EU takes measures to protect EU cos following US sanctions on Iran

As a response to the US re-imposition of sanctions against Iran, the EU intends to amend its Blocking Regulation (Regulation (EC) 2271/06) to protect EU companies from the extraterritorial effects of US secondary sanctions against Iran, Standard Club has informed its members in a web update on the global situation following the unilateral US decision to reimpose sanctions on Iran.

Ben Chandler, Claims Executive at Club managers Charles Taylor, wrote that Regulation (EC) 2271/06 was originally introduced in the context of US sanctions against Cuba. It allows the EU to protect businesses from the extraterritorial effect of particular sanctions adopted by a third country outside the EU. Although the Blocking Regulation will apply in all EU member states, the responsibility for enforcement lies with each individual EU member state. The updated Blocking Regulation will enter into force (at the latest) at the beginning of August 2018, subject to the European Parliament and the European Council not raising objections to the measures.

Standard Club noted that the US secondary sanctions against Iran would have an extraterritorial effect – that is, it would be illegal for EU companies and financial institutions to engage in a wide range of economic and commercial activities with Iran.

The Club noted that this could create a serious issue for European companies with pre-existing trade with Iran, given that disregard of US secondary sanctions by such companies could lead to heavy fines and/or criminal charges in the US, or even exclusion from the US market altogether.

The amendments to the Blocking Regulation have been designed to offer a level of protection to European companies trading with Iran.

The Blocking Regulation:

  • Forbids EU persons from complying with extraterritorial sanctions.
  • Allows companies to recover damages arising from such sanctions.
  • Nullifies the effect of any foreign judgment in the EU which is based on the imposing / enforcement of such sanctions.

Commentators have questioned the effectiveness of the Blocking Regulation to offset the effects of re-instated US sanctions. This is on the basis that:

  • Companies would have to stop using the US dollar, which is unrealistic in many cases, given that 90% of global transactions use this currency.
  • The remedies provided by the Blocking Regulation do not fully shield companies from the practical negative effects of breaching US sanctions (e.g. asset seizures; criminal charges in the US), which were still deeply unattractive for companies.
  • Companies would have to “choose” between trading in the US and trading in Iran, with many companies inevitably choosing the US due to the size and importance of the US market.
  • The Blocking Regulation did not assist to defend against companies potentially losing access to the US financial system, if they had previously engaged in transactions involving Iran.

Therefore, while there were certain legal remedies available to European companies under the amended Blocking Regulation, it would potentially be the case that, for many companies, the US market would remain too important economically and commercially, and these companies would continue to prioritize their business in the US at the expense of trading with Iran.

The Club said that the response by the EU demonstrated that it intended to take a different approach from the US to conducting business with Iran going forward, and intended to continue to encourage trade with and investment in Iran.

However, Standard Club warned that the different approaches being taken by US and EU had the potential to further complicate the situation for commercial entities, including the club’s owner and charterer members, who were currently attempting to take all necessary steps to ensure that no commercial activity they undertake breaches sanctions.

“While the approach being taken by the EU to Iran might, in principle, represent a positive development for club’s members monitoring future opportunities to trade Iran, the conflicting Iranian sanctions regimes being pursued by the US and EU have the potential to cause confusion, and increase risk of inadvertent breach of one or other sanctions regime”, the Club said.

Due to the increasing complexity of the situation, the club recommended that its members continue to take a very cautious approach to potential Iranian-linked commercial activity, and to carry out necessary commercial due diligence accordingly to make sure any particular activity was not sanctioned.