2018 brought with it President Trump’s decision that the United States would withdraw from the Joint Comprehensive Plan of Action (“JCPOA”). That signaled the U.S.’s intention not only to reimpose trade sanctions on Iran but also, in many instances, to impose “secondary sanctions” on non-U.S. persons – including EU businesses – that continue to trade with Iran. Hoping to mute the impact of the U.S. action, the European Commission amended a 22 year-old “blocking” regulation, which was promulgated in 1996 to discourage EU companies from complying with U.S. secondary sanctions. The original blocking regulation proved largely ineffective in freeing European companies from the burden of U.S. secondary sanctions, and it remains to be seen whether the 2018 amendments will be any more potent. With the 180 day wind-down period on dealing with Iran having ended on November 5, 2018, EU companies, like Odysseus on his treacherous voyage between Scylla and Charybdis, were left to choose which demon – U.S. trade sanctions or EU blocking regulations -- is more perilous, and manage their risks accordingly. Early indications are that U.S. secondary sanctions remain the greater perceived peril, a fact that will take on increasing significance as the United States seeks to contain Iranian influence at the same time that it is withdrawing troops from Middle East battlegrounds.
The United States applies its economic and trade sanctions against targeted nations on an extra-territorial basis, requiring compliance not only by U.S. persons wherever located, but also, in many circumstances, by foreign persons as well. Application of these “secondary sanctions” to foreign persons may be triggered by, for example, engagement in U.S. dollar-denominated transactions, involvement of the U.S. financial system, or inclusion of more than de minimus amounts of U.S. goods or technology.
Regulation (EC) 2271/96, enacted by the EU Council in 1996, sought to block the application of certain U.S. secondary sanctions to EU persons, including businesses and financial institutions. The so-called “Blocking Regulation” prohibited EU persons from:
- Complying with any requirement or prohibition under listed U.S. sanctions against Cuba, Libya and Iran (the “Blocked Sanctions”)
- Recognizing or enforcing any judgment or decision of a judicial or administrative authority outside the European Community giving effect to the Blocked Sanctions
The Blocking Regulation provided that EU persons could recover any damages caused by application of Blocked Sanctions from the person or other entity causing such injury, e.g., from a person who refused to complete a transaction due to the applicability of U.S. sanctions. Alternatively, EU persons whose economic or financial interests were affected, directly or indirectly, by the Blocked Sanctions or any actions based thereon could be authorized, based on criteria to be established by the European Commission, to comply fully or partially with the Blocked Sanctions to the extent that non-compliance would seriously damage their interests or those of the European Community. EU member states were authorized to enact certain implementing regulations, and although some did (e.g., Germany), some declined to do so (e.g., France, Belgium). Significantly, the Blocking Regulation applied to EU subsidiaries and affiliates of U.S. companies, and to U.S. persons resident in the EU.
U.S. withdrawal from the JCPOA and the resulting snap-back of U.S. sanctions against Iran prompted the European Commission, in June 2018, to adopt Regulation (EU) 2018/1100. The amendment significantly broadened the range of U.S. sanctions with whose secondary application EU companies are not to comply. These include U.S. prohibitions on:
- Trade with Iran’s petroleum industry under the Iran Sanctions Act of 1996
- Trade and financial transactions with Iran’s ports, energy, shipping, or shipbuilding sectors under the Iran Freedom and Counter-Proliferation Act of 2012
- Financial transactions with the Central Bank of Iran or designated Iranian financial institutions under the National Defense Authorization Act for Fiscal Year 2012
- Certain financial transactions with designated Iranian persons, the Government of Iran and the Central Bank of Iran under the Iran Threat Reduction and Syria Human Rights Act of 2012
- Reexport of U.S.-origin goods to Iran under the Iranian Transactions and Sanctions Regulations
Based on the instruction in the Blocking Regulation, the Commission adopted Implementing Regulation (EU) 2018/1101, which established criteria for authorizing EU persons to comply with U.S. sanctions, and establishes procedures for submission of authorization requests to the Commission by persons subject to the Blocking Regulation.
The effectiveness of the Blocking Regulation as a mechanism to offset the impact of the Blocked Sanctions has been widely questioned, and there have been very few instances of the Blocking Regulation being used in practice in its 22 year history. Indeed, it does not appear that any EU person has been subject to penalties for noncompliance since the adoption of the initial Blocking Regulation in 1996. This reflects the reality that concern over potential EU penalties pales in comparison to fear of possibly being cut off from access to the U.S. financial system or U.S. goods and technology.
It remains to be seen whether EU or country-level regulators will step up enforcement practices under the amended Blocking Regulation in an attempt to dissuade EU companies from terminating their business dealings with Iranian counter-parties, and whether any such measures will provide sufficient comfort to cause EU persons to act in disregard of U.S. sanctions. If the early response of major EU companies, and some EU member nations, to reimposition of U.S. secondary sanctions is an accurate indicator, they will not. In the meantime, like Odysseus, EU businesses (including foreign subsidiaries of U.S. companies) will need to chart their course with care as they attempt to navigate the treacherous path between U.S. sanctions and EU blocking regulations.