On 18 May 2018, the European Commission announced its intention to expand Council Regulation (EC) 2271/96 of 22 November 1996 (the “Blocking Regulation”) in order to discourage European companies from complying with newly re-imposed U.S. Iran-related sanctions. On 6 June 2018, the European Commission adopted a delegated regulation to enact these changes, which will come into force by 6 August 2018 (the date when the first wind-down period for the U.S. secondary sanctions on Iran expires), provided the EU Parliament and Council do not have objections.
This blogpost considers how the Blocking Regulation will work in practice for UK and European companies, in particular in light of the UK’s departure from the European Union (“EU”) in 2019.
U.S. withdrawal from the JCPOA
On 8 May 2018, the United States announced its intention to withdraw from the Joint Comprehensive Plan of Action (the “JCPOA”) and reintroduce nuclear-related economic sanctions on Iran that had been previously lifted, effectively restoring the 2013 U.S. Iran-related secondary sanctions program, subject to 90- and 180-day wind‑down periods. Secondary sanctions target certain activities carried out by persons outside U.S. jurisdiction by threatening that such persons will themselves be sanctioned by the United States. See our alert memorandum for further details.
Following this decision, there has been significant opposition to the United States’ unilateral withdrawal from the remaining parties to the JCPOA, with the leaders of China, France, Germany, Russia and the UK confirming their ongoing commitment to the deal. The extension of the Blocking Regulation to cover U.S. sanctions on Iran is intended to demonstrate the EU’s commitment to the JCPOA and opposition to the U.S. decision to withdraw.
The operation of the Blocking Regulation
The Blocking Regulation does not affect the operation of U.S. laws and will not prevent the possibility that European companies could be targeted by U.S. secondary sanctions if they engage in sanctionable conduct. Rather, it operates to penalize compliance with U.S. secondary sanctions. For this reason (and for the practical reasons discussed further below), the Blocking Regulation was widely considered not to be successful when first introduced in the 1990s to counter U.S. sanctions on Cuba.
The main features of the Blocking Regulation are as follows:
- A prohibition on complying with the foreign law
Under Article 5 of the Blocking Regulation, certain persons (broadly, EU nationals, residents and companies (“EU Persons”)) are prohibited from complying with “any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly” from the foreign laws specified in the Blocking Regulation’s annex (the “Annex”). This phrasing is deliberately broad, and is likely to encompass all actions or measures taken by the U.S. Department of State, the U.S. Treasury (and the Office of Foreign Assets Control) or any other U.S. Government authority.
The EU Commission may authorize compliance with foreign laws listed in the Annex if non-compliance would “seriously damage” the interests of the company in question or of the Community. Arguably, non-compliance with U.S. sanctions will very often have the potential to do serious damage to the interests of EU persons, meaning that the authorization mechanism could significantly reduce the impact of the Blocking Regulation, depending on how it is exercised by the EU Commission.
- An obligation to notify the EU Commission where the foreign law could affect economic or financial interests of an EU Person
Under Article 2, an EU Person must notify the EU Commission within 30 days of obtaining information that the specified laws have affected, directly or indirectly, its economic or financial interests. The EU Person must provide any additional information requested by the EU Commission.
Although the Blocking Regulation contains no de minimis exception to this notification obligation, it is in most cases not clear how the EU Commission could evaluate the effect of the specified laws on individual companies for the purposes of monitoring enforcing the notification obligation. In practice, a person’s interests may be driven by a variety of factors and not only the possibility of secondary sanctions; a company may, for example, cease to operate in a particular area for various other business reasons. Policing compliance with the notification obligation, thus, becomes almost impossible.
- Non-recognition of foreign law decisions
Under Article 4, neither the EU courts nor those of the Member States may recognize or enforce foreign court or administrative decisions relating to the laws specified in the Annex. It is not clear how Member States will interpret this obligation in the context of their own treaties and domestic laws on the recognition of foreign judgments.
- Sanctions for breach of the Blocking Regulation
Under Article 9, the relevant EU Member State will determine sanctions for breach of provisions of the Blocking Regulation. In the past, however, Member States have very rarely brought enforcement actions to implement the Blocking Regulation, and there may be little appetite to do so in this instance.
- The ability to seek damages
Under Article 6, EU Persons are entitled to recover damages, including legal costs, for losses caused by “the application of the [specified laws] or actions based thereon or resulting therefrom.” The damages are to be obtained “from the natural or legal person or any other entity causing the damages or from any person acting on its behalf or intermediary.” It is not clear whether this envisages the EU Person could obtain damages from the foreign state imposing the law or from other EU individuals complying with the foreign law (or both). In the former case, the implementation of that provision in practice may be particularly problematic given the general immunity of the foreign states.
Use of the Blocking Regulation to counter the U.S. withdrawal from the JCPOA
The delegated regulation updates the Annex in order to counter the effects of the U.S. withdrawal from the JCPOA. The amended Blocking Regulation will come into force by 6 August 2018, provided there is no objection from the EU Council or Parliament. 6 August 2018 is also the date of the expiry of the 90-day wind-down period provided for by the U.S. regime.
The proposed new Annex refers to the U.S. legislative and regulatory provisions relating to secondary sanctions on Iran. These include secondary sanctions on investments into and other dealings with Iran relating to the energy, petroleum, oil and gas, shipbuilding, metals, financial and insurance sectors, and transactions relating to the Government of Iran.
Once the revised Annex becomes effective and EU member states implement sanctions for non-compliance with the Blocking Regulation, EU companies will likely be ‘caught between a rock and hard place’. Each company will have to make a value judgement as to which set of laws to obey, factoring in the likelihood and potential impact of: (i) U.S. secondary sanctions being enforced; and (ii) the relevant EU Member State imposing sanctions for non-compliance with the Blocking Regulation.
Given the seriousness of U.S. sanctions, the jurisdictional reach of the regime, the ubiquity of the U.S. financial system and use of U.S. dollars in commercial transactions, as well as the importance of the U.S. market internationally, making the decision to disregard U.S. sanctions in order to comply with EU law will be a difficult one to make. In a decision that may be seen as a bellwether, the European Investment Bank, the EU’s non-profit lending institution, recently announced that despite the Blocking Regulation, it would not participate in the Iranian market owing to U.S. sanctions. European-headquartered conglomerates such as Total, Maersk and Siemens have also announced that they are re-evaluating their activities in Iran.
On the other hand, it is not clear with what vigour the U.S. government will pursue secondary sanctions on European companies. Secondary sanctions are essentially a political tool and the U.S. authorities have significant discretion in their implementation.
As for the Blocking Regulation, it is difficult to foresee how effective the Blocking Regulation will be in practice. It seems unlikely that damages will be realistically obtainable from the U.S. government. It is also unclear whether sanctions for non-compliance with the Blocking Regulation will be accompanied by impactful, consistent and coordinated enforcement across EU Member States. As noted above, the past suggests this may not be the case.
Whichever set of laws a company decides to comply with, when making contractual representations as to its compliance with EU and U.S. law (for example, in connection with a securities offering), it will have to bear in mind that in complying with the sanctions laws of one jurisdiction, it is likely to be breaching the sanctions laws of the other.
The Blocking Regulation’s application in the UK after Brexit
On 26 June 2018, the European Union (Withdrawal) Act 2018 (the “Withdrawal Act”) entered into law. The Withdrawal Act provides for the UK’s withdrawal from the European Union on 29 March 2019 (“Brexit”), via the repeal of the European Communities Act 1972 and the formal incorporation of most EU laws into UK law.
Under Section 3 of the Withdrawal Act, EU regulations operative immediately before Brexit (such as the Blocking Regulation) will be incorporated into domestic UK law upon Brexit.
The Withdrawal Act gives UK Government ministers the power to correct problems arising from withdrawal through regulations implemented by statutory instruments (the “delegated powers”). These delegated powers may be exercised prior to Brexit (such that the legislation amended thereby takes effect upon Brexit), and may require parliamentary approval, depending on the extent of the changes. EU Regulations implemented in UK law after Brexit may only be repealed or modified via parliamentary procedure or a pre-existing authority to amend.
A number of aspects of the process described in the Blocking Regulation will clearly no longer be feasible or relevant in the UK after Brexit:
- references to EU companies will not make sense;
- the EU courts will not have jurisdiction with regards to the damages process; and crucially
- the role of EU institutions in the blocking process will not be relevant – the Commission will not accept notifications from or provide authorizations to UK companies and the Council may not add or delete laws to or from the Annex.
Given the issues referred to above, we expect delegated powers to be used in order to provide for:
- the blocking powers to apply to UK companies;
- the UK courts to take jurisdiction in the provision of damages; and
- relevant UK authorities to take the role of the EU institutions in the process.
As noted in our previous blog post, the UK Parliament recently passed legislation (the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”)) allowing the UK Government to impose sanctions following Brexit. SAMLA does not provide authority to revoke the Blocking Regulation after it has been implemented in UK law following Brexit.
However, depending on how the delegated powers in relation to the Blocking Regulation are exercised, the UK Government may have the power to amend the Annex without prior Parliamentary approval, and thereby easily remove the relevant U.S. laws. Further, as discussed above, the enforcement mechanics of the Blocking Regulation are not set out in the Blocking Regulation itself and therefore depend on the discretion of the relevant government. Therefore, transcription of the Blocking Regulation into UK law will not guarantee its enforcement.
The UK Government has made its ongoing commitment to the JCPOA clear and has indicated its sanctions policy is likely to remain aligned with the EU immediately following Brexit. However, the UK Government will have a new ability to steer its own course in this respect, and the ever-changing geopolitical landscape means that the future of the Blocking Regulation in the UK after Brexit, and indeed the future of UK sanctions policy, remains to be seen.
Please do not hesitate to contact Polina Lyadnova (firstname.lastname@example.org) or Matthew Fisher (email@example.com) in our London office, or any of your usual contacts at the Firm, should you have any questions.
 Interestingly, the Annex also refers to export controls on goods, technology and services to Iran under the U.S. Iranian Transactions and Sanctions Regulations, which were never lifted under the JCPOA in the first place.