The EU Blocking Statute: the European Commission seeks to preserve the Iran nuclear deal

On 8 May 2018, President Trump announced that the US would no longer be a party to the Joint Comprehensive Plan of Action (the JCPOA) concluded on 14 July 2015 in relation to Iran's nuclear programme.  As a consequence, the US will begin re-imposing the nuclear-related sanctions against Iran it had waived.  This includes so-called extra-territorial, or secondary, sanctions.

President Trump's decision has been widely criticised by the other parties to the JCPOA.  In particular, the EU stated that it would take steps to seek to preserve the Iran nuclear deal.

Accordingly, on 6 June 2018 the European Commission adopted an update of Council Regulation (EC) No. 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country and actions based thereon or resulting therefrom, referred to as the "Blocking Statute".

The European Parliament and the Council will have a period of two months from 6 June 2018 to object to these measures, before the Blocking Statute is implemented into EU law.  

This briefing considers what this development means for companies with interests in Iran.

What is the Blocking Statute?

The Blocking Statute dates from the mid-1990s, and efforts by the European Community to respond to US sanctions on Cuba, Iran and Libya which purported to have extra-territorial effect on European Community citizens and companies.  As the Blocking Statute records, the European Community took the position that such sanctions violated international law and impeded the free development of world trade.

The Blocking Statute is short – merely 13 articles long – but essentially covers four elements:

1. a requirement to notify the European Commission if the economic and/or financial interests of an EU person (see below) are affected by specified US sanctions laws or by actions based thereon or resulting therefrom (Article 2);
2. a prohibition on the recognition or enforcement of any judgment of a court or tribunal or decision of an administrative tribunal located outside the EU giving effect to the specified US sanctions laws, or to actions based thereon or resulting therefrom (Article 4);
3. a prohibition on compliance "whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission" with any requirement or prohibition based on the specified US sanctions laws, or actions based thereon or resulting therefrom (Article 5) (the Compliance Prohibition); and
4. an entitlement for an EU person to recover damages, including legal costs, caused to that person by the application of the specified US sanctions laws, or by actions based thereon or resulting therefrom (Article 6).

To whom does the Blocking Statute apply?

The entitlements and restrictions contained in the Blocking Statute apply to EU persons.  EU persons are defined differently to the manner adopted in recent EU sanctions legislation, and encompass:

a) any natural person resident in the EU and a national of an EU Member State;
b) any legal person incorporated in the EU;
c) any natural or legal person referred to in Regulation 4055/86 (which relates to maritime transport, and essentially extends the scope of the Blocking Statute to shipping companies with vessels registered in EU Member States);
d) any other natural person resident in the EU, unless that person is in the country of which he is a national; and
e) any other natural person within the EU, including territorial waters and air space and in any aircraft or vessel under the jurisdiction or control of an EU Member State, acting in a professional capacity.  

The breadth of this definition means that it would capture subsidiaries of US companies incorporated in EU Member States.

Does the Compliance Prohibition always apply?

Yes, but EU persons may be authorised by the European Commission to comply with specified US sanctions laws if non-compliance would seriously damage their interests or those of the EU.

There is a mechanism for issuing authorisations to permit this.  It remains to be seen how this will work in practice.

What is the European Commission doing now?

The original Blocking Statute contained a mechanism to update which specific US sanctions laws it covers.  Although one US sanctions law relevant to the US secondary sanctions on Iran was already covered – the Iran and Libya Sanctions Act of 1996 (now the Iran Sanctions Act of 1996) – others such as the wide-ranging Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 were not.

It appears that the European Commission is using the mechanism in the Blocking Statute to ensure that it covers all the secondary sanctions legislation the US is bringing back into force.

What happens now?

The European Parliament and the Council will have a period of two months (potentially extendable to four months, although this seems unlikely), from 6 June 2018, to object to the updated Blocking Statute, before it is implemented.  If no objection is raised within this period, the updated Blocking Statute will be published and will enter into force on or around 5 August 2018.  

Should EU persons be concerned about the Blocking Statute?

There are two areas of concern.

First, although as an EU Regulation the Blocking Statute is directly applicable in all EU Member States, it is up to each EU Member State to determine the penalties to be imposed in the event of breach of any relevant provisions of the Blocking Statute.  Such penalties must be effective, proportionate and dissuasive.

Although implementation of the Blocking Statute into EU Member States law has historically been patchy, with some Member States having failed to do so, and others having treated breach of the Blocking Statute merely as an administrative offence, in a number of Member States breach is a criminal offence.  In the UK, for example, under The Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996, breach of Article 2 (notification to the European Commission) or Article 5 (the Compliance Prohibition) is punishable by an unlimited fine on indictment.  

Historically, enforcement of the Blocking Statute has been very limited, with no known enforcement in the UK.  As a result commercial parties – especially banks – tended to pay it little attention, preferring instead to comply with US extra-territorial sanctions.  However, the political prominence of the situation in respect of Iran and the efforts taken by the European Commission to update the Blocking Statute mean that EU persons cannot assume that enforcement in the future will be as limited as before.  

Second, the Blocking Statute is broadly, and, in places, vaguely drafted, making assessment of its practical application difficult.  Article 5 (Compliance Prohibition), for example,  prohibits compliance "actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the [specified US sanctions laws] or from actions based thereon or resulting therefrom".  Determining whether a specific step was based on actions resulting from US sanctions laws may be factually challenging.  It may be even harder to prove this in a court of law.  Conversely, parties against whom breach of the Blocking Statute is alleged may find it difficult to prove that decisions in relation to Iran were not taken in order to "comply" with US extra-territorial sanctions.  

Similarly, Article 6 permits recovery of damages caused by the application of US sanctions laws.  But recovery from whom?  If damages claims were brought against the US Government, this would raise sovereign immunity issues.  

There is much that remains unclear about this unique instrument of EU law, and it is hoped that the EU will provide guidance on the Blocking Statute's application when it enters into force. 

What else have the European Commission and EU Member States done?

The European Commission has also updated the European Investment Bank's External Lending Mandate, which would make Iran eligible for investment activities by the European Investment Bank.  However, the European Investment Bank's practical support for Iranian projects still remains at the discretion of its governing bodies.

Separately, on 4 June 2018, Germany, Britain and France sent a public letter to the Trump administration calling for, among other things, exemptions in respect of the US extra-territorial sanctions for European companies that initiated or concluded their contracts for doing business with Iran after the JCPOA implementation day (16 January 2016).  The letter also sought public confirmation of areas of business that are exempt from US extra-territorial sanctions, such as pharmaceuticals, healthcare, and exemptions to allow for economic relationships in key sectors, in particular in the fields of energy, automotive, civil aviation and infrastructure.

What conclusions can be drawn at this stage?

When the Blocking Statute was put in place in the 1990s, it formed part of a two pronged attack against US extra-territorial sanctions by the European Community, alongside a WTO complaint.  The approach worked.  It brought the US back to the negotiating table and ultimately resulted in the US waiving the most controversial extra-territorial sanctions as regards EU persons.

The EU may be hoping for a similar outcome this time.  But the concern for many EU persons will be that the effect of updating the Blocking Statute will be to place them in an unenviable position – obliged to choose between ignoring US extra-territorial sanctions and running the risk of being targeted themselves by the US, or ignoring the Blocking Statute with potential criminal consequences closer to home.

With thanks to Ida Mokhtassi of Ashurst for her contribution.