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Out-Law Analysis | 09 Aug 2018 | 4:23 pm | 6 min. read
The updated Blocking Regulation is part of the EU's support for "continued full and effective implementation of the Joint Comprehensive Plan of Action (JCPOA) – the Iran nuclear deal, including by sustaining trade and economic relations between the EU and Iran, which were normalised when nuclear-related sanctions were lifted as a result of the JCPOA". President Trump announced the intention of the US to withdraw from the JCPOA and reinstate secondary sanctions against Iran in May of this year.
The European Commission has published guidance on the application of the Blocking Regulation ('the Guidance'), in the form of a Q&A.
The purpose of the Blocking Regulation is to provide protection against the application of certain US secondary sanctions where they affect the interests of EU persons "engaging in international trade and/or the movement of capital and related commercial activities between the Community and third countries". The US secondary sanctions are wide enough to apply to non-US persons in respect of activities that are wholly unconnected to the US.
The US secondary sanctions caught by the Blocking Regulation since its inception in 1996 have been relatively limited in scope, covering specific US economic sanctions imposed on Cuba, Libya and Iran. However, the latest update to the regulation brings within its scope the prohibitions reinstated by the US on 6 August 2018 and those due to be reinstated on 4 November 2018, and actions based on or resulting from those sanctions. These are referred to in the Guidance as the "listed extra-territorial sanctions".
The listed extra-territorial sanctions are those contained in:
Certain US sanctions relating to Cuba also remain included within the scope of the Blocking Regulation.
There are four main components of the Blocking Regulation.
The Blocking Regulation prohibits EU persons from complying, either directly or through a subsidiary or other third party, actively or by deliberate omission, directly or indirectly, with any requirement or prohibition within the listed extra-territorial sanctions without authorisation to do so.
The Guidance confirms that the Blocking Regulation does not require EU businesses to do businesses with Iran. It says that EU operators "are free to choose whether to start working, continue, or cease business operations in Iran … 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, which the Union law does not recognise as applicable to them".
Responding to a parliamentary question in April 2015, the European Commission acknowledged that it may be difficult to determine the basis for decisions not to proceed with business in sanctioned countries. Vice-president Mogherini, on behalf of the Commission, said that it was "not usually possible" to establish whether a decision by an EU person or entity not to engage in certain activities is "a direct result of the US legislation rather than commercial considerations".
The Guidance continues that requests for authorisation to comply with any listed extra-territorial sanctions "are appropriate when the behaviour that the applicant wishes to adopt is based on, or determined by, the listed extra-territorial legislation". Applications must be made in writing to the European Commission, which will consider whether sufficient evidence has been provided that the interests of the applicant or the EU would be seriously damaged by non-compliance, based on 14 criteria set out in Commission Implementing Regulation (EU) 2018/1101.
Applying for a licence from the US authorities in order to be exempt from the application of the listed extra-territorial sanctions is considered to be a breach of the prohibition unless authorisation has first been obtained from the European Commission to do so.
EU persons whose economic and/or financial interests are directly affected by the listed extra-territorial sanctions must inform the European Commission of this within 30 days. In the case of EU businesses, the reporting obligation rests with directors, managers and others with managerial responsibility.
Confidential information provided to the European Commission in connection with the reporting obligation is covered by "the obligation of professional secrecy" and will not be disclosed without the permission of the person providing it.
Judgements/decisions of non-EU courts, tribunals or administrative authorities giving effect to the listed extra-territorial sanctions are not enforceable in the EU. This is intended to shield EU persons, for example from the effects of any decision requiring seizure or enforcement of any penalty in the EU based on the listed extra-territorial sanctions.
EU persons "engaging in international trade and/or the movement of capital and related commercial activities between the Community and third countries" are entitled to recover damages caused to them by the application of the listed extra-territorial sanctions through the courts in member states. Recovery can take the form of seizure and sale of the assets of the persons causing the damage, their representatives or intermediaries.
The Guidance raises the question of whether EU operators can sue the US authorities in order to recover damages. It states that "who exactly will be the defendant in each case will depend on the specifics of the case, on the kind of damage caused, the person or entity actually causing it, the possible shared responsibility in causing such damage, etc.".
For the Blocking Regulation to be effective, it must be enforced. It is for each member state to introduce a penalty regime for breaching the Blocking Regulation, which provides that such penalties must be "effective, proportional and dissuasive". In the UK, it is a criminal offence to breach the prohibition or fail to comply with the reporting obligation, punishable by an unlimited fine.
To date, the Blocking Regulation has not been tested at an EU level or in the courts of the member states.
In 2007, charges were brought against Austrian bank BAWAG for breaching the Blocking Regulation after it closed the accounts of 100 Cuban nationals in order to facilitate its acquisition by a US private equity firm, Cerberus Capital. At that time, the US-Cuban sanctions prohibited US persons from dealing with Cuban persons. However, the charges were dropped because the accounts were reinstated after appropriate authorisations were obtained from the US authorities.
Lack of enforcement has led to the effectiveness of the Blocking Regulation being questioned as a tool to protect EU businesses. The EU parliament acknowledged this issue at the time that the update to the Blocking Regulation was proposed, although it stated that its adoption "sends an important political message". The Blocking Regulation has so far been unsuccessful as a bargaining chip in negotiating exemptions from the secondary sanctions for EU companies that initiated or concluded contracts for business in Iran after the date of JCPOA implementation, and to maintain banking channels and financing channels with Iran, amongst other matters.
This lack of enforcement within the EU is in contrast to the level of enforcement activity in the US against non-US businesses acting in breach of US secondary sanctions, particularly against non-US financial institutions. EU financial institutions that facilitate transactions in breach of the US secondary sanctions face being cut off from the US financial system, potentially sounding the death knell for international business.
EU businesses and citizens acting in breach of the US secondary sanctions also face being sanctioned themselves by the US, and restricted from access to the US and the US market. The threat of such penalties will undoubtedly have had a role to play in the decision by large multinationals such as Total, Maersk, Torm, Peugeot, Boeing and Siemens Corporation to signal a departure from the Iranian market.
In these unchartered territories, how effective the Blocking Regulation will ultimately be at protecting EU businesses that decide to proceed in Iran from the effects of enforcement of secondary sanctions by the US remains to be seen.
Stacy Keen is a regulatory law expert at Pinsent Masons, the law firm behind Out-Law.com.
Diversity and Inclusion - best laid plans
Fintech meet up