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The EU’s Response to the US Sanctions on Iran: the Blocking Regulation

  • United Kingdom
  • Competition, EU and Trade

25-05-2018

On 18 May 2018, the European Commission (the “Commission”) launched the formal process to activate the Blocking Regulation, intended to counter the re-imposition of secondary sanctions on Iran by the US.

The Blocking Regulation forbids EU persons from complying with certain US extraterritorial sanctions, allows companies to recover damages arising from such sanctions, and nullifies the effect in the EU of any foreign court judgments based on them. The aim is to have the measures in force before 6 August 2018, when the first tranche of US sanctions take effect.

Background

On 8 May 2018, President Trump announced that the US will withdraw from the Iran nuclear deal (the Joint Comprehensive Plan of Action (“JCPOA”)) and begin re-imposing those sanctions which were lifted as part of the JCPOA (please see our previous briefing here).

Shortly after the announcement, the High Representative of the EU for Foreign Affairs and Security Policy issued a declaration of her regret concerning President Trump’s decision and confirming the EU’s commitment to the JCPOA as long as Iran continues to comply with its obligation.

EU action to protect businesses against US extraterritorial sanctions

The Commission recognises that simply “staying true” to the JCPOA is not enough to save the deal. Jean-Claude Juncker, President of the Commission, said that “the American sanctions will not be without effect. So we have the duty, the Commission and the European Union, to do what we can to protect our European businesses, especially SMEs”. The Commission is especially concerned about the potential negative impact of the US secondary sanctions (i.e. those applicable to non-US persons) on European companies which have invested in Iran in good faith since the JCPOA came into effect.

Consequently, the Commission has devised a response plan proposing measures to mitigate the impact of President Trump’s decision on EU businesses and to preserve the spirit of the JCPOA. The proposed measures notably include the reactivation of Council Regulation (EC) 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country (the “Blocking Regulation”).

The Annex to the Blocking Regulation includes a list of foreign legislative measures against which the Regulation aims to provide protection. On 18 May 2018, the Commission launched the formal process of updating the list in the Annex to include the US sanctions against Iran which will be re-imposed later this year

The Blocking Regulation

What is it?

The Blocking Regulation was first passed in 1996 to counteract the effects of the extra-territorial application of US sanctions under the Helms Burton Act (Cuba) and the Iran and Libya Sanctions Act (the “blocked measures”).

The Blocking Regulation:

1. requires any EU person to notify the Commission of any effects on its economic and/or financial interests caused by a blocked measure (Article 2);

2. nullifies the effect of any judgment of a court or tribunal or decision of an administrative authority located outside the EU giving effect, directly or indirectly, to a blocked measure (Article 4);

3. prohibits EU persons from complying with any requirements or prohibitions based on or resulting from a blocked measure (Article 5) (although EU persons may obtain an authorisation from the Commission to comply with such requirements or prohibitions if non-compliance would seriously damage their interests or those of the EU (Articles 7 and 8)); and

4. provides that an EU person shall be entitled to recover any damages, including legal costs, caused to the person by the application of a blocked measure (or by actions based on or resulting from such a measure) (Article 6).

The EU Blocking Regulation was invoked in 2007 when the Austrian government decided to initiate an enforcement action against BAWAG, an Austrian bank. BAWAG had closed accounts held by Cuban clients to comply with US sanctions against Cuba after being targeted for acquisition by a US investor. The case against BAWAG was dropped when the US investor obtained a licence from the US authorities permitting the Austrian bank to maintain the accounts. Apart from this instance, the EU Blocking Regulation has largely been ineffective in counteracting the effects of the US extraterritorial sanctions, with EU Member States not engaging in any enforcement activities.

The proposed inclusion of the re-imposed US sanctions

The Annex to the Blocking Regulation is to be updated to include the US sanctions on Iran which will be re-imposed later this year.

As soon as the amendment comes into force (which is expected to happen by 6 August 2018, when the first tranche of US sanctions take effect), EU persons will be prohibited from complying with the re-imposed sanctions. This prohibition will apply both:

  • to EU companies owned or controlled by US persons, which will be directly at risk of US sanctions for any dealings with Iran; and
  • to EU persons (including financial institutions) which are not otherwise subject to US ownership or control, but which nonetheless face the risk of “denial-of-access” penalties from the US for not complying with the Iran sanctions (i.e. potentially losing the ability to obtain finance from US banks, bid for US government contracts, travel to the US, etc.).

Relying on the Blocking Regulation, EU persons will have the comfort that any foreign court judgments issued against them based on the re-imposed sanctions will not be enforceable against them in EU courts.

EU persons may also be able to recover damages in EU courts arising from the application of the sanctions. Such recovery may be obtained from persons causing the damages or from any person acting on their behalf. The flip side is that there is a risk that EU persons taking a commercial decision to pull out of Iran due to the fear of US sanctions may potentially face legal proceedings initiated by contracting parties in the EU under the Blocking Regulation if such decision leads, for example, to the termination of existing supply contracts.

Commentary

The Blocking Regulation has generally been ineffective when it comes to counteracting the effects of the US sanctions on Cuba. EU businesses fear the extraterritorial reach of US sanctions far more than any EU Member State enforcement action.

The proposed re-activation of the Blocking Regulation is likely to put EU businesses in an even more difficult position, particularly given the permeation and intricacies of the US’s extended financial networks. As the UK Foreign Secretary Boris Johnson already admitted, it would be very difficult to protect European businesses “due to the extra-territorial effect of US sanctions and the difficulty companies have when they touch the live wire of the American financial network and they find themselves almost immediately sanctioned.” Businesses are essentially forced to choose between doing business in the US and doing business in Iran.

EU businesses with links to Iran must now take steps to assess how best to minimise the chance of violating US sanctions. At the same time, any decisions to pull out of Iran should factor in the risks of legal action based on the Blocking Regulation.

At this stage, it is questionable whether the Blocking Regulation, albeit a strong political statement, will truly and adequately protect the interests of EU businesses. However, it is possible that the re-activation of the Blocking Regulation will be accompanied by an actual enforcement plan, which may give it more ‘bite’ and effectively dissuade EU businesses from pulling out of Iran-related contracts. The Commission is expected to issue guidance on the application of the Blocking Regulation before 6 August.

 

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