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Combatting Extraterritorial Sanctions – Updates to the EU Blocking Regulation

  • United Kingdom
  • Competition, EU and Trade

20-06-2018

On 6 June 2018 the European Commission (the “Commission”) issued a proposal which seeks to reactivate Council Regulation (EC) No 2271/96 (the “Blocking Regulation”), in a bid to protect EU companies from the extra-territorial effects of US sanctions on Iran. The Blocking Regulation, amongst other things, makes it illegal for EU companies to comply with certain prohibitions in US sanctions legislation.

The Blocking Regulation has historically been considered ineffective as a means of counteracting US sanctions. It is for the EU Member States to decide what penalties are to be imposed for breaches of the relevant provisions and, for the most part, Member States have declined to engage in any enforcement activities.

Updating the Blocking Regulation to counter the US’ withdrawal from the Iran nuclear deal might send an important political message. However, it remains questionable whether the legislation will have any meaningful impact, other than contributing to the difficulties of businesses trying to make sense of the increasing complexity of global trade laws.

Background

On 8 May 2018, President Trump announced that the US would be withdrawing from the Iran nuclear deal (the Joint Comprehensive Plan of Action (“the JCPOA”)) and begin re-imposing those sanctions which were previously lifted (please see our briefing about President Trump’s announcement here).

The EU has since expressed regret over President Trump’s decision and the ‘E3’ (UK, France and Germany) have sent a letter to the Trump administration seeking a reprieve on behalf of EU entities and individuals from compliance with US sanctions in respect of Iran (please see our briefing about the letter here).

The EU 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 the Blocking Regulation.

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 by the application of a blocked measure (or by actions based on or resulting from such a measure) (Article 6).

The “blocked measures” to which the Blocking Regulation applies are listed within the Annex. The Blocking Regulation applies to all EU nationals, non-EU nationals residing or doing business in the EU, and EU-incorporated companies (including EU subsidiaries of US companies). Please see our previous briefing on the Blocking Regulation here.

The Proposal

On 18 May 2018, following unanimous backing from the EU Heads of State, the Commission launched the formal process of amending the Blocking Regulation to include the extra-territorial measures which the US intends to re-impose in relation to Iran. On 6 June 2018, the Commission issued a Proposal setting out the suggested amendments to the Blocking Regulation (the “Proposal”).

Updates to the Annex

The Proposal replaces the existing Annex to the Blocking Regulation, setting out all of the “blocked measures” to which the Blocking Regulation applies. The new Annex includes:

1. the Iran Sanctions Act of 1996, containing prohibitions relating to the following activities which, if breached by non-US persons, can result in restrictions of access to US Government procurement and the US financial services market:

i. investment in Iran of at least USD20 million during a period of 12 months that contributes to the enhancement of Iran’s ability to develop petroleum resources;

ii. provision to Iran of goods, services or other support worth USD1 million or more (or USD5 million or more in aggregate over a 12-months period) that could facilitate the maintenance or expansion of Iran’s production of petroleum;

iii. provision to Iran of goods, services or other support worth USD250,000 or more (or USD1 million or more in aggregate over a 12-month period) that could contribute to the maintenance or expansion of Iran’s production of petrochemical products;

iv. provision to Iran of refined petroleum or of certain goods, services or other support which could contribute to the enhancement of Iran’s ability to import refined petroleum;

v. participation in a joint venture for the development of petroleum resources outside Iran, in which Iran has particular interests; and

vi. involvement in the transport of crude oil from Iran or concealment of the Iranian origin of cargo consisting in crude oil and refined petroleum;

 

2. the Iran Freedom and Counter-Proliferation Act of 2012, containing prohibitions relating to the following activities which, if breached by non-US persons, can result in restrictions of access to US Government procurement and the US financial services market:

i. provision of support, goods or services to persons designated on the Specially Designated Nationals and Blocked Persons (SDN) list;

ii. trade with Iran in goods and services used in connection with the energy, shipping or shipbuilding sectors of Iran;

iii. purchase of petroleum from Iran and related financial transactions;

iv. trade with Iran in precious metals, graphite, raw or semi-finished metals, or software that may be used in specific sectors or involve certain persons; and

v. provision of underwriting services, insurance or reinsurance related to the activities mentioned above;

3. the National Defense Authorization Act for Fiscal Year 2012, containing prohibitions relating to the following activities which, if breached by non-US financial institutions, can result in civil and criminal penalties and restrictions related to the opening and maintenance of correspondent accounts in the US:

i. conduct or facilitation of any significant financial transaction with the Central Bank of Iran or another designated Iranian financial institution;

4. the Iran Threat Reduction and Syria Human Rights Act of 2012, containing prohibitions relating to the following activities which, if breached by non-US persons, can result in restrictions of access to US Government procurement and the US financial services market:

i. provision of underwriting services, insurance or reinsurance to certain Iranian persons;

ii. facilitation of the issuance of Iranian sovereign debt;

iii. engaging in any transaction with the Government of Iran or any person subject to the jurisdiction of Iran prohibited by US law (this applies to foreign subsidiaries owned or controlled by US persons);

iv. provision of specialised financial messaging services to the Central Bank of Iran or a financial institution whose interests in property are blocked;

5. the Iranian Transactions and Sanctions Regulations, containing prohibitions relating to the following activities which, if breached by non-US persons, can result in the imposition of civil penalties, fines and imprisonment:

i. re-export of any goods, technology or services that (a) have been exported from the US and (b) are subject to export control rules in the US, if the export is made knowing or having reason to know that it is specifically intended for Iran.

European Parliament Briefing

The European Parliament Briefing on the Proposal (the “Briefing”), prepared for the European Parliament as background material to assist in its parliamentary work in relation to the Blocking Regulation, admits that the effectiveness of the Blocking Regulation as a mechanism to offset US sanctions is questionable:

  • In order to enforce the prohibition on complying with extra-territorial sanctions, it must be established, for example, that a company which has ceased conducting business with Iran has done so as a result of complying with US legislation, rather than as a result of implementing a commercial decision. The Commission itself has in the past admitted that “it is not usually possible to establish that the [company’s] decision is a direct result of the US legislation rather than commercial considerations”.
  • While the Blocking Regulation might shield a company from fines imposed by US authorities (by providing for compensation of costs incurred as a result of US sanctions) it cannot shield the company from the practical effects of sanctions imposed on it. These may include:
  • asset seizures and even criminal charges in the US;
  • a prohibition on any credit or payments between the entity and any US financial institution;
  • restriction on imports from the sanctioned entity;
  • an ban on US persons from investing in or purchasing significant amounts of equity or debt instruments from a sanctioned person; and
  • exclusions from the US of corporate officers or controlling shareholders of a sanctioned company.
  • The Blocking Regulation cannot stop financial institutions that engage in transactions with Iran from losing access to the US financial system.

Surprisingly, the Briefing acknowledges that the Blocking Regulation will in fact put EU companies between a rock and a hard place: they will be forced to choose between facing penalties for failing to comply with US sanctions and facing penalties for failing to comply with the Blocking Regulation. Medium-sized EU companies with little or no US exposure could continue to conduct business in Iran in non-USD currencies. However, multinationals with important economic interests in the US may simply prefer to pull out of Iran. As such, the Briefing admits that “the Blocking Regulation may actually harm EU companies”.

In addition, while the Blocking Regulation aims to protect EU companies by allowing them to claim damages in EU courts for losses suffered as a result of violating US sanctions, in reality this might mean pursuing the US Office of Foreign Assets Control directly – an idea that many would find deeply unattractive.

Nevertheless, the Blocking Regulation sends a political message to the US Government. The implementation of the original Blocking Regulation in 1996 against the US sanctions on Cuba led to a political solution in 1998 under which US authorities agreed not to actively enforce extraterritorial sanctions on EU companies doing business with Cuba. The EU is certainly hoping for exemptions from US secondary sanctions for EU companies (please see our comments on the ‘E3’ letter to Trump’s administration referred to above) – the reactivation of the Blocking Regulation could potentially help bring the US to the negotiating table.

Next steps

The European Parliament and the Council now have a period of two months to object to the Proposal before it is adopted as EU law (although they may choose to signal earlier that they will not object, thus allowing the measure to come into force earlier). The Commission hopes that the updated Blocking Regulation will come into force before 7 August, when the first set of US secondary sanctions on Iran are due to be re-imposed.

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