The Blocking Regulation was originally introduced in the context of US sanctions against Cuba, which allows the EU to protect businesses from the extraterritorial effect of particular sanctions adopted by a third country outside the EU. Although the Blocking Regulation will apply in all EU member states, the responsibility for enforcement lies with each individual EU member state.
The US secondary sanctions against Iran have extraterritorial effect, meaning that it is illegal for EU companies and financial institutions to engage in a wide range of economic and commercial activities with Iran.
This potentially creates a serious issue for European companies with pre-existing trade with Iran, given that disregard of US secondary sanctions by such companies can lead to heavy fines and/or criminal charges in the US or even exclusion from the US market altogether.
The amendments to the Blocking Regulation are designed to offer a level of protection to European companies trading with Iran, as it:
- Forbids EU persons from complying with extraterritorial sanctions.
- Allows companies to recover damages arising from such sanctions.
- Nullifies the effect of any foreign judgment in the EU which is based on the imposing / enforcement of such sanctions.
How effective is the amended Blocking Regulation to offset the effect of US secondary sanctions?
Commentators have questioned the effectiveness of the Blocking Regulation to offset the effects of re-instated US sanctions, on the basis that:
- Companies would have to stop using the US Dollar, which is unrealistic in many cases, given that 90% of global transactions use this currency.
- The remedies provided by the Blocking Regulation do not fully shield companies from the practical negative effects of breaching US sanctions (e.g. asset seizures; criminal charges in the US), which are still deeply unattractive for companies.
- Companies will have to “choose” between trading in the US and trading in Iran, with many companies inevitably choosing the US due to the size and importance of the US market.
- The Blocking Regulation does not assist to defend against companies potentially losing access to the US financial system, if they have previously engaged in transactions involving Iran.
Therefore, while there are certain legal remedies available to European companies under the amended Blocking Regulation, it will potentially be the case that, for many companies, the US market will remain too important economically and commercially, and these companies will continue to prioritize their business in the US at the expense of trading with Iran.
Of course, it is only likely to become clear in time exactly what effect US secondary sanctions against Iran and the EU Blocking Regulation have on companies’ trading patterns, and how the competing regimes interact. The Club noted:
The response by the EU demonstrates that the EU intends to take a different approach (as compared with the US) to conducting business with Iran going forward, and intends to continue to encourage trade with and investment in Iran.
The different approaches being taken by US and EU have the potential to further complicate the situation for commercial entities. While the approach being taken by the EU to Iran might, in principle, represent a positive development for club’s members monitoring future opportunities to trade Iran, the conflicting Iranian sanctions regimes being pursued by the US and EU have the potential to cause confusion, and increase risk of inadvertent breach of one or other sanctions regime.
--> Due to the increasing complexity of the situation, the club recommends operators to continue to take a very cautious approach to potential Iranian-linked commercial activity, and to carry out necessary commercial due diligence accordingly to make sure particular activity is not sanctioned.
--> If they are in any doubt as to whether a particular commercial activity may infringe sanctions, the club would strongly recommend that they should seek legal advice from an expert sanctions lawyer.