Compliance & Investigations
US-Iran sanctions and countermeasures of the EU: Updated EU Blocking Regulation enters into force
On 6 August 2018, the first part of the reactivated US sanctions against Iran became effective. In response to this unilateral reinstatement of sanctions against Iran by the US, the EU had already initiated a “blocking statute” in June 2018. The updated blocking statute entered into force on 7 August 2018. It is intended to mitigate against the effects of the extra-territorial US sanctions on the interests of EU companies that do legitimate business with Iran. However, it gives rise to a number of problems for companies that do business with Iran.
US president Trump already announced in May 2018 that the US was withdrawing from the nuclear agreement with Iran (Joint Comprehensive Plan of Action – “JCPOA”) and reinstating all the sanctions against Iran that had been lifted on the basis of the JCPOA after a “wind-down” period of 90 days (i.e. ending on 6 August 2018) and 180 days (i.e. ending on 4 November 2018). All the other parties to the agreement (EU, Germany, France, UK, Russia, China and Iran) then affirmed their commitment to the full and continued implementation of the JCPOA. In order to demonstrate this and to protect the interests of European companies that do business with Iran, on 6 June 2018 the European Commission introduced the update of the EU Blocking Regulation from 1996 by including the list of reactivated US sanctions against Iran in the scope of the Regulation. The US sanctions against Iran that were re-included in the scope concern the “secondary sanctions”, i.e. US sanctions that are aimed at companies based outside of the US. If companies violate secondary sanctions, they risk significant damage in the US ranging from fines to a de facto exclusion from the US market. This is intended to pressure companies outside the US to comply with US law and to cease doing business with Iran.
The aim of the EU Blocking Regulation is to counteract the effects of the US sanctions on EU economic operators that legitimately engage in international trade and/or the movement of capital and related commercial activities with third countries in line with EU law. Since neither the European Parliament nor the Council raised objections to the update of the EU Blocking Regulation, this (as well as the related Implementing Regulation (EU) 2018/1101) was published in the Official Journal of the EU on 7 August 2018 and thus put into effect.
Scope of the Blocking Regulation
The EU Blocking Regulation must be complied with by all natural persons who are resident in the EU and a national of a Member State, as well as by all legal persons incorporated within the EU. This also applies in particular to EU subsidiaries of US companies that were formed in accordance with the law of a Member State and have their registered office, headquarters or main branch within the EU. However, legally dependent branch offices of US companies in the EU are not subject to the EU Blocking Regulation. US subsidiaries of EU companies are not subject to the EU Blocking Regulation either.
Content of the Blocking Regulation
The EU Blocking Regulation prohibits the above-mentioned persons and companies from complying with the US legal acts listed in the Annex to the Regulation unless they are exceptionally authorised to do so by the Commission. Moreover, the EU Blocking Regulation entitles these persons – in the event that they suffer losses due to the specified US legal acts – to recover damages from the persons or companies causing such losses. In addition, rulings of foreign courts (i.e. those of the US in particular) that are imposed to enforce the sanctions are not recognised in the EU:
The terms of the EU Blocking Regulation apply to all of the legal acts listed in the Annex to the Regulation, which currently comprise US measures against Cuba and Iran. As part of the update, the following legal acts were newly included in the Annex: “Iran Sanctions Act of 1996”, “Iran Freedom and Counter-Proliferation Act of 2012”, “National Defense Authorization Act for Fiscal Year 2012”, “Iran Threat Reduction and Syria Human Rights Act of 2012” and “Iran Transactions and Sanctions Regulations”. For the sake of clarity, the provisions of the above-mentioned legal acts are in each case set forth – at least in a summarised manner – in the Annex of the EU Blocking Regulation.
The basic principle of the EU Blocking Regulation is that EU economic operators are prohibited from complying with the listed US legal acts, including decisions, rulings or arbitration awards based on these acts.
The EU Blocking Regulation also provides that EU economic operators must inform the European Commission within 30 days about any indirect or direct damage to their economic or financial interests due to the listed US legal acts or due to measures based on or resulting from such acts.
The updated EU Blocking Regulation began applying to all EU economic operators as of the date on which it entered into force, i.e. as of 7 August 2018. In particular, the Regulation is also to be applied to contractual obligations that were already assumed before the date on which it entered into force.
Under the EU Blocking Regulation, EU economic operators are entitled to recover any damages incurred by them as a result of the application of the listed US legal acts or the measures based on or resulting from such acts. The opposing party of this claim for damages is the authority, court, company or any other office that caused the damage, or the person who is acting on their behalf or as an intermediary. On the other hand, the EU Blocking Regulation does not create a separate claim for damages under EU law, for example of an Iranian business partner against an EU company that violates the Regulation. At most, contractual claims for damages might be possible in this regard.
Impact of the Blocking Regulation on companies affected
Based on the principle of legality, companies/their bodies are obliged to comply with the EU Blocking Regulation and set up a compliance system accordingly. This includes in particular the satisfaction of obligations to notify the European Commission as well as adherence to the prohibition on complying with the US legal acts listed in the Regulation. In practice it will still need to be discussed whether and under what conditions the duty of legality is limited, at least in exceptional cases: For example, one could consider in particular to what extent, in exceptional situations, it might be possible to rely on the justification of conflicting duties since the company management is facing conflicting duties, e.g. because strict compliance with the duty of legality means that the company could potentially suffer serious, immediate damage.
However, the EU Blocking Regulation does not oblige companies to do or continue business with Iran. Rather, the companies remain free to decide, based on their own assessment, whether or not to operate in a sector of the economy. Thus, the discontinuance of (existing) Iran business does not necessarily violate the EU Blocking Regulation as long as this conduct is based on general, economic or civil law considerations that are not related to sanctions.
Violations of the EU Blocking Regulation can be punished as an administrative offence with a fine of up to EUR 500,000 (per violation). Moreover, there is also a risk that individual legal transactions conducted in violation of the EU Blocking Regulation can be deemed null and void or that violations of the EU Blocking Regulation will trigger contractual claims for damages on the part of the (Iranian) business partner.
The EU blocking statute has not yet been applied in practice. There is no known case in which administrative offence proceedings were initiated due to a violation of the statute (similar to the existing boycott prohibition pursuant to section 7 Foreign Trade Ordinance). As far as the future is concerned, it remains to be seen how the competent authorities will handle the enforcement of this Regulation.
Recommendations for action
- To begin with, the company affected is advised to adapt its compliance system to the new requirements based on the EU Blocking Regulation. In particular, any indirect or direct damage to its economic or financial interests due to the listed US legal acts or due to the measures based on or resulting from such acts is to be reported to the European Commission within the 30-day period. Such a report is also possible by e-mail (to firstname.lastname@example.org).
- Companies affected should check whether a conflict between compliance with the EU blocking statute, on the one hand, and secondary sanctions, on the other, exists at all: Not all Iran business is sanctioned by the US. If one’s own Iran business does not violate secondary sanctions, there is no conflict with the EU Blocking Regulation and therefore no risk of violating it, either.
- Irrespective of this, in the case of a conflict, an attempt should be made to find a mutually agreeable arrangement with the Iranian contracting partner.
- Although the EU Blocking Regulation does allow the European Commission to grant exceptional authorisation to companies to comply with the listed US legal acts, this is not an effective solution in the short term. Firstly, the formal requirements for granting such authorisation are already very strict: The company must furnish proof that, due to a specific behaviour, it is exposed to the danger of secondary sections and that, as a result, it is seriously damaged or impaired. Secondly, the decision practice of the European Commission will need time to develop. In addition, the wording of the assessment criteria that can establish that serious damage has been incurred is in some cases extremely vague (e.g. “whether the protected interest is likely to be specifically at risk”, “adverse effects on the conduct of economic activity”).