EU Commission reports on reforming EU Blocking Regulation

• United Kingdom

• Fraud and financial crime
• Litigation and dispute management
• Sanctions

23-09-2021

Background

The EU Commission (“the Commission”) has been consulting on potential amendments to the EU Blocking Regulation (Regulation 2271/96) since January 2021.

The steps taken to date include undertaking a road map/inception impact assessment in relation to its review of the current EU Blocking Regulation. The initial feedback period for this impact assessment closed on 31 August 2021.

A public consultation process seeking further feedback on the Commission’s proposed amendments to the EU Blocking Regulation has now been launched. These proposals include implementing additional deterrence mechanisms and streamlining the application of the EU Blocking Regulation, for example by reducing compliance costs for EU persons and businesses. The questionnaire will remain open to all citizens and organisations (both in the EU and outside) until 4 November 2021.

By way of background, the purpose of the EU Blocking Regulation is to protect EU operators from the extra-territorial application of third country laws. The EU Blocking Regulation prohibits compliance by EU operators with any requirement or prohibition based on specified foreign laws, for example US measures concerning Cuba and Iran. EU operators whose economic and financial interests are affected by the extra-territorial application of those laws are obligated to inform the Commission. If EU operators consider that non-compliance with a requirement or prohibition based on the specified foreign laws would seriously damage their interests or the interests of the EU, they can apply to the Commission for an authorisation to comply with those laws.

For more detail on the EU Blocking Regulation please see our previous briefing notes, here, here and here.

Report

On 3 September 2021 the Commission also published a report (“the Report”) into the application and effect of the EU Blocking Regulation. The report focuses on the notifications (which are formal submissions to the Commission) which report adverse effects in relation to the extra-territorial effects of sanctions.

In total, between 1 August 2018 and 1 March 2021, the Commission received 63 notifications (35 related to US sanctions against Cuba and 28 against Iran) from both individuals and companies based in 12 different Member States. The majority of notifications are from companies engaged in international trade or banking activities but also include notifications from individuals and other entities, like associations, diplomatic missions, and business federations.

The report categorises these notifications as follows:

1. Adverse effects related to banking activities or other financial services, including unilateral terminations by a financial institution of the provision of banking services.

2. Adverse effects caused by one or several business partners, most often due to a business partner’s decision to terminate the business relationship with the notifying party.

3. Administrative and judicial proceedings in the US, including the existence or threat of proceedings before US administrative or judiciary authorities.

4. Reluctance to engage in business in countries targeted by extra-territorial laws.

What does this mean?

The Report makes it clear that a number of respondents are reluctant to invest in countries targeted by extra-territorial sanctions, and suspects that many more EU individuals and corporations have the same concerns.

The Report concludes that the extra-territorial application of sanctions measures against EU persons is at odds with international law, and undermines various EU institutions and objectives including the Single Market and foreign policy. It also highlights the wider impact extra-territorial sanctions (particularly those from the US) have had on legitimate investment and trade activity.

Given the early stage of the Report in the policymaking lifecycle, it is likely to be some time before any concrete proposals are presented to the European Parliament. As a result, any substantive amendments to the EU Blocking Regulation may not be voted on until 2022. However, many of the practical examples of difficulties associated with extra-territorial sanctions cited in the report will likely inform future policy on this topic.

Under Article 2 of the EU Blocking Regulation, the Commission will be kept informed of all associated developments that affect EU individuals and companies, as well as the EU as a whole. The Commission has stated it intends to continue monitoring the impact of the extra-territorial laws referred to in the report, and inform the European Parliament and Council accordingly.

Overall, the Report presents a strong stance in respect of extra-territorial sanctions, and appears to make clear that the EU does not intend to shirk the opportunity to deter or counteract extra-territorial sanctions via the EU Blocking Regulation. The Report appears to stress that additional measures with regard to the EU Blocking Regulation will likely be needed. What form these measures will take remains to be seen.

Impact on UK business

Post Brexit, the UK has retained the EU Blocking Regulation in domestic law (the “UK Blocking Regulation”). Whilst UK Persons are no longer legally required to comply with the EU Blocking Regulation, it would be wise for UK businesses and financial institutions to monitor the situation and any changes which the EU may seek to adopt as this may impact their wider business with EU based entities. It will also be interesting to see whether the Commission’s consultation may result in similar changes to the UK Blocking Regulation or whether we will see further divergence of sanctions between the UK and the EU.

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