EU Seeks to Contain the Impacts of U.S. Reimposition of Extra-Territorial Sanctions on Iran

The U.S. yesterday commenced the phased re-introduction of its pre-JCPOA extra-territorial sanctions in relation to Iran – with some measures applying immediately, and others from 5 November. The EU has condemned U.S. measures, and has followed through with an update to its Blocking Regulation. This note outlines the core elements. 

The Political Context 

The EU and its Member States expressed their dismay when the U.S. decision to withdraw from the JCPOA was announced in May, and along with Russia and China (the other JCPOA signatories), they committed to keep the JCPOA alive even without the U.S. Yesterday, a fresh joint statement of the EU and the E3 (the UK, France, Germany) repeated their “deep regret” at the re-imposition of sanctions by the U.S. 

But the EU is under pressure to do more. Iran has indicated that it will only continue to commit to the JCPOA, and desist from further uranium enrichment, if the EU signatories can find a way to ensure that it benefits from remaining committed. The EU’s businesses are much more intertwined with the U.S. economy than those in China and Russia, meaning that the EU feels much more directly the effects of U.S. secondary sanctions. So the onus for coming up with a way to curtail those impacts falls primarily on the EU. Having had its request for EU exemptions to the U.S. measures rejected, it has proceeded to update its Blocking Regulation. 

EU Blocking Regulation – Key Elements 

The Blocking Regulation update¹ came into force as of yesterday. The European Commission has also adopted at the same time: 

• a Regulation² setting out the procedure by which EU persons may apply for an authorisation to comply with a relevant U.S. law, where non-compliance would seriously damage the applicant’s, or the EU’s, interests; and 
• a Guidance Note³ regarding the Blocking Regulation, in Q&A form. 

The Regulation is unusual in many respects, and is as yet untested in court.

 To Which U.S. Sanctions Laws Does the Blocking Regulation Apply? 

The measures in the Blocking Regulation (which are described below) apply in relation to the U.S. laws and regulations which are cited in the Annex to it.⁴ A number of U.S. laws are now cited in the Annex, and in relation to each law, particular provisions are described. However it is unclear which specific measures are covered. An introductory note to the Annex clarifies that the descriptions of particular measures are “for information only” – seemingly suggesting that all measures in the cited legislation are covered. The recitals and Guidance appear to confine it to the “extra-territorial effects” of such legislation. But this still leaves it unclear whether all extra-territorial effects are included (whether of primary or secondary sanctions, and whether or not suspended by the JCPOA) or whether it is, as the Guidance at one point suggests, intended to be confined to “the extra-territorial U.S. sanctions that were either lifted or waived by U.S. under the JCPOA and which have been or will be re-imposed”. Looking at the objective of the update to the Blocking Regulation,⁵ the best (purposive) reading would seem to be that it applies only to the measures set out in yesterday’s Executive Order. 

To Whom Does the Blocking Regulation Apply? 

The Regulation applies to EU persons (wherever they are, including in the U.S.) and to EU entities including EU subsidiaries of U.S. entities. EU branches of U.S. entities are, however, not within scope, nor are non-EU subsidiaries of EU companies. 

Are EU Persons Prohibited From Compliance? 

The stated effect of the Blocking Regulation is that it “counteracts the effects of the extra-territorial application of laws … made by third countries, and of actions based thereon or resulting therefrom”. It does this not by protecting EU businesses from the U.S. extra-territorial measures (notwithstanding a claim to this effect in Article 1 of the Regulation), but by prohibiting EU persons from complying with any “requirement or prohibition based on or resulting from the extra-territorial U.S. measures”. Breach of this prohibition carries, in the UK and a number of other EU Member States, criminal penalties. 

The formulation of the prohibition is not straightforward: compliance with the U.S. extra-territorial measures themselves is not, it appears, prohibited. Rather it is prohibited to comply with a “requirement or prohibition” which is “based on or resulting from” such measures. The Guidance does not help with what this means, but it would appear to be aimed primarily at restrictions imposed by private operators in response to the U.S. sanctions, such as, a refusal by a bank or insurer to support an Iran related transaction. There is some possibility that it was in fact intended to prohibit both compliance with the U.S. extra-territorial laws themselves and with requirements/prohibitions based on or resulting from them,⁶ but at this stage it remains unclear. 

A person who “complies” with such a requirement that results from a U.S. extra-territorial law would appear to be in breach. As to what this means, the Guidance offers some assistance: 

“EU operators are free to conduct their business as they see fit, in accordance with EU law and applicable national laws. This means that they are free to choose whether to start working, continue, or cease business operations in Iran … and whether to engage or not in an economic sector on the basis of their assessment of the economic situation. The purpose of the Blocking Statute is exactly to ensure that such business decisions remain free, i.e., are not forced upon EU operators by the listed extra-territorial legislation …” 

So in broad terms, EU persons are not obliged to act in accordance with requirements based on the U.S. laws in the Annex. But if they do, they must be clear that they are not motivated in doing so by the U.S. laws in question, or by restrictions which are based on or result from such laws. 

The Blocking Regulation allows for entities to apply to the Commission for an authorisation to comply with one of the U.S. laws in the Annex, where non-compliance would “seriously damage” the applicant’s, or the EU’s, interests. The Guidance note clarifies that not all damage is serious, and that it will not allow this process to be used by businesses to obtain letters of comfort. Authorisations will not be backdated, and will be processed “as swiftly as possible” but without any fixed timeframe being indicated. 

Damages Claims for Losses Arising from Compliance with Requirements Based on U.S. Sanctions 

Where a person who is “engaging in international trade and/or the movement of capital and related commercial activities between the EU and third countries” suffers loss due to another person applying any of the U.S. laws in the Annex, the person who suffers loss can recover damages against the other party. 

Damages claims are most likely to arise where one party withdraws from a contract related to trade with Iran, either due to concerns of the implications under U.S. law, or because a third party (such as a bank, insurer or transporter) refuses to provide an ancillary service necessary for the contract performance to proceed. There are many variant scenarios in which a claim for damages might arise under this provision, and the Guidance notes the breadth of this provision. It remains to be seen how broadly the provision is applied by the courts, but it is likely to generate some significant claims. 

The Guidance clarifies that liability in damages arises not only for the responsible entity, but also for its “representatives”. This may open up the possibility of claims for damages against individual staff, not merely the entities they represent and companies acting for them. 

Reporting Obligation 

EU persons (and their directors and managers individually) are obliged to inform the European Commission within 30 days where their economic and/or financial interests are affected by the U.S. laws set out in the Annex, or by actions based on or resulting from them. 

Impacts in Practice 

Aside from the uncertainties that arise from broadly crafted terms, some of which are outlined in this note, a key concern for businesses about the use of the Blocking Regulation has always been that it would put EU businesses in an impossible position of being damned (by the EU) if they respect the U.S. secondary sanctions, and damned (by the U.S.) if they don’t. The prevailing view is that, faced with such incompatible requirements, businesses will find the threat of OFAC or other U.S. secondary sanctions measures a greater concern than the threat of enforcement action by any EU sanctions authority. 

That may be right, and nothing published yesterday changes that. However, the unknown factor is the possibility of damages claims against entities that cause losses as a result of compliance with U.S. extra-territorial measures (or against their representatives). In the absence (so far at least) of any indication by any EU Member State authority that it intends to really focus on enforcing this Regulation, the civil damages risk may be the element that weighs most on the minds of commercial and compliance staff in businesses when weighing up the balance of compliance challenges. 

Other Measures 

The EU/E3 Joint Statement noted also that the remaining parties to the JCPOA have committed to work on effective finance channels with Iran. To this end, a further measure passed yesterday added Iran to the lending mandate of the European Investment Bank,⁷ which enables the EIB to provide finance for investment projects in Iran (along with the many other countries within its mandate) that contribute to EU policy objectives (although the EIB itself needs to take account of international sanctions, limiting its scope to act on this expansion of its mandate). The statement also noted that the work of the remaining JCPOA parties continues, and in that vein, other measures may yet follow to assist in keeping the JCPOA alive. 

How Dechert Can Help 

With experienced sanctions professionals in both London and Washington, D.C., Dechert’s International Trade practice advises companies on the full range of sanctions matters, and stands ready to assist EU companies considering operations in or with Iran (or considering ceasing such operations) as to how best to manage the competing compliance risks. 

Footnotes 

_{1) Commission Delegated Regulation (EU) 2018/1100
2) Commission Implementing Regulation (EU) 2018/1101
3) Guidance Note 2018/C 277 I/03
4) The Annex does not contain any reference to the new Executive Order (“EO”) issued yesterday. A court would likely take the view that as the EO refers in its pre-amble to, and implements provisions in, certain laws and regulations, it is enough that the Annex refers to those laws and regulations. But this further adds to the lack of clarity as to precisely which U.S. measures are covered.
5) In particular Recitals (4) and (5) of Regulation (EU) 2018/1100
6) Support for this view is found in the sentence in section 7 of the Guidance which reads “It is important to note that this also includes any actions based thereon or resulting therefrom” (emphasis added).
7) Commission Delegated Decision (EU) 2018/1102}