Bahrain found liable for indirect expropriation for putting Iranian-controlled Future Bank under administration

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IISD | 4 July 2022

Bahrain found liable for indirect expropriation for putting Iranian-controlled Future Bank under administration

by Sanchit Suri

Bank Melli Iran and Bank Saderat Iran v. Bahrain, PCA Case No. 2017-25

A tribunal awarded a sum of EUR 243 million plus interest to Bank Melli Iran and Bank Saderat Iran (collectively, “claimants”) in their investor–state dispute against the Kingdom of Bahrain (“Bahrain”).

The tribunal found Bahrain to have breached its obligations against unlawful expropriation under Article 6 of the Agreement on Reciprocal Promotion and Protection of Investments between the Government of the Islamic Republic of Iran and the Government of the Kingdom of Bahrain, dated October 19, 2002 (“BIT”). The arbitration was conducted under the UNCITRAL Arbitration Rules 1976 as per the BIT, with the Permanent Court of Arbitration acting as appointing authority by mutual agreement.


The investment in this case was the claimants’ shareholding in Future Bank. Future Bank was established in Bahrain by the claimants with a co-investor in 2004. It operated profitably till April 30, 2015, when it was put under statutory administration by the Central Bank of Bahrain (CBB).

Future Bank’s business model involved considerable dealings with Iranian businesses, particularly through the claimants. This aspect became the centre of the political controversy in this dispute. Beginning in July 2006, the international community began voicing concerns over Iran’s nuclear program. In the following years, a number of sanctions were imposed on Iran and Iranian businesses by the UN, EU, and U.S., including against the claimants themselves. Resultantly, a long-drawn tussle ensued between the CBB and Future Bank. Between 2006 and 2013, the CBB produced a number of reports highlighting lacunae in Future Bank’s practices and regulatory compliance, especially in dealings involving entities that were the subject of international sanctions.

On April 30, 2015, the Crisis Management Committee of the CBB met and decided to place Future Bank under administration. The same day, the CBB took control of Future Bank by securing the premises with the assistance of the security personnel of the Ministry of Interior, and excluding the bank’s senior management from the premises. Eventually, on December 22, 2016, the CBB resolved to liquidate Future Bank. On February 8, 2017, the claimants initiated arbitration under the BIT.

Preliminary objections

In the arbitration, Bahrain contended that Future Bank had engaged in systematic illegal activities in its operations. These included non-compliance with international sanctions and rules against money laundering and financing of terrorism. Bahrain argued that this resulted in a lack of jurisdiction and rendered the claims inadmissible.


The tribunal disagreed with Bahrain on jurisdiction. Bahrain’s objection was premised on the BIT providing that an “investment” was “every kind of asset invested … in accordance with the laws and regulations of the [host State]” (emphasis added). However, the tribunal reasoned that the ordinary meaning of this phrase required investments to be only made in accordance with local law. While illegality affecting the making of an investment will place it outside the tribunal’s jurisdiction, subsequent illegal activities would not. Since Bahrain’s allegations of illegality pertained only to Future Bank’s conduct after its establishment, the tribunal reasoned that its jurisdiction was not called into question.


In contrast, the tribunal concluded that illegal activities subsequent to the making of an investment can affect admissibility. It noted that international tribunals have a general duty to condemn a party that has engaged in violations of international public policy by denying it assistance in any way by the arbitral process. The tribunal observed that there is no reason why such a duty must be limited to illegalities committed at the time of making the investment.

However, the tribunal recognized that inadmissibility was a stringent sanction. Therefore, it concluded that the illegality must firstly be serious and widespread, and secondly, must bear a close relationship to the claims, to render them inadmissible. Upon analyzing the facts in light of these two requirements, the tribunal concluded that the claims could not be considered inadmissible. Certain observations made in this assessment are noteworthy:

  1. The tribunal noted that in a business as complex and heavily regulated as banking, certain violations are bound to occur. Therefore, even serious violations would not necessarily result in inadmissibility, if they were infrequent and proactively remedied.
  2. The tribunal took into account whether the investor’s wrongful conduct violated a fundamental rule of law. In this regard, the tribunal considered that only UN Security Council sanctions constituted fundamental rules of international law, and not U.S. or EU sanctions, which advanced political objectives of particular states.
  3. The tribunal also considered the gravity of each alleged illegality. For instance, the tribunal distinguished between violations (such as accepting repayment of loans from sanctioned entities) that were less grave than violations like providing fresh financing.

Ultimately, the tribunal concluded that though Future Bank committed certain illegalities, they were not systematic and severe. Further, in any case, the claimants’ claims did not arise out of transactions tainted by these illegal activities.


Article 6(1) of the BIT prohibited unlawful expropriation of investments, by providing that “investments … shall not be nationalized, confiscated, expropriated, or subjected to similar measures by the [host State] except such measures [sic] are taken for public purposes, in accordance with due process of law, in a non-discriminatory manner and effective and appropriate compensation is envisaged.” The tribunal reasoned that the CBB’s decision to put Future Bank under administration suspended the exercise of the claimants’ shareholding rights, which were undoubtedly in the nature of property interests. Therefore, the decision could be labelled as expropriation.

At the same time, the tribunal recognized that the CBB’s decision would not be considered expropriation if it could be considered within the recognized limits of Bahrain’s regulatory and police powers. In this regard, the tribunal noted the following:

  1. The analysis of the regulatory or police powers exception is particularly important in highly regulated industries such as banking.
  2. The tribunal would owe certain deference to specialized regulatory organs such as the CBB. Genuine errors or inefficiencies of a regulator would not constitute expropriation.
  3. That said, the gravity and multiplicity of the regulator’s errors can call into question the true intent behind the impugned measures.

On the facts, Bahrain’s own witness had confirmed that Bahraini law required a thorough review before putting a bank in administration. If the CBB had followed this rule, it would have extensive documentary record available of its reasons for the action against Future Bank. However, the tribunal observed that all Bahrain had produced was minutes of the CBB’s Crisis Committee Management meeting, and only after a production order. There was also limited evidence of the CBB raising Future Bank’s alleged violations either internally or with Future Bank in the time leading to the impugned decisions.

On the other hand, the tribunal found it significant that a few weeks before Bahrain placed Future Bank under administration, Iran had agreed with the United States, France, Germany, the United Kingdom, Russia, and China to constrain its nuclear program to get partial relief from sanctions. Saudi Arabia was reportedly strongly opposed to this and had been pressuring several states to sever ties with Iran. Bahrain was reported to have strong ties with, and be economically dependent on, Saudi Arabia. Further, the tribunal noted that another Iranian company, the Iran Insurance Company, was put into administration on the same day as Future Bank. The tribunal saw this as strong circumstantial evidence of a motivation of political retribution behind the CBB’s impugned measures.

As a result, the tribunal concluded that Future Bank’s administration and liquidation were not bona fide regulatory measures and constituted an indirect expropriation of the claimants’ shareholding interests in Future Bank. Since the tribunal had concluded that the measures were not bona fide, and since evidently no compensation was offered to the claimants, the expropriation violated Article 6 of the BIT.

Other treaty violations

The claimants also alleged violations of the full legal protection and discrimination standard under Article 4 of the BIT, as well as Article 5 of the BIT, which incorporated more favourable treatment that investors were entitled to under municipal or international law. However, the tribunal observed that the factual premises underlying these claims were the same as those underlying the unlawful expropriation claim. Therefore, the tribunal dispensed with analyzing these other claims in the interest of procedural economy.


Double recovery

Bahrain argued before the tribunal that the damages awarded to the claimants must be reduced by any value they would receive from the liquidation of Future Bank. However, the tribunal did not do so. Instead, it took note of a statement made by the claimants’ expert that the claimants will not seek double recovery and will deduct any liquidation proceeds from damages owed to them under the award.

Income-based valuation inappropriate

The parties were in disagreement over the best approach to quantify the fair market value of Future Bank. The claimants advocated for a higher valuation based on an income-based (i.e., discounted cash flow) approach, or a market-based approach. The tribunal recognized that, generally, the income-based approach best reflected the fair market value of a going concern with a proven record of profitability, such as Future Bank. That said, the income-based valuation would require that Future Bank continue to be equally profitable into the future. The tribunal considered this to be speculative for two reasons.

  1. In considering the objection as to admissibility, the tribunal had found Future Bank to have committed some violations of applicable laws and regulations. This created a significant regulatory risk to Future Bank’s income.
  2. It was uncontroversial that Future Bank’s business model was primarily based on its dealings with Iranian entities. Future Bank had been facing increased pressure from the CBB to reduce its exposure to its shareholders and more generally to Iran.

Therefore, the tribunal rejected an income or market-based approach, and awarded damages based on a valuation of Future Bank’s assets and liabilities as on the date of its being put under administration.

The decision concludes the long-drawn arbitration, which, although initiated on February 8, 2017, only saw an award on November 9, 2021.


Sanchit Suri is a counsel at Singularity Legal. His experience includes advising clients in international arbitrations under institutional rules like SIAC, DIAC, & JAMS and in disputes before courts in India, Singapore, and the United Kingdom.

The views expressed herein are the author’s personal views and do not represent the views of Singularity Legal.

Note: The tribunal was composed of Professor Gabrielle Kaufmann-Kohler (president), Professor Bernard Hanotiau, and the Rt. Hon. Lord Collins of Mapesbury. The claimants had initially nominated Professor Emmanuel Gaillard as their nominee, while the respondent had nominated Lord Collins. The Secretary General of the PCA appointed both arbitrators, as well as Professor Rudolf Dolzer as the president. However, both Professor Gaillard and Professor Dolzer unfortunately passed away during the proceedings. This had required a rehearing in the arbitration. The award is available at:

source: IISD