In Certain Iranian Assets (Islamic Republic of Iran v. United States of America), the International Court of Justice (ICJ) rendered its judgment on the dispute regarding the measures adopted by the United States to seize assets of the Central Bank of Iran (Bank Markazi) to compensate U.S. victims of terrorist attacks committed abroad with the alleged support of Iran.Footnote ¹

This judgment concluded only one of the two most recent chapters of the Iran v. United States saga, which continues before the ICJ with the Alleged Violations case.Footnote ² Both disputes are rooted in the 1955 Treaty of Amity, Economic Relations, and Consular Rights (Treaty).Footnote ³

While the judgment under consideration offers much food for thought, I argue that the Court missed the opportunity to clarify the meaning of the Treaty's “transfer of funds” clause (Article VII),Footnote ⁴ a type of provision that has seldom been interpreted by international tribunalsFootnote ⁵ and which is also at the center of the Alleged Violations case.

This comment illustrates the pivotal role of Article VII of the Treaty and the relationship it establishes with the legal framework of the International Monetary Fund (IMF).

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In 2016, Iran instituted proceedings before the ICJ, claiming that certain U.S. legislative, executive, and judicial measures were having a serious adverse impact upon the ability of the Islamic Republic, and of Iranian companies, to exercise their rights under the Treaty, as they allowed plaintiffs to attach the assets of Bank Markazi in cases brought before U.S. courts over Iran's alleged support of terrorist acts.

Two of such measures—which also included the so-called “terrorism exception” of the U.S. Foreign Sovereign Immunities Act (FSIA)Footnote ⁶ and Section 201 of the 2002 Terrorism Risk Insurance Act (TRIA)Footnote ⁷—were at the very heart of the dispute: (1) U.S. Executive Order No. 13599,Footnote ⁸ a unilateral sanction which blocks all assets belonging to the Government of Iran, Bank Markazi, and Iranian financial institutions that are in the United States, that come to the United States, or that come in the possession or control of any U.S. person (including their overseas branches); and (2) Section 502 of the 2012 Threat Reduction and Syria Human Rights Act (ITRSHRA),Footnote ⁹ pursuant to which Iranian frozen assets—including those of Bank Markazi—may be subjected to execution or attachment to satisfy judgments in actions brought by victims of terrorist acts sponsored by Iran.

More precisely, Section 502 made certain Iranian assets specifically available to enforce the judgment in the Peterson case,Footnote ¹⁰ which concerned Iran's alleged liability in the 1983 killing of U.S. Marines and servicemen in Beirut. Bank Markazi filed a petition for certiorari with the U.S. Supreme Court (SCOTUS) arguing that the “tailor-made” statutory provision breached the principle of separation of powers, as Congress was directing courts to reach a pre-determined outcome in pending proceedings in violation of Article III of the U.S. Constitution. The Court of Appeals for the Second Circuit held that ITRSHRA Section 502 did not compel judicial findings; rather, it retroactively changed the law applicable in a given case, through a permissible exercise of legislative authority.Footnote ¹¹ Ultimately, SCOTUS upheld the validity of the provisionFootnote ¹² and consequently, in June 2016, the U.S. District Court ordered the distribution among the plaintiffs in the Peterson case of Bank Markazi's frozen assets worth U.S.$1,895 billion. The sum corresponded to the proceeds of the Bank's investments in financial assets in the United States (i.e., the nominal value of the securities denominated in U.S. dollars purchased by Bank Markazi between 2002 and 2007, plus interests accrued). Since then, Iranian frozen assets have been distributed to thousands of judgment creditors.

In its preliminary objections before the ICJ, the United States contended that Iran's claims concerning the U.S. adoption of unilateral blocking sanctions and the breach of sovereign immunity fell outside the scope of the Treaty and, therefore, of the jurisdiction of the Court.

On February 13, 2019, the ICJ rendered its judgment on the preliminary objections raised by the United States,Footnote ¹³ declaring that it had jurisdiction over all parts of the dispute, except the Applicant's claims based on the alleged violation of the customary international legal rules on the sovereign immunity of central banks, as these rules did not fall within the scope ratione materiae of the Treaty.Footnote ¹⁴

With regard to the violations of the rights and protections afforded to the “companies” of a Contracting Party under Articles III, IV, and V of the Treaty, the ICJ postponed to the merits phase the decision on whether the activities carried out by Bank Markazi in the United States rendered it a “company” within the meaning of the Treaty (para. 97). In doing so, the Court nevertheless made clear that nothing precludes a priori a single entity from engaging both in business and in sovereign activities. Remarkably, the Court specified that “it is the nature of the activity actually carried out which determines the characterization of the entity engaged in it” (para. 92, emphasis added). An entity therefore qualifies as a company, even when the entity's activities of a commercial nature do not constitute its principal activities.

With the question of Bank Markazi's sovereign immunity ruled outside the Court's jurisdiction, Iran was thus left to rely on the argument that its Central Bank was indeed a “company” for the purposes of Articles III, IV, and V of the Treaty. In a somewhat surprising twist, while Bank Markazi had always strenuously defended its sovereign immunity in the proceedings before U.S. courts, Iran claimed before the ICJ that the investment activities carried out by the Bank in the territory of the United States were of a commercial nature and that the Bank was performing financial activities like any other private company doing business in a free and competitive market.

The United States, on the other hand, contended that such transactions were part of the traditional tools used by central banks to exercise their sovereign functions, despite the fact that U.S. domestic courts had found Bank Markazi's financial operations to be commercial in nature and, therefore, not protected by immunity from freezing or attachment measures.

In the 2023 judgment on the merits, the ICJ developed—quite unusually—a different test for identifying a “company” within the meaning of the Treaty from the test that it had formulated in its preliminary objections decision. The Court established that the relevant criterion is not the nature of a single (commercial) activity per se, but rather the context in which the activity is carried out, “taking particular account of any links that it may have with the exercise of a sovereign function” (para. 51). Since the transactions conducted by Bank Markazi—i.e., the investments it had made on the U.S. financial markets—were “inseparable from its sovereign functions” (para. 52), the Court ruled that Bank Markazi could not be characterized as a “company” and concluded that it had no jurisdiction over Iran's claims on the issue.Footnote ¹⁵

While dismissing what can be rightly considered the core of Iran's submissions, the Court gave the United States a pyrrhic victory, as it rejected the U.S. objection to admissibilityFootnote ¹⁶ as well as its defenses on the merits.Footnote ¹⁷

As regards the U.S. invocation of the essential security exception (Article XX(1)(d) of the Treaty), the ICJ not only reaffirmed its earlier holding that it was entitled to assess whether U.S. measures were indeed “necessary” to protect its essential security interests (para. 106)Footnote ¹⁸ but also ruled that Executive Order No. 13599 was too remote from the protection of U.S. security. In fact, the only risk to which it referred was the general risk to the international financial system stemming from deficiencies in Iran's anti-money laundering framework (para. 108).

On the substantive scope of protection under the Treaty and the alleged violations of the standards of treatment that each Party is bound to afford to nationals and companies of the other Party, the ICJ made three findings.

First, it held that U.S. measures—i.e., Section 1610 of the FSIA,Footnote ¹⁹ Section 201 of the TRIA,Footnote ²⁰ and Executive Order No. 13599—disregarded the separate and autonomous legal personality of Iranian enterprises as provided for by Article III(1) and that, being “manifestly excessive” and “unreasonable,” they violated the fair and equitable treatment standard of Article IV(1) (paras. 135 et seq.).

Second, the Court held that U.S. judicial decisions ordering the attachment and execution of the property of Iranian companies pursuant to the TRIA and FSIA “unreasonable provisions” amounted to a taking of property without compensation, in breach of Article IV(2) (paras. 177 et seq.).

Third, the ICJ found that the United States had also breached its obligation with respect to freedom of commerce under Article X(1). Here, the Court interpreted the term “commerce” in a broad sense, as encompassing not only trade in goods but even “activities entirely conducted in the financial sector, such as trade in intangible assets” (para. 215)Footnote ²¹ and ruled that Executive Order No. 13599 amounted to an “actual impediment to any financial transaction or operation” to be conducted by Iran or Iranian companies in the United States (para. 220).

The Court rejected all other claims lodged by the Applicant (in particular, the one concerning Article VII of the Treaty, which will be analyzed in the following paragraphs)Footnote ²² and declared that Iran was entitled to compensation.

Significantly, however, the Court did not order the United States to cease its internationally wrongful acts and unfreeze assets belonging to Iranian companiesFootnote ²³ because the Treaty was no longer in force between the Parties at the time the decision was adopted.Footnote ²⁴

In sum, although carving out the issues concerning the freezing and attachment of the assets owned by the Central Bank of Iran, the Court dealt a hard blow—possibly not the last one—to the unilateral sanction regime of the United States.

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In this author's view, the Court was too quick to dismiss Iran's claim on the violation of Article VII of the Treaty, failing to recognize the significance of the issue and its possible future repercussions.

Pursuant to the first paragraph of Article VII of the Treaty:

The second and third paragraphs of the provision clarify that certain types of transfers must be guaranteed even when the exceptions provided by letters (a) and (b) apply.

At the outset, it is worth noting that the prohibition set forth by Article VII is not limited to transfers of funds made by nationals and companies; it also applies to transfers made by a Contracting Party and its organs. As a consequence, the fact that Bank Markazi cannot be considered a company within the meaning of the Treaty is irrelevant for the purposes of establishing a violation of the provision. This issue, however, was not disputed by the Parties, which disagreed only on the interpretation of the term “restrictions.”

In Iran's view, Article VII prohibits restrictions on inward/outward flows of payments as well as of capitals. Because the asset freezes in Executive Order No. 13599 entailed restrictions on capital movements (i.e., the repatriation of the frozen assets of Bank Markazi), Iran argued that the United States breached its treaty obligations.

The United States argued instead that Article VII prohibits only exchange restrictions on payments and transfers for current international transactions (i.e., the “exchange restrictions” prohibited by IMF Article VIII, Section 2(a), on which see infra) and that no such restrictions were ever enacted by the United States. Moreover, since Executive Order No. 13599 was to be excluded from the scope of application of the Treaty by its essential security clause, Iran's claim should have been rejected.

The Court sided with the U.S. interpretation that Article VII only prohibited exchange restrictions: given the treaty practice existing at the end of World War II and the fact that at that time capital controls were widespread, it was difficult to maintain that the Parties had intended to renounce to the use of such tool (para. 207). As Iran's claim did not concern exchange restrictions but only the repatriation of the frozen assets of Bank Markazi (i.e., a movement of capital), the Court concluded that no violation of Article VII could be found.

Below, I intend to demonstrate that Article VII(1) can be interpreted as prohibiting both payment restrictions and capital controls. Second, I will address restrictions imposed for security reasons, an issue that is strikingly absent from both the Parties’ arguments and the Court's analysis. Then, I will focus on the “substantial link” between the Treaty of Amity and the IMF legal framework. Last, I will focus on the relationship between “security restrictions” and essential security clauses.

First, Article VII must be interpreted taking into account the object and purpose of the Treaty, the very title of which broadly refers to “Economic Relations” and not merely to “Commerce” as done by the majority of bilateral treaties concluded by the United States until the late 1960s. Indeed, the Preamble of the Treaty clearly states that the Contracting Parties aimed at “encouraging mutually beneficial trade and investments and closer economic intercourse generally between their peoples” (emphasis added). In Oil Platforms, the ICJ confirmed that the Contracting Parties intended to promote the “harmonious development of their commercial, financial and consular relations.”Footnote ²⁵

Moreover, Article VII is an embryonic “free transfer of funds clause” having almost unique features.Footnote ²⁶ Unlike modern clauses typical of current investment agreements, it provides for a protection that is not limited to transfers “made in connection with an investment.” Its purpose thus appears to be the protection of any transfer of funds that would foster close economic relations between the Parties and effectively protect their reciprocal interests.Footnote ²⁷

Following this interpretation, the Court could have easily found a breach of Article VII, as U.S. unilateral sanctions clearly prevent Iran, its organs and nationals—both natural and juridical persons—from transferring funds to or from the United States.

Second, even if we were to agree with the Court's position that Article VII applies only to exchange restrictions, Iran's claim would still stand when analyzing the issue from a “security restrictions” perspective.

By way of background, it is recalled that the IMF Articles of Agreement (IMF Articles)Footnote ²⁸ treat asymmetrically capital movements and current transactions. While Article VI, Section 3 of the IMF Articles allows member states discretion in regulating and controlling capital movements, Article VIII, Section 2(a) of the IMF Articles states that member countriesFootnote ²⁹ may impose restrictions on the making of payments and transfers for current international transactions (“exchange restrictions”) only with the Fund's approval.Footnote ³⁰

Moreover, the IMF Articles do not list the circumstances that would justify exchange restrictions but only establish that such measures must be approved by the Fund, leaving to the IMF Executive Board the competence to regulate the matter.

Therefore, already back in the 1950s and 1960s, the Executive Board adopted a number of decisions—which are still in force—clarifying that IMF members can apply exchange restrictions not only for balance of payments reasons but also for the preservation of national or international security (“security restrictions”).

In particular, Executive Board Decision No. 144-(52/51) established that security restrictions (including asset freezes) must be notified in advance in order to obtain the Fund's approval. However, such approval may be inferred from the Fund's silent assent: if the Executive Board does not reply within thirty days from notification, the member state “may assume that the Fund has no objection to the imposition of the restrictions.”Footnote ³¹

By approving asset freezes entailing exchange restrictions, the IMF exercises its competence over measures that would otherwise be prohibited by Article VIII, Section 2(a) of the IMF Articles. Instead, when the same sanctioning measure also entails capital controls, approval from the Fund is not required pursuant to Article VI, Section 3 of the IMF Articles.

Over the years, the Fund has tacitly approved countless security restrictions,Footnote ³² without distinguishing whether they were imposed by a member state as part of its unilateral sanctions policy or pursuant to a resolution of the UN Security Council adopted under Chapter VII of the UN Charter.

Remarkably, the United States is the IMF member that, since 1952, has most often relied on Executive Board Decision No. 144-(52/51), invoking its application for the vast majority of its unilateral sanctionsFootnote ³³—including Executive Order No. 13599Footnote ³⁴—and always obtaining the Fund's tacit approval.

One might also contend that the tacit assent procedure set forth in Executive Board Decision No. 144-(52/51) does not satisfy the “specific approval” language of Article VII(1) of the Treaty, but this issue appears not to have been raised by the parties.

Third, a separate factor worth exploring is that Article VII is an ex ante coordination provision,Footnote ³⁵ designed to reconcile the obligations deriving from the Treaty with those arising from the Contracting Parties’ membership in the IMF.Footnote ³⁶ To prevent any normative conflict, Article VII establishes a “substantial link” with IMF rules on current account convertibility and exchange restrictions.Footnote ³⁷ In other words, the Parties to the Treaty decided to clarify what would happen in the event that one of them lawfully exercised its right either to impose exchange restrictions under Article VIII, Section 2(a) of the IMF Articles or to establish capital controls under Article VI, Section 3 of the IMF Articles, given that such restrictive measures can hamper the realization of the Treaty objectives.Footnote ³⁸

To this end, it was agreed that the Contracting Parties were nonetheless obliged both to ensure the withdrawal of certain types of funds under Article VII(2) of the Treaty and to administer the restrictions in a manner “not to influence disadvantageously the competitive position of the commerce, transport or investment of capital of the other High Contracting Party in comparison with the commerce, transport or investment of capital of any third country” (Article VII(3) of the Treaty, emphasis added).

In particular, pursuant to Article VII(2) of the Treaty, the Party imposing exchange restrictions has to “promptly make reasonable provision for the withdrawal” of compensation owed in case of expropriation, “earnings” in the form of “interests or dividends,” and “capital transfers.”

If we agree that security restrictions fall under the scope of the Treaty, it is therefore possible to contend that Bank Markazi was entitled to repatriate its assets, i.e., the nominal value of the securities it had purchased in the U.S. financial markets plus interests accrued.

Last but not least, it is worth noting that, in the judgment under consideration, the ICJ held that Executive Order No. 13599 did not amount to a measure necessary to protect the U.S. essential security interests pursuant to Article XX(1)(d) of the Treaty (para. 108). The question which remains unanswered is therefore the following: as the Court denied the essential security purpose of Executive Order No. 13599, could its security restriction nature have been taken into account instead?

Had the Court recognized that Executive Order No. 13599 amounts to a security restriction, such unilateral sanction would have been held legitimate not pursuant to the Treaty essential security clause but through the door left open by Article VII(1), which substantially links the Treaty to the IMF legal framework.

One important lesson is that the tacit assent of the IMF and its tolerance of unilateral security restrictions may reach other treaty regimes, potentially allowing a state the discretion to exonerate itself from other treaty commitments that in some way tie into the IMF.

Although only a few international investment agreements and free trade agreementsFootnote ³⁹ contain an ex ante coordination clause providing for a substantial link with IMF rules,Footnote ⁴⁰ it should be underlined that the Fund is, in its own words, not “a suitable forum” for the discussion of political and military issues.Footnote ⁴¹ The question, then, is: on what grounds should it tacitly approve discriminatory long-term unilateral security restrictions the legitimacy of which is being fiercely debated?

In all likelihood, this issue will resurface in the pending Alleged Violations case,Footnote ⁴² because that dispute was triggered by Executive Order No. 13846,Footnote ⁴³ a security restriction that the United States promptly notified to the IMF Executive Board in 2018.Footnote ⁴⁴