Bank Melli Iran and Bank Saderat Iran v Bahrain
PCA · Investment (ICSID and treaty) · Bahrain · 9 Nov 2021
Why it matters
This is a landmark investor-state arbitration under the Iran-Bahrain BIT, one of the few public awards involving Iranian state-owned banks. It clarifies the standard for expropriation claims where a host state takes regulatory action against a bank allegedly involved in sanctions evasion. The tribunal rejected jurisdictional objections based on illegality, finding that the banks' investment was not tainted by serious illegalities. It also addressed valuation of a bank with no market comparables, using a discounted cash flow and asset-based approach, and awarded EUR 243 million in compensation.
Summary
Bank Melli Iran and Bank Saderat Iran, two Iranian state-owned banks, invested in Future Bank B.S.C., a retail bank incorporated in Bahrain in 2004. Future Bank was established as a joint venture with Bahraini shareholders, with the Iranian banks holding a majority stake. From 2005 onward, Future Bank faced increasing regulatory scrutiny from the Central Bank of Bahrain (CBB) due to international sanctions against Iran, particularly U.S. and UN sanctions targeting Iranian banks and entities. The CBB conducted multiple inspections and issued reports finding deficiencies in Future Bank's anti-money laundering and sanctions compliance. In September 2010, the CBB issued a directive requiring Future Bank to cease all transactions with Iranian entities, including its own shareholders. Despite this, Future Bank continued to have significant exposure to Iranian clients. In April 2015, the CBB placed Future Bank under forced administration, and it was later liquidated. The Iranian banks initiated arbitration under the Iran-Bahrain BIT, claiming that Bahrain's actions amounted to expropriation without compensation, and also violated fair and equitable treatment and full protection and security. Bahrain raised preliminary objections, arguing that the claims were inadmissible because Future Bank had engaged in illegal activities (sanctions evasion and money laundering) and that the claimants had not exhausted local remedies. The tribunal rejected these objections, finding that the alleged illegalities were not serious enough to bar jurisdiction or admissibility, and that the BIT did not require exhaustion of local remedies. On the merits, the tribunal held that the forced administration and liquidation of Future Bank constituted an expropriation under Article 6 of the BIT. It found that the measures were not for a public purpose, were discriminatory, and lacked due process and proportionality. The tribunal awarded compensation of EUR 243 million, representing the fair market value of the investment as of the date of expropriation (April 30, 2015), plus simple interest at the 5-year U.S. Treasury bond rate. The tribunal dismissed the claim for moral damages. The award is significant for its analysis of the illegality defense in investment arbitration and its valuation of a bank in a sanctions environment.
The detail
Parties: Bank Melli Iran and Bank Saderat Iran v Bahrain
Case number: PCA Case No. 2017-25
Outcome: Tribunal found Bahrain breached Article 6 of the BIT (expropriation) and ordered payment of EUR 243 million plus interest to Claimants; dismissed moral damages and other claims.
Quantum: EUR 243,000,000
Applicable law: Agreement on Reciprocal Promotion and Protection of Investments between Iran and Bahrain (2002 BIT); UNCITRAL Arbitration Rules (1976); governing law: BIT and international law.
Issues in play: The BIT's expropriation provision (Article 6) versus Bahrain's regulatory measures under its Central Bank Law and CBB Rulebook, including anti-money laundering and sanctions compliance. The tribunal assessed whether the forced administration and liquidation of Future Bank constituted a lawful expropriation for a public purpose or an unlawful taking without compensation.
Read the full decision at italaw ↗
Locus Standi links to the source decision and publishes its own plain-language summary. It does not reproduce the text of the award.