportunity to rebut the allegations. That opportunity is absent if the party does not know what the allegations are. The degree of detail necessary to be given must, in my opinion, be sufficient to enable the opportunity to be a real one.”

At an earlier stage of the present proceedings, Collins J considered whether those principles should be applied to disclosure in the context of an application to set aside a financial restrictions decision. In his open judgment given on 5^th November 2014, he concluded that they did, and that compliance with Article 6 requires disclosure which “meets the requirement of AF3”: see [2014] EWHC 3631 (Admin). His decision was upheld by the Court of Appeal in Bank Mellat v HM Treasury (No 4) [2015] EWCA Civ 1052, [2016] 1 WLR 1187, especially at paragraph 28. In an open judgment with which the other members of the court agreed, Richards LJ at paragraphs 33 and 34 accepted submissions made by counsel appointed as special advocate at that hearing (and adopted by Mr Underwood as special advocate before me) that the duty of disclosure relates to disclosure of allegations, not of evidence; that the standard of disclosure is a relatively high one, and that where detail matters (as it often will), detail must be met with detail; and that there must be a real opportunity for rebuttal. He cited the words of Lord Neuberger MR in Bank Mellat v HM Treasury [2012] QB 91: disclosure must be –

“sufficient to enable the bank to give sufficient instructions not merely to deny, but actually to refute (insofar as that was possible) ‘the essential allegations’ relied on by the Treasury to justify the making and continuance of the direction.”

Richards LJ went on, at paragraph 35, to accept submissions that –

“if the Treasury relied on specific allegations in support of the directions, Bank Mellat was entitled to sufficient information about them even if they related to an Iranian bank other than Bank Mellat. It would be no answer to say that Bank Mellat was unlikely to be able to answer allegations relating to other Iranian banks. Disclosure cannot be avoided by arguing that it would make no difference to the outcome”.

My approach:

As I have indicated, counsel have succeeded in narrowing the issues between them. The Treasury has provided additional gists and has provided an amended witness statement by Mr Matthew Taylor, which includes reference to and summary of further closed material. In the result, the issues which I have to determine are set out in a schedule which summarises the unresolved aspects of requests for disclosure.

In determining those issues, the approach which I must take is as follows. First, I must consider whether disclosure of the closed material to which those requests relate would be contrary to the public interest. If it would not, I must refuse permission to withhold the material, and direct disclosure in accordance with the usual requirements of civil litigation. If it would, I must grant permission for the Treasury not to disclose that material, and I must next consider whether to direct the Treasury to serve a summary of the relevant material in terms which do not include material which it would be contrary to the public interest to disclose. If I direct disclosure or a summary of the material, the Treasury will then have to decide whether it nonetheless wishes to keep the material closed: the Treasury may do so (see CPR 79.26(7)(a)), but if it takes that stance the court will consider whether to make a direction in accordance with CPR 79.26(7)(b). Both Mr Kovats and Mr Underwood suggested that a separate hearing on notice would be necessary before such a direction should be given, and I agree.

If I decide that disclosure of any of the closed material would be contrary to the public interest, and further decide that a summary of that material cannot or need not be provided, then the Treasury may rely on that closed material in support of its case even though the Bank cannot know what it is. But in order to comply with Article 6, I must apply the principles set out in AF3: I must consider whether the Treasury should be required to disclose further information, so as to enable the Bank to give effective instructions in answer to, or in denial and/or rebuttal of, specific allegations which were relied upon to support the making of the Orders; and I must consider whether, if that information is not disclosed, the court should direct that the Treasury must not rely on certain allegations or must make concessions in order to ensure a fair trial. In considering what is necessary in order to ensure a fair trial, I accept Mr Kovats’ submission that I must keep in mind the material which has been disclosed: a distinction must be drawn between undisclosed material which is the sole or decisive basis of a particular allegation, and undisclosed material which is simply a further example or illustration of an allegation in respect of which other material has been disclosed.

In my separate closed judgment I apply that approach to the specific issues. For the reasons which I there set out, but which cannot be included in this open judgment, my decisions are that certain material may be withheld, but that disclosure must be made of information contained in certain other material.