On 6 June 2018, the European Commission ("Commission") adopted a draft Delegated Regulation expanding the scope of Council Regulation (EC) No 2271/96 ("EU Blocking Regulation") to include the extra-territorial aspects of the U.S. Iran sanctions (please see our dedicated alert on this topic). The objective of the amended EU Blocking Regulation will be to protect EU companies against the extra-territorial effects of the U.S. Iran sanctions that "unduly affect the interests of natural and legal persons established in the [EU] and engaging in trade and/or the movement of capital and related commercial activities between the [EU] and Iran" (please see draft Delegated Regulation).
To whom does it apply?
The amended EU Blocking Regulation will apply to all EU nationals, non-EU nationals residing/doing business in the EU and EU-incorporated companies (including EU subsidiaries of U.S. companies) (together referred to as "EU Persons") that are potentially concerned by the following U.S. Iran sanctions ("covered U.S. Iran sanctions"):
- The "Iran Sanctions Act of 1996" to the extent that it, inter alia, prohibits: (1) certain investments in Iran; (2) the provision of certain goods and services to Iran; (3) participation in certain joint-ventures outside Iran in which Iran or its Government has particular interests; and (4) involvement in the transport of crude oil from Iran.
- The "Iran Freedom and Counter-Proliferation Act of 2012" to the extent that it, inter alia, prohibits: (1) the provision of significant support to certain persons in Iran or designated/blocked Iranian individuals; (2) trade in certain goods and services with Iran; (3) purchases of petroleum/petroleum products from Iran; (4) transactions related to trade in natural gas with Iran; and (5) the provision of certain underwriting, insurance and reinsurance services.
- The "National Defense Authorization Act for Fiscal Year 2012" to the extent that it, inter alia, prohibits significant financial transactions with the Central Bank of Iran or any other designated Iranian financial institution.
- The "Iran Threat Reduction and Syria Human Rights Act of 2012" to the extent that it, inter alia, prohibits: (1) the provision of underwriting, insurance or reinsurance services to certain Iranian persons; (2) involvement in the issuance of Iranian sovereign debt; (3) transactions with the Government of Iran or any person subject to the jurisdiction of the Government of Iran prohibited by U.S. law; and (4) the provision of specialised financial messaging services to the Central Bank of Iran or a financial institution whose interests in property are blocked in connection to Iran's proliferation activities.
- The "Iranian Transactions and Sanctions Regulations" to the extent that it, inter alia, prohibits: the re-export of any goods, technology or services intended for Iran or its Government that (1) have been exported from the U.S., and (2) are subject to export controls rules in the U.S.
The covered U.S. Iran sanctions (a full list of which is included in the Annex to the draft Delegated Regulation) restrict the potential business operations of EU persons in almost every key Iranian industry sector (e.g., energy and petrochemicals, banking and finance, insurance and reinsurance, shipping or automotive).
Why does it matter?
The amended EU Blocking Regulation will: (1) prohibit compliance with the covered U.S. Iran sanctions unless formally authorised by the Commission; (2) prohibit recognition or enforcement of U.S. court/administrative decisions giving effect to the covered U.S. Iran sanctions; and (3) provide for the possibility to recover any damages (including legal costs) caused by the application of the covered U.S. Iran sanctions. In practice:
- EU Persons could seek to comply with both the covered U.S. Iran sanctions and the amended EU Blocking Regulation by either requesting specific licences/waivers from the U.S. authorities that would allow them to maintain their business operations in Iran, or requesting an authorisation from the Commission to comply with the covered U.S. Iran sanctions on the basis that non-compliance would seriously damage their interests or those of the EU.
- EU Persons could choose to comply with the covered U.S. Iran sanctions by winding down their business operations in Iran, thereby taking the risk of violating the amended EU Blocking Regulation. It is worth noting that, to date, certain Member States do not have legislation to enforce the EU Blocking Regulation (e.g., Belgium, France, Greece, Luxembourg) and that most of the Member States that have legislation to enforce the EU Blocking Regulation provide either for administrative penalties (e.g., the maximum fines in Germany, Italy and Spain amount to respectively EUR 500,000, EUR 92,962 and EUR 601,012) and/or criminal offences (e.g., Ireland, the Netherlands and Sweden where maximum prison sentences amount to respectively 12 months, two years and 6 months).
- EU Persons could choose to comply with the EU Blocking Regulation by maintaining their business operations in Iran, thereby taking the risk of violating, or creating legal exposure to adverse action under, the covered U.S. Iran sanctions. Non-compliance with the covered U.S. Iran sanctions could result – depending on the provision at issue – in (1) civil and criminal penalties; (2) measures to limit imports into the U.S. or procurement to the U.S.; (3) prohibition of designation as primary dealer or as repository of U.S. Government funds; (4) denial of access to loans from U.S. financial institutions or transfers through such institutions; (5) prohibition of transactions in foreign exchange subject to the jurisdiction of the U.S. (including all USD trade); (6) export restrictions by the U.S.; (7) prohibition of property transactions subject to the jurisdiction of the U.S. including the designation of a foreign person as a Specially Designated National (“SDN”), which would result not just in asset freezes involving property interests subject to U.S. jurisdiction but also secondary sanctions exposure for anyone who engages in a significant transaction with the SDN; (8) refusal or assistance by EXIM-Bank; (9) landing and port-calling restrictions for vessels and visa/entry restrictions into the U.S. for individuals; and/or (10) prohibitions and limitations to the opening and maintenance of correspondent accounts in the U.S.
Separately, the Commission announced that it would pursue the removal of existing obstacles for the European Investment Bank ("EIB") to finance activities in Iran, which could allow the EIB to support EU investment in Iran and could be useful in particular for small and medium-sized companies.
When does it become effective?
The European Parliament and the Council have until 6 August 2018 to express objections against the inclusion of the covered U.S. Iran sanctions within the scope of the EU Blocking Regulation. Absent any objections during this period – which is likely given the strong and vocal support of both institutions for the Commission's initiative – the amended EU Blocking Regulation will enter into force on 6 August 2018, i.e., on the day of the actual reinstatement of the U.S. Iran sanctions following the expiry of the first wind-down period. The amended EU Blocking Regulation could also enter into force before that date if the European Parliament and the Council inform the Commission of their intention not to express any objection.
How should EU companies prepare?
EU companies doing business in Iran should consider their potential exposure to both the amended EU Blocking Regulation and the covered U.S. Iran sanctions. This includes: (1) reviewing whether their activities in Iran are subject to the covered U.S. Iran sanctions; (2) determining whether their contractual obligations with Iranian counterparties and financial institutions contain representations and warranties relating to U.S. sanctions compliance; and (3) assessing potentially applicable penalties under the amended EU Blocking Regulation and the covered U.S. Iran sanctions.
Depending on the extent of their exposure to either regimes, EU companies should also consider: (1) engaging with the Commission and the Member States to determine whether they could be granted an authorisation to comply with the covered U.S. Iran sanctions, and/or (2) engaging with the U.S. authorities to determine whether they could be granted a specific licence or waiver that would allow them to maintain their operations in Iran.