The long arm of sanctions indictments

In Pilatus Bank and Pilatus Holding v ECB, Case T-27/19, the General Court of the European Union dismissed an application by Pilatus Bank plc (the “Bank”) to annul a decision of the European Central Bank (the “ECB”) which withdrew the Bank's banking licence. In reaching its decision, the General Court held that the ECB could withdraw a bank's authorisation on the basis of its assessment of the “good repute” of a bank’s shareholders who had been arrested in the United States on charges of breaching US sanctions. Banks and other financial institutions should note the direction of travel set by the ECB, particularly in light of the recent raft of new sanctions against Russia. 
The Bank’s sole indirect shareholder was indicted in the US, resulting in withdrawal requests from the Bank’s customers
. The Bank was established in Malta and was subject to the supervision of the Malta Financial Services Authority (the “MFSA”). In March 2018, an Iranian businessman, who was director and indirectly held 100% of the Bank’s capital and voting rights, was arrested in the US for alleged breaches of US sanctions against Iran (the conduct complained of was not illegal under EU law). Following the indictment, the Bank’s customers sought to withdraw funds amounting to €51.4m, which represented approximately 40% of the deposits on the Bank’s balance sheet. 

The ECB withdrew the Bank’s authorisation. The MFSA adopted a number of directives requiring the removal of the director from his post, and also ordering a moratorium on the Bank’s transactions. In June 2018, the MFSA proposed that the ECB withdraw the Bank's authorisation to act as a credit institution. The ECB did so in November 2018 (the “Contested Decision”). 
The Bank applied to the General Court for annulment of the Contested Decision, which was rejected. The Bank advanced several substantive and procedural arguments, pleading (among other things) that the ECB had erred in its decision to withdraw the Bank’s credit institution authorisation. The General Court found against the Bank on each argument, as summarised below.

The ECB is competent to withdraw authorisation from credit institutions. The Bank argued that the ECB merely rubber stamped the MFSA’s withdrawal proposal, and therefore the Contested Decision was not a genuine decision of the ECB. The General Court disagreed. Under Article 14(5) of Regulation No. 1024/2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions (the “SSM Regulation”), the ECB may withdraw the authorisation of a credit institution following consultations the with the national competent authority. The General Court held that the ECB decided to withdraw the Bank’s licence and the proposal was not adopted in breach.

The ECB may withdraw authorisation if it not satisfied of the suitability of a bank’s members, including their “good repute”. The Bank submitted that the ECB had erred by basing its withdrawal decision on the existence of the indictment in the US, arguing that the ECB was not entitled to rely on a “mere press release” and that the ECB failed to “examine the facts” underlying the press release, including for example that the alleged conduct was not illegal under EU law. The General Court noted that, under Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (“CRD IV”), the ECB was entitled to refuse or withdraw a bank’s authorisation if, taking into account the need to ensure the sound and prudent management of the institution and to ensure the preservation and stability of the financial system of the EU, it is not satisfied as to the suitability of the shareholders or members, particularly in circumstances where the criteria set out in Article 23 of CRD IV (i.e., good repute) were not met. 

The General Court held that this assessment should consider whether the shareholder’s conduct complied with the applicable law and regulations, and also the public perception of the relevant conduct. While a shareholder’s indictment was insufficient by itself to call into question their good repute, “the negative perception of that repute … provided it is demonstrated on the basis of specific evidence” may justify the withdrawal of the authorisation of a bank. Given the need to ensure the stability of the financial system within the EU, the General Court held that the ECB had not erred in withdrawing the authorisation of the Bank on the basis of the indictment and the “corresponding perception of his good repute” which had “resulted in significant negative consequences” for the Bank (i.e., significant withdrawals). This was the case even though the relevant individual was only an indirect shareholder of the Bank, he had been indicted and not convicted of the alleged conduct, and the allegations related to breaches of US sanctions rules and was not unlawful in the EU. 

The General Court dismissed the Bank’s remaining various administrative pleas
. In relation to a plea that the ECB had infringed the Bank’s right to the presumption of innocence, it bears highlighting that the General Court held this principle does not “preclude the adoption of measures which do not constitute a criminal sanction and do not imply any accusation of a criminal nature”; the ECB had not infringed this in withdrawing the Bank’s authorisation. 

The standing of key individuals and stakeholders can give rise to regulatory and other risks. Firms should be mindful of these risks, particularly in view of current sanctions
. The judgment of the General Court makes clear that the authorisation of a credit institution may be withdrawn by the ECB on the basis of the “good repute” of its influential shareholders. National competent authorities and the ECB are unlikely to pull punches when it comes to the raft of recent sanctions. This decision also is consistent with the increasing trend internationally, where regulators are focusing on the non-financial (and other) misconduct of influential figures at regulated firms (for more on this, see Beyond financial failings: misconduct and diversity developments in 2021 | Linklaters). Firms should keep this decision front of mind in the coming weeks and months.

Written by Michael Munk, Managing Associate in London, Louis-Eudes Giroux, Associate in Luxembourg, and Elena Cucuz, Trainee Solicitor in London.

If you would like to discuss this case further or have any questions, please do not hesitate to get in touch with our Banking Litigation team.

You can read more about our practice at This article is not legal advice. The views and opinions expressed here are the personal opinions of the authors and do not necessarily represent the views and opinions of Linklaters.