On May 18, 2018, the European Commission announced the launch of the formal process to activate the European Union's “blocking statute” (Council Regulation (EC) 2271/96 of Nov. 22, 1996) by updating the list of sanctions falling within its scope. Specifically, the Commission has proposed amending the list of laws identified in the annex to Regulation 2271/96 by adding the reimposed US sanctions on Iran.
The Commission started the formal process after receiving broad informal support from the leaders of the member states to a larger package of four measures that the Commission has proposed that, according to the Commission, are intended to protect the interests of EU companies investing in Iran and to demonstrate the EU's continued commitment to the Joint Comprehensive Plan of Action, or JCPOA.
Framework Established by the Blocking Statute
The stated purpose of the blocking statute is to protect against, and counteract the effects of, the extraterritorial application of certain third-country laws. The list of the third-country laws covered by the regulation has not been updated since the adoption of the regulation in 1996.
Originally, the EU adopted the blocking statute to address issues of extraterritoriality of US laws relating to the embargo of Cuban products (the Helms-Burton Act) and sanctions against Iran and Libya (the Iran and Libya Sanctions Act of 1996). The blocking statute applies to companies incorporated in the EU member states. If the reimposed US sanctions on Iran are added to the annex, the framework established by the blocking statute would apply as follows:
- EU companies would have to notify the Commission whenever the renewed US extraterritorial sanctions directly or indirectly affect the economic or financial interests of the company. An EU company would be required to provide the relevant information within 30 days from the date on which that company obtained such information. The Commission could request additional information that is relevant for the purposes of the blocking statute.
- EU companies would be prohibited from complying with the extraterritorial effects of US sanctions identified in the blocking statute. In particular, EU companies would be prohibited from complying with requirements or prohibitions, including any requests by non-EU courts, based on the US sanctions covered by the blocking statute, unless an EU company obtained an authorization to comply from the Commission. EU companies could seek an authorization permitting full or partial compliance with the reimposed US sanctions if noncompliance with those US sanctions would seriously damage the interests of the company or of the EU.
- EU companies could seek to recover damages in EU courts as a result of the sanctions. Damages could be recovered from “the natural or legal person or any other entity causing the damages or from any person acting on its behalf or intermediary.”
- The blocking statute nullifies the effect in the EU of any foreign court judgments or decisions of administrative bodies which are based on the reimposed US sanctions. Such judgments or decisions are not recognized or enforceable in any manner in the EU.
- Finally, EU companies could face sanctions or penalties for breaches of the requirements of the blocking statute. Each member state determines what sanctions or penalties apply in case of a breach.
Past Experience With Application of the Blocking Statute
Since its adoption in 1996, the blocking statute was seen by the member states more as a political tool serving mainly as a warning to the United States. To date, there is very little evidence indicating how the blocking statute has been applied in practice:
- There is no publicly available information on the number and extent of notifications that EU companies and other affected persons may have submitted to the Commission.
- It is not clear to what extent — if at all — EU companies and other affected persons have been able to recover damages caused by the extraterritorial effects of US sanctions identified in the blocking statute.
- The member states have initiated very few enforcement actions against persons who have complied with the covered US sanctions in breach of the blocking statute. There are no reported cases where a person has been penalized for noncompliance with the requirements of the blocking statute.
- It appears that the Commission has not granted any full or partial compliance authorizations to EU companies on grounds of potential serious damage to the interests of an EU company or of the EU. The Commission has also yet to adopt the formal criteria for assessing such authorizations.
Amendments to Activate the Blocking Statute
The annex to the blocking statute would be amended by means of a “delegated act” to be drawn up by the Commission in consultation with experts from the member states.
The Commission’s aim is to add the relevant US Iran sanctions laws to the annex before Aug. 6, 2018, when the first wave of US sanctions will be reimposed.
The European Parliament and the council (the member states) will also have a say on the amendments to the blocking statute adopted by the Commission. The delegated act will enter into force if (a) neither the parliament nor the council opposes it within a two-month period of review, or (b) they inform the Commission that they do not object to the amendment prior to the end of the two-month period.
If a majority of the parliament’s members (i.e., 376 members) vote to object to the delegated act, the amendments to the blocking statute cannot enter into force. The council can object to the adopted delegated act with a qualified majority (in brief, 55 percent of the member states (16 out of 28), representing at least 65 percent of the total EU population).
At an informal meeting on May 16 in Sofia, the leaders of the member states unanimously backed the package of measures, including the blocking statute, proposed by the Commission. It has been reported that since the May 16 meeting, certain member states may have changed their position regarding the blocking statute.
In any event, it seems unlikely that the council would object to the amendments activating the blocking statute. Similarly, there is no indication thus far that the European Parliament intends to oppose the addition of the relevant US Iran sanctions laws to the annex of the blocking statute.
If the delegated act amending the blocking statute is adopted, the Commission is expected to control the implementation and application process with support of the European External Action Service (EEAS is the EU diplomatic service managing the EU's diplomatic relations with non-EU countries and conducting the EU’s foreign and security policy). It is also likely that additional guidance will follow to facilitate the application and understanding of the blocking statute.
Potential Impact on EU Companies
EU companies with Iran-related activities covered by the reimposed US sanctions may find themselves in a difficult legal and, possibly, political situation. If the reimposed US sanctions take effect and the blocking statute is activated, EU companies could face a direct conflict of laws between the blocking statute and the relevant US sanctions on Iran.
The affected companies will be exposed to legal uncertainty relating to the risks of US enforcement of the reimposed sanctions and EU enforcement of the blocking statute. EU governments could come under some political pressure to enforce the blocking statute against EU companies ceasing their Iran-related activities due to the reimposed US sanctions.
Ambiguous provisions and the lack of experience with the practical application of the blocking statute will further contribute to the legal uncertainty. Additional guidance from the Commission could be useful in bringing clarity to EU companies, but it needs to be adopted well before the amendments to the blocking statute enter into force.
It is also not clear that the blocking statute would do anything to shield EU companies from US sanctions laws. While an EU company could argue that the conflict of laws between the blocking statute and the relevant US sanctions against Iran should be viewed as a mitigating factor for US authorities to consider in determining whether and how to proceed with any enforcement action or sanction, it is not clear whether that argument would have an effect on the enforcement decisions of the US authorities.
We can expect different reactions from EU companies facing the conundrum of the US extraterritorial sanctions and the blocking statute.
Small and medium-sized enterprises, or SMEs, that have no operations in the United States, that have no US customers or suppliers and that do not rely on US dollar financing might see the blocking statute as a positive EU initiative which potentially mitigates the impact of US sanctions. While most SMEs are unlikely to feel comfortable directly violating US primary sanctions (risking potentially substantial civil and/or criminal penalties and even jail time for the individuals involved), some of them may feel that the existence of the EU blocking statute reduces the likelihood that they would be targeted for otherwise lawful — but nonetheless sanctionable — activity that falls within the scope of the US secondary sanctions regime.
In fact, it seems that the Commission primarily has had SMEs’ interests in mind in proposing the measures. Still, even EU companies that take solace in the blocking statute and choose to engage in sanctionable (even if not unlawful) Iran-related activities may face significant difficulty in finding business partners to support those efforts.
Multinational companies with business operations in the US, US shareholders or other exposure to US commercial and/or financial markets are likely to be concerned about the activation of the blocking statute. They face greater exposure not only to the imposition of penalties under US primary sanctions, but also to the risk of being cut off from the US commercial and financial markets through the imposition of secondary sanctions.
EU financial institutions, which were reluctant to reenter the Iran market when sanctions were lifted as a result of the JCPOA, are unlikely to rely on the protection offered by the blocking statute, not least because a number of EU and member state stakeholders have expressed doubts about the effectiveness of the blocking statute in the financial services sector. The Commission vice president, Valdis Dombrovskis, has recently noted that it could be of “limited effectiveness, given the international nature of [the] banking system and especially the exposure of large systemic banks to [the] US financial system and US dollar transactions.”
It is also unlikely that EU financial institutions will find comfort in one of the other proposed measures encouraging member states to explore the possibility of one-off bank transfers to the Central Bank of Iran.
The activation of the blocking statute potentially could be viewed as a political statement rather than an effective legal tool that the EU companies will be able to rely upon. At the same time, the blocking statute could become factor in discussions between the EU and the US to try to mitigate the impact of the reimposition of US sanctions on Iran.
Some member states may have doubts about whether the benefits of measures to counteract penalties from the US would outweigh their costs. In particular, the German government appears to be concerned that the blocking statute could be ineffective and possibly harm German companies. German Economy Minister Peter Altmaier has recently stated “if in the end jobs will be lost in Germany [as a result of the blocking statute], one has to ask whether this is the right thing to do.”
EU companies who want to continue to engage in — or disengage from — Iran-related activities may find themselves caught between a rock and a hard place. They will need to carefully examine their Iran-related activities going forward, and determine whether their activities falling within the scope of the blocking statute would be illegal or sanctionable under US law. If so, they would be left with the unenviable choice of deciding how best to go about mitigating those risks.