EU Blocking Statute and US sanctions apply “inconsistent demands”

In its update on the re-imposed US Sanctions on Iran, UK Club referred to an article from law firm Gibson Dunn, “Navigating the Divide for International Business”, which added EU-perspective detail to the Iranian sanctions.

The EU enacted Commission Delegated Regulation (EU) 2018/1100 (the “Re-imposed Iran Sanctions Blocking Regulation”), which supplemented Council Regulation (EC) No 2271/96 (as amended, the “EU Blocking Statute”) simultaneously to the new Iran EO from the US.

Gibson Dunn said that the combined effect of the EU Blocking Statute and the Re-imposed Iran Sanctions Blocking Regulation would be to prohibit compliance by EU entities with US sanctions on Iran which have been re-imposed following the US withdrawal from the JCPOA.

The EU matched President Trump’s strident language. One senior EU official said that “if EU companies abide by US . . . sanctions they will, in turn, be sanctioned by the EU.”

As Gibson Dunn observed, the two actions appeared to place multinational companies in an impossible bind between the inconsistent demands (and rhetoric) of powerful regulators.

But the law firm said that “depending upon how Washington and EU Member States choose actually to implement their respective authorities, this bind may prove navigable”.

All of the sanctions and counter-sanctions were in large part discretionary. In pre-JCPOA times, the Obama Administration had similarly broad authorities to impose “secondary sanctions” on companies around the world for transactions with Iran, but imposed such sanctions very sparingly. Similarly, the EU’s Blocking Statute had been in place in some form for nearly 20 years. In that time the EU and its member states had enforced the rules infrequently.

Gibson Dunn said that the question going forward was whether the Trump Administration, the EU, and its various Member States would more forcefully and consistently enforce these discretionary and contradictory authorities. Early indications were that, despite the language of the new regulations and the rhetoric of senior officials, there might be more flexibility on both sides of the Atlantic than might seem to be the case at first sight. However, Gibson Dunn said that this would not remove the challenges from multinational companies eager to avoid angering either European or US regulators, but it might provide a way forward.

Almost immediately after President Trump announced his intention to withdraw from the JCPOA on May 8th 2018, the European Union and senior leaders in several major EU Member States announced their intention to remain compliant with the JCPOA and to reinvigorate the EU Blocking Statute so as to continue to promote the sanctions relief that the bloc views as central to the JCPOA. While some Member States moved to update their domestic legislation in this regard prior to the end of the first wind-down period, the EU had not formalized any changes until August 7th.

The EU Blocking Statute was designed as a counter-measure to what the EU considers to be the unlawful effects of third-country (primarily, but not exclusively, US) extra-territorial sanctions on EU operators. Its purpose was first and foremost to protect EU operators engaging in international trade, in a manner wholly compliant with EU law, but in breach of sanctions imposed by other countries. At a political level, it was also designed to display the EU’s disapproval of sanctions regimes implemented by third countries which the EU considers to be abusive or unreasonable. The EU Blocking Statute set out a series of requirements relating to offending overseas sanctions and then (in an Annex) listed the overseas sanctions regimes to which it applied.

The Re-imposed Iran Sanctions Blocking Regulation was accompanied by an Implementing Regulation, relating to the process for EU operators to apply for authorization from the EC to comply with Blocked US Sanctions.

The EU Blocking Statute applies to a wide range of actors including:

  • any natural person being a resident in the EU and a national of an EU Member State;
  • any legal person incorporated within the EU;
  • any national of an EU Member State established outside the EU and any shipping company established outside the EU and controlled by nationals of an EU member state, if their vessels are registered in that EU member state in accordance with its legislation;
  • any other natural person being a resident in the EU, unless that person is in the country of which he is a national; and
  • any other natural person within the EU, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control of an EU member state, acting in a professional capacity.

The EU’s guidance note emphasized that, when EU subsidiaries of US companies were formed in accordance with the law of an EU Member State and had their registered office, central administration or principal place of business within the EU, then they were subject to the EU Blocking Statute. However, branches of US companies in the EU were not subject to the EU Blocking Statute.

The EU Blocking Statute prohibits EU operators from complying with a set of specific extra-territorial laws or any decisions, rulings or awards based on those laws. The laws are listed and include six different US sanctions laws and one set of US regulations (OFAC’s Iranian Transactions and Sanctions Regulations). The EU Blocking Statute applied to all EU operators from August 7th 2018 and does not allow for any grandfathering of pre-existing contracts or agreements.

Gibson Dunn observed that the EU Guidance indicated that EU operators were prohibited from even requesting a licence from the US to maintain compliance with US sanctions. The Guidance said that merely requesting such permission – without first gaining authorization from the EU or a competent authority in a Member State to do so – was tantamount to complying with US sanctions.

The EU Blocking Statute also required EU operators to report to the EC within 30 days of any circumstances arising from the extraterritorial laws that affect their economic or financial interests.

It also held that any decision rendered in the US or elsewhere made due to the extraterritorial measures could not be implemented in the EU. Gibson Dunn observed that this meant, for instance, that any court decision made in light of the extraterritorial measures, could not be executed in the EU, “presumably even under existing mutual recognition agreements”.

Finally, the EU Blocking Statute allows EU operators to recover damages arising from the application of the extraterritorial measures, although it was not made clear how this would work in practice. Gibson Dunn said that it appeared to allow an EU operator “to exercise a private right of action and to be indemnified by companies that do comply with the US laws if in so doing those companies injure the EU operator”.

For instance, if a European company had a contract to provide certain goods to Iran. the European company would not be allowed to break that contract due to their desire to comply with US sanctions. However, if some of those goods were derived in part from other companies that have decided to comply with US measures and to cease supplying any material destined for Iran the European company might be compelled to cease its transactions with Iran. “In such case the Iranian company could sue the European company for breach of contract – the European operator could in turn sue its supplier for the damages caused due to the supplier’s compliance with the extra-territorial US sanctions.”

The UK has in place a law, the Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996, which broadly makes compliance with Blocked US Sanctions a criminal offence. That Order does not provide for custodial sentences, but it does provide for a potentially unlimited fine.

Certain other Member States have also opted for the creation of criminal offences. These include Ireland, the Netherlands and Sweden. Other Member States, including Germany, Italy and Spain, have devised administrative penalties for non-compliance. Meanwhile some Member States, including France, Belgium and Luxembourg, do not appear ever to have even implemented the EU Blocking Statute, notwithstanding the obligation on them as a matter of general EU law to prescribe penalties for breach of EU law which are effective, proportionate and dissuasive.

The Reality Rather Than The Rhetoric

Gibson Dunn noted that, despite the breadth of the EU Blocking Statute language, the enforcement language and posture, and the absolute nature of some of the rhetoric emanating from Brussels and certain Member State capitals, there had clearly been uneven application of existing rules. The legal firm expected the same going forward with the updated EU Blocking Statute.

The EU Blocking Statute also appeared to include sufficient flexibility to provide multinational companies a potential path to navigate between Washington and Brussels, even before assessing the potentially low likelihood of enforcement.

Two key flexibilities were written into the EU regulations:

  1. Guidance allows EU operators to request authorization to comply with US sanctions if not doing so would cause “serious harm to their interests or the interests of the European Union.” The European Commission has an existing template for making such a request which includes 13 potential criteria that applicants can call upon when making their application. These include whether there exists “a substantial connecting link” between the EU operator and the US, whether not complying with US measures could have “adverse effect on the conduct of [a company’s] economic activity,” or whether the “applicant’s activity would be rendered excessively difficult due to a loss of essential inputs or resources, which cannot be reasonably replaced.”

The law firm said that, given the centrality of the US financial system, and in some cases US supply chains, many European companies could likely be able to make such claims.

  1. As part of the EU Blocking Statute, EU operators would not be forced to continue business with Iran. Rather, the Guidance notes that EU operators would still be free to conduct their business as they see fit – including “whether to engage or not in an economic sector on the basis of their assessment of the economic situation.”

As such, Gibson Dunn said that it expected to see an increasing number of European firms to cease engaging in Iran, following in the wake of dozens of major European companies and financial institutions who have already announced their departure (and an even larger number who chose never to enter even under the JCPOA).

Gibson Dunn said that there were many reasons apart from sanctions that could cause a company to decide to suspend Iranian operations. “Indeed there is significant momentum behind European companies leaving Iran or otherwise indicating their plans to limit engagement.  Notably, this activity has included not just major private European companies leaving or announcing their intention to do so, but also actions by publicly-owned firms and even regulators”, the law firm said, noting that the President of the European Investment Bank (an institution owned by the EU’s Member States) had publicly stated that the institution’s global operations would be put at risk if it continued its Iranian activities in light of US sanctions.

The German Bundesbank recently quietly decided to revise its terms and conditions on cash withdrawals applicable to German financial institutions to include a provision that allowed the Bundesbank to reject a request from Tehran to withdraw €300m in cash from the German-regulated Europäisch-Iranische Handelsbank, an Iranian-owned bank based in Hamburg, Germany. The Bundesbank’s terms and conditions now inter alia state that such transactions could be refused in cases in which the transaction would threaten the Bundesbank’s relationships with other central banks or financial institutions in third countries.

Gibson Dunn anticipated that the next steps in either enhancing sanctions on Iran (from the US side) or protecting trade with Iran (from the EU side) would be regulatory.

“In line with past practices we think it possible that US regulators will provide further guidance in the form of FAQs or even General Licenses to calibrate their policies. EU regulators, and Member States could do the same. Actual enforcement on either side of the Atlantic is likely to be slow in coming.”

The law form said that the Trump Administration had followed the Obama Administration’s playbook by sending senior officials to major foreign companies and countries thought to be the most likely source of non-compliance with US measures. “In the Obama era such outreach led to significant compliance enhancements in the companies and countries visited and thereby reduced the Obama Administration’s need to actually impose extra-territorial measures (secondary sanctions)”, said Gibson Dunn.

Administrations, major Iranian oil importers such as India and China remained potential wildcards. Provided they receive substantial reduction exemptions to allow continued purchase of Iranian crude, Gibson Dunn assessed that other major Iranian oil importers such as South Korea, Japan, and Taiwan would likely on the whole opt to comply with US measures. “Seoul, Tokyo, and Taipei would be unlikely to risk angering Washington given their broader needs for US support in the region and their financial institutions will be similarly loathe to alienate their US partners and risk their access to the American market and the US dollar”, said Gibson Dunn.

Concluding, the law firm said that the Trump Administration had not articulated its goals clearly with respect to the reimposed sanctions, and in the lead up to the US midterm elections in November 2018 could decide to become even more aggressive so as to gain support from its base.

Similarly, as the Iranian government deals with the reimposed sanctions alongside mounting domestic protests it may also lash out aggressively, perhaps going as far as fulfilling its pledge to block the Straits of Hormuz or otherwise interfere with global trade or other core regional security interests.

“If either of these external factors come to bear, the situation would quickly become more challenging and the sanctions realities faced by global companies and governments could change radically”, Gibson Dunn said.