EU Blocks U.S. Sanctions Against Iran: European Businesses Stuck Between a Rock and a Hard Place

On 5 November 2018, all sanctions that the US lifted in 2016 with the entry into force of the Joint Comprehensive Plan of Action (JCPOA) will come into force again. As these are mainly secondary sanctions, i.e. sanctions that also apply extraterritorially to transactions not related to the US, European Companies doing business in Iran will come into the crosshairs of US sanctions against Iran. For Iran business falling under the direct scope of US law, there was and still is a total embargo anyway. On 7 August, the first set of these sanctions was re-instated.

The European Union (EU) is not leaving unanswered the unilateral withdrawal of the USA or the legal consequences of sanctions. The EU urges EU companies to continue and bolster trade with Iran and updates its so-called Blocking Regulation (Council Regulation (EC) No 2271/96), aimed at “protecting against the effects of the extra-territorial application adopted by a third country”.  

I. What are the main effects of the EU Blocking Regulation?

1. Prohibition to comply with US sanctions

Most importantly, the EU Blocking Regulation prohibits European economic operators from complying with the US Iran sanctions: Pursuant to Article 5 of the Blocking Regulation, no EU person or company “shall comply […] actively or by deliberate omission with any requirement or prohibition” that is based on or results from the acts incorporated in the Regulation’s Annex.

As of today, the Annex includes the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA), the National Defense Authorization Act (NDAA) for Fiscal Year 2012, the Iran Threat Reduction and Syria Human Rights Act of 2012, and the Iran Transactions and Sanctions Regulations. Violations of Article 5 of the Blocking Regulation are subject to penalties as laid down in the respective national legal system of the EU Member States. In Germany, e.g., a violation of Article 5 based on negligence can be fined with 250,000 EUR, and a deliberate violation with up to 500,000 EUR.

2. Nullification of US decisions based on sanctions

Pursuant to its Article 4, the Blocking Regulation nullifies the effect in the EU of any foreign decision based on the listed extra-territorial legislation or the acts and provisions adopted pursuant to them. In consequence, no administrative, judicial or arbitral decision that will require seizure or enforcement of any economic penalty against an EU operator based on the aforementioned acts will be executed in the EU, thus shielding EU persons and companies operators from the effects of such decisions in the EU.

II. What can companies do?

The reinstatement of US sanctions and the updating of the Blocking Regulation poses a dilemma for EU companies: They can ultimately only comply with European or US law, but not with all the requirements.

The Blocking Regulation itself offers a possible way out. It provides that the European Commission may grant an exemption from the Blocking Regulation on the basis of which companies may comply with US sanctions if non-compliance would seriously damage its interests or those of the EU. An application for an exemption would have to demonstrate why the applicant would be seriously harmed if US sanctions were complied with. The EU made it very clear that “not every nuisance or damage suffered” will allow applicants to obtain the authorisation applied for. The Commission's criteria for granting an exemption are laid down in Implementing Regulation (EU) 2018/1101) and include the following: the existence of an ongoing administrative or judicial investigation against the applicant initiated for non-compliance with US sanctions, the existence of a parent company or subsidiary in the USA, adverse effects on the conduct of economic activity posing a serious risk of bankruptcy, and the effects on the domestic employment market of EU Member States. EU persons and companies are well advised to draft the application carefully.

In theory, pursuant to its Article 6, the Blocking Regulation also provides for EU operators that incurred damages arising from the application of the listed extra-territorial legislation to recover those damages from the natural or legal persons or entities causing them. However, the application of this provision before Member States’ national courts appears very unlikely to be of great practical value.

In case the EU Commission is reluctant to grant an authorisation to comply with US sanctions, EU persons and companies find themselves stuck between a rock and a hard place. It will probably come down to negotiating the options and mitigate the risks, since neither EU penalties nor US sanctions are self-executing, thus leaving room for a way out, however uncertain…