On 8 May 2018, the US announced that it was withdrawing from the Joint Comprehensive Plan of Action (JCPOA) and would re-impose all US sanctions that were lifted when the JCPOA was implemented in January 2016. As discussed in a previous blog post, this re-imposition of sanctions is to occur in two stages, on 7 August and 5 November 2018. In response, the EU's 1996 'Blocking Statute' (Council Regulation (EC) No 2271/96) has been updated so that it applies to the re-imposed US-Iran sanctions with effect from 7 August 2018. According to the European Commission this is to mitigate the impact of the US sanctions "on the interests of EU companies doing legitimate business in Iran". The Commission has also published a very welcome Guidance Note on the operation of the Blocking Statute. This blog post provides an overview of the re-imposed US sanctions and the Blocking Statute, and considers the potential impacts of the Blocking Statute on firms engaged in and winding down their Iran-related business.
Re-Imposition of US-Iran Sanctions
On 7 August 2018, licenses authorising importation into the US of Iranian foodstuffs and carpets, and authorising the negotiation of certain aviation-related contingent contracts, expired, and "secondary sanctions" – that is, sanctions that target Iran-related activities by non-US persons – were re-imposed on transactions concerning:
- The provision of assistance or support for the purchase or acquisition of US dollar banknotes or precious metals by the Government of Iran;
- The direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
- The purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
- The purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
- Iran’s automotive sector.
On 5 November 2018, the US intends to revoke the license authorising US-owned or -controlled foreign entities to engage in Iran-related business, re-designate on the list of Specially Designated Nationals and other US sanctions lists some 400 persons that were de-listed when the JCPOA was implemented, and re-impose the remaining secondary sanctions, which target non-US persons involved in transactions concerning:
- Iran’s port operators, and the Iranian shipping and shipbuilding sectors, including the Islamic Republic of Iran Shipping Lines, South Shipping Line Iran, or their affiliates;
- Iranian petroleum with, among others, NIOC, NICO, and the National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
- Dealings by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions;
- The provision of specialised financial messaging services to the Central Bank of Iran and certain Iranian financial institutions;
- The provision of underwriting services, insurance, or reinsurance for any activity for which US sanctions have been imposed; and
- Dealings with Iran’s energy sector.
To Whom Does the EU's Blocking Statute Apply?
- The Blocking Statute applies to 'EU Persons' which include:
- Any natural person resident in the EU and a national of an EU Member State;
- Any legal person incorporated within the EU;
- Any national of a Member State established outside the Union and any shipping company established outside the Union and controlled by nationals of a Member State, if their vessels are registered in that member state in accordance with its legislation
- Any other natural person 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 territorial waters and air space and in any aircraft or vessel under the jurisdiction or control of an EU Member State, acting in a professional capacity.
The Guidance Note further explains that:
- EU nationals resident outside of the EU, including in the US will be subject to the Blocking Statute;
- EU subsidiaries of US companies that are incorporated under the law of a Member State and have their registered place of office, central administration, or principal place of business in the EU will also be subject to the Blocking Statute;
- The Blocking Statute does not apply to branches of US companies, as they do not have distinct legal personality from their parent company; and
- US subsidiaries of EU companies are not subject to the Blocking Statute, though their EU‑incorporated parents will be.
How Does the Blocking Statute Operate?
The Annex to the Blocking Statute lists the US statutes and regulations from which relief will be provided to EU Persons. The listed statutes and regulations contain the US sanctions provisions which were re-imposed on 7 August 2018 and will be re-imposed on 5 November 2018, which are discussed above.
The Blocking Statute comprises of four main components:
- Article 2: EU Persons must notify the European Commission within 30 days if their "economic and/or financial interests" are "affected, directly or indirectly, by [the specified US sanctions]", or "by actions based on or resulting from [the specified US sanctions]". If a corporate entity is affected, this obligation applies to its directors and persons with management responsibilities;
- Article 4: A judgment of a court or tribunal or decision of an administrative tribunal located outside the EU will not be recognised or enforced in the EU if it gives effect to the specified US sanctions, or to actions based on or resulting from the specified US sanctions;
- Article 5: EU Persons must not comply "whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission" with any requirement or prohibition based on the specified US sanctions, or actions based on or resulting from the specified US sanctions. The European Commission may authorise compliance in certain circumstances, see further below; and
- Article 6: EU Persons are entitled to recover damages, including legal costs, from those who caused them.
The Authorisation Process
Article 5 of the Blocking Statute allows EU Persons to seek the Commission's permission to comply with US sanctions if not doing so would seriously damage their interests or those of the EU. The authorisation process is set out in Commission Implementing Regulation (EU) 2018/1101 (the Authorisation Regulation).
Critically, EU Persons will need to explain why and in what ways not complying with US sanctions would cause "serious damage" to their interests or the interests of the EU which would "justify the need to derogate in specific and duly motivated circumstances to the rule imposed by the Blocking Statute". When assessing whether there will be "serious damage", the Commission will have regard to at least 13 factors enumerated in Article 4 of the Authorisation Regulation. These factors include:
- The existence of a substantial connecting link with the USA: for example the applicant has parents or subsidiaries there, or US nationals or entities participate;
- Whether measures could be reasonably taken by the applicant to avoid or mitigate the damage;
- The adverse effect on the conduct of economic activity, in particular whether the applicant would face significant economic losses, which could for example threaten its viability or pose a serious risk of bankruptcy; and
- Whether the enjoyment of the individual rights of the applicant would be significantly hindered.
Some of those applying for authorisation may point to one of the primary chilling effects of these US sanctions on EU Persons - the threatened loss of access to the US financial system. It is expected that the European Commission will be asked to consider whether an EU Person's loss of access to the US financial system amounts to an "adverse effect on the conduct of economic activity" which could threaten an EU Person's "viability".
Applications for authorisation will need to be considered carefully. The Guidance Note stresses that the authorisation procedure "should not be used in order for [EU Persons] to seek so-called ‘letters of comfort’ from the Commission or confirmation that their business decisions are in line with the Blocking Statute".
Effect on Current Winding Down Steps
Many firms are winding down their Iran-related business in advance of the re-imposition of US sanctions. How will the Blocking Statute affect those continuing efforts?
A firm's appetite for Iran-related business may be influenced by a number of factors, with fear of adverse consequences in the US being only one of these. For example, a firm might decide to terminate Iran‑related arrangements because of reputational risk of doing business with Iran; profitability; or the reluctance of banks to process payments with an Iran nexus.
In the context of the Blocking Statute, the European Commission has previously acknowledged the difficulty of proving that decisions made by an EU Person were in fact motivated by compliance with US sanctions rather than other commercial factors. For example, it will be difficult to prove as a matter of fact that a decision to decline cover or terminate a contract was made due to US sanctions instead of a restriction imposed by a third-party bank or insurer or for other legitimate compliance concerns, given Iran is a high risk jurisdiction for anti-money laundering purposes and subject to a Financial Action Task Force call to action. This difficulty appears to be acknowledged in the Guidelines, which state that EU Persons are "free to choose whether to start working, continue, or cease business operations in Iran or Cuba, and whether to engage or not in an economic sector on the basis of their assessment of the economic situation" and that "the purpose of the Blocking Statute is exactly to ensure that that such business decisions remain free [from the effect of US sanctions]".
An EU Person might not be able to wind down its Iran-related business as much as it wishes. For example early termination of a contract might not be possible; or it might be called upon to perform an obligation that would not comply with US sanctions. In these circumstances the EU Person might consider applying for a licence from the relevant US authority (OFAC), granting a derogation or exemption from US sanctions.
According to the Guidance Note, however, such an application would be viewed as amounting to compliance with US sanctions, in breach of the Blocking Statute. The EU Person would first need to persuade the Commission to give permission (under Article 5) for the OFAC application to be made.
By contrast, the Commission does not object to mere discussions with OFAC to understand the impact of US sanctions on an EU Person and whether non-compliance with US sanctions might entail serious damage to their interests. The Guidance Note states that the EU Person does not need the Commission's permission for such conversations.
Issues Awaiting Clarification
There remain a number of issues about the operation of the Blocking Statute which await clarification.
First, the efficacy of the proposed relief from US sanctions remains uncertain. Though Article 6 permits recovery of damages caused by the application of US sanctions laws, it does not specify against whom a recovery action may be commenced. This has a bearing on the efficacy of this provision. For example, a damages claim against the US government would implicate sovereign immunity issues, potentially defeating an Article 6 claim or limiting the pool of assets against which a judgment may be enforced. Then, there are the political implications involved with bringing Article 6 proceedings against the US government in a European court.
It also remains to be seen whether the terms of Article 6 will permit a claim to be brought (or a judgment to be enforced against) against the European subsidiary of a US company (as they are distinct legal persons), if it is the US company that has caused the relevant damage to an EU Person.
Secondly, it remains unclear how the updated Blocking Statute will be enforced by Member States. Though the updated Blocking Statute is directly applicable in all EU Member States, it falls to each EU Member State to:
- Determine the penalties to be imposed in the event of a breach of the Blocking Regulation; and
- Amend or interpret their domestic laws to enable enforcement against EU Persons in breach (that is, EU Persons that have complied with US sanctions listed in the Annex).
Implementation and enforcement of the Blocking Statute by EU Member States has historically been limited and inconsistent. There remain a number of EU Member States that have not enacted implementing legislation at all (for example, France). Other EU member states have chosen to impose penalties of varying degrees of severity. For example, under UK law (the Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996), a breach of Article 2 or Article 5 is a criminal offence punishable by a fine on conviction. On the other hand, under German law (German Foreign Trade Ordinance (Außenwirtschaftsverordnung)), breaches of the Blocking Statute are an administrative offence punishable by a fine up to a statutory maximum.
The updated Blocking Statute does provide limited protection to EU Persons against the relevant US sanctions. However it cannot - even conceptually - shield them from the worst potential consequences of failing to comply with these, such as exclusion from the US financial system. And in many ways it serves to make their compliance role substantially more difficult. In certain circumstances EU Persons might face a dilemma: fail to comply with US sanctions (with all the risks that entails), or breach the Blocking Statute. Much will depend on how readily the Commission is persuaded that not complying with US sanctions would cause "serious damage" to the applicant's interests.
Associate Qi Jiang contributed to this article.