Summary: The recent decision by the US Government to pull out of the Joint Committee Plan of Action (JCPOA) and to re-impose sanctions against Iran poses a difficult question for companies in Europe (including subsidiaries of US companies): if they continue business in Iran, will they face enforcement action or imposition of secondary sanctions from the Office of Foreign Assets Control (OFAC)?

However, the pressure of this question may increase if the EU introduces measures to prohibit the application of US sanctions in Europe. Steps have been taken by the European Commission to amend the Blocking Regulation, with the aim of limiting the impact of US sanctions in the EU.

What is the EU Blocking Regulation?

The Blocking Regulation (officially known as Regulation 2271/96) is an EU regulation allowing the EU to protect businesses from the extraterritorial impact of particular legislation or sanctions adopted by a third country (such as the US). It was originally introduced in the context of US sanctions against Cuba, and has also been applied to US sanctions concerning Libya and Iran.

By amending the Annex to the Blocking Regulation, the European Commission can effectively prohibit European businesses from complying with the specified foreign (i.e. US) legislation or sanctions. Crucially, it also ensures that those judgments or decisions of courts, tribunals or administrative authorities from outside the EU, which give effect to the relevant legislation/sanctions, are not recognised or enforceable in the EU. The Blocking Regulation also includes a “clawback” provision, allowing European businesses to claim damages caused by the relevant legislation or sanctions.

The Blocking Regulation (and its Annex) applies in all EU Member States. Although it is an EU regulation, the responsibility for enforcement lies with each of the individual EU Member States.

Amending the EU Blocking Regulation to deal with US sanctions against Iran

Following a recent meeting of EU leaders, there has been broad speculation that the EU may seek to amend the Blocking Regulation to counteract the impact of recent US sanctions against Iran. Notwithstanding President Trump’s announcement that the US will pull out of JCPOA, the EU currently remains committed to the plan.

The US sanctions, which will come into force as early as 6 August 2018, are wide ranging and capable of affecting non-US businesses, with “secondary sanctions” potentially applicable to EU businesses. The President of the European Commission, Jean-Claude Juncker, has made it clear that he considers the Commission has a duty to protect European companies. As such, he has launched the process to ‘activate’ the Blocking Regulation.

From a procedural perspective, the European Commission (using powers granted to it in 2014) can add the new US sanctions to the Annex of the Blocking Regulation. The process requires notification to various EU institutions (specifically the European Parliament and Council) and requires a two-month waiting period during which those institutions may raise objections to the proposals. On 18 May 2018, the European Commission confirmed that it indeed launched the process. Whilst the two-month period may have begun, it may be subject to either extension or reduction, if the institutions indicate that they have no objections. On a political level, there is still considerable uncertainty over whether the activation of the Blocking Regulation in respect of the latest US sanctions has sufficient support amongst EU Member State governments (who effectively comprise the EU Council).

What is the practical impact?

An amended Blocking Regulation would not, of course, compel EU businesses to continue dealing with Iran. However, it will likely place businesses affected by the US sanctions in an unwelcome and difficult position. Effectively, they risk being damned if they comply with the US sanctions and damned if they don’t!

Despite the theoretical protection offered by the Blocking Regulation, EU businesses choosing to continue dealing with Iran in the face of the US sanctions run a number of risks in respect of dealings with the US. By way of example, an EU business in contravention of US sanctions might run into issues in respect of its ability to access the US financial system.

It is highly likely that most large EU companies (or subsidiaries of US companies) may be significantly more concerned about safeguarding their US business connections than those in Iran. As such, those companies might prioritise compliance with US sanctions – notwithstanding the amended Blocking Regulation.

Historically, when the Blocking Regulation was first introduced in respect of the US sanctions concerning Cuba, it was seldom used (if at all) by Member State authorities. Given a choice between complying with the Blocking Regulation and US sanctions, non-US companies have tended to opt to comply with US sanctions. It is unlikely that many businesses will rely on the Blocking Regulation for security.

With this in mind, it is questionable how much practical impact any proposed amendment to the Blocking Regulation Annex would have.

Companies who believe their activities, current or planned, may infringe new US sanctions should seek legal guidance. If the Blocking Regulation is amended as proposed, businesses should also factor in the question of if and how that affects them.