First published in Complinet August 10
On 26 July 2010, the European Union imposed its toughest sanctions yet on Iran, hitting the energy, transport, finance and insurance sectors, as well as expanding the list of "listed" individuals and entities with whom commercial dealings are prohibited. The new sanctions are contained in a Council Decision and a Regulation both of 26th July 2010.
Some of the sanctions come into force immediately as from 26 July, but others will require further EU legislation which is expected in September or shortly thereafter. EU Member States will also enact legislation to further enforce the measures, with severe penalties for violations for both individuals and corporate entities.
This article offers a brief overview of the problems raised in complying with the sanctions.
The EU Council Decision of 26 July 2010
The EU Council is the supreme law-making institution of the EU. Its Decisions and other measures give force to so-called "common positions". These are binding on the 27 Member States who are required to "ensure that their national policies conform to the Union positions". These include national criminal laws to enforce the sanctions since the EU does not have legal powers to create criminal penalties.
Formally the Council Decision came into force on 26th July 2010, the date of its adoption. While from that date onwards, Member States are legally bound to act in conformity with the Council Decision; its legal effects vary according to the type of sanction involved and the gradual enactment of implementing measures at both EU and Member State levels.
Sanctions involving measures freezing funds and economic resources and the prohibition on insurance and reinsurance contracts will be implemented by a further Council Regulation. This can be expected in late September 2010, due to the summer holiday recess and the need to observe the complex procedure for new Council Regulations. However, the adoption of this further implementing Regulation could arise later, not least if significant concessions are made by Iran.
There already exist a number of UK national criminal laws to enforce EU sanctions against Iran. Further criminal penalties will be enacted by the UK once the above-mentioned EU Regulation is issued in the autumn.
Scope of the sanctions
The EU Council's sanctions hit a number of sectors but in different ways. There are general exceptions for humanitarian purposes.
(a) Article 1 prohibits the direct or indirect supply, sale or transfer of a comprehensive range of materials, equipment, goods and technology related to the nuclear or armaments industries.
(b) Article 4 prohibits the supply, sale or transfer of key equipment and technology for the refining, exploration and production of oil and gas, including LNG, but does not include any export ban on crude oil, LNG or other refined products. This prohibition also covers the financing of such activities and the creation of joint ventures. However, the continuity of contracts existing before the 26 July 2010 is permitted.
(c) The transportation of goods prohibited by the Decision is also prohibited by Articles 15-18, including the supply of fuel and services to Iranian ships and aircraft reasonably suspected of carrying prohibited goods.
(d) Restrictions on admission to EU territory are placed on individuals listed in Annex 1 and a freeze imposed on the funds and other economic assets controlled directly or indirectly by persons and entities listed in Annexes 1 and 2. No funds or economic resources can be made available directly or indirectly, to or for the benefit of persons or entities covered by the freeze.
Insurance industry sanctions
Article 12 of the Council Decision contains a wide prohibition on insurance and reinsurance services to Iranian persons or entities.
- "The provision of insurance and re-insurance to the Government of Iran, or to entities incorporated in Iran or subject to Iran's jurisdiction, or to any individuals or entities acting on their behalf or at their direction, or to entities owned or controlled by them, including through illicit means, shall be prohibited.
- Paragraph 1 shall not apply to the provision of health and travel insurances to individuals.
- It shall be prohibited to participate, knowingly or intentionally, in activities the object or effect of which is to circumvent the prohibition referred to in paragraph 1."
In answer to a Clyde & Co information request, the EU Council confirmed that a forthcoming Council Regulation "will define the specific provisions relating to the execution of existing contracts and obligations" subject to Article 12. As mentioned, the earliest likely date for this Regulation is late September 2010, and it could be later. This makes the operation of the Article 12 prohibition difficult to determine.
There are three categories of insurance and reinsurance contracts affected by this sanction:
(a) contracts in existence before 26 July 2010
(b) contracts pre-dating 26 July 2010 but whose duration extends beyond that date
(c) new contracts from 26 July 2010 onwards.
Contracts in existence before 26 July 2010
The Council's Decision does not have retroactive effect, since this is only permitted by EU Law in exceptional circumstances which are absent in the present case. Consequently, the fulfilment of contractual obligations including payments made to claimants under such contracts would not violate the EU sanctions.
However, Article 10(3) of the Council Decision sets out specific rules for the transfer of funds to and from Iran, requiring notifications or authorisations from the "competent authority of the Member State concerned", (in the UK the Treasury)
(a) transfer below €40,000 can be made without prior authorisation but amounts above €10,000 must be notified
(b) transfers above €40,000 must have prior authorisation.
The authors' view is that claims arising on pre-26 July 2010 contracts can be honoured (subject to the funds transfer rules described above).
Contracts pre-dating 26 July 2010 but whose duration extends beyond that date
The effect of the Decision on contracts continuing beyond 26 July 2010 is more difficult to determine. If a loss occurs after that date and the relevant national body authorises payment of the resulting claim there should be no difficulty. However, if the authorisation is refused, then the contract would seem to be frustrated. There would seem to be no duty on the underwriter to challenge the refusal through judicial review.
New contracts from 26 July 2010 onwards
New contracts after 26 July 2010 would seem to be prohibited, although pending national legislation there is no criminal sanction attaching to the formation of such agreements at the time of writing.
The Council's prohibition on insurance and reinsurance contract is clearly prospective, applying from 26 July 2010 until further notice. It is also absolute and unqualified. A Council Decision becomes part of the "acquis communautaire" and is in force as from the date of its adoption , although further legislative acts at EU and/or national level would be required to give effect to the terms of the Decision. These measures under the CFSP, therefore, do not without further implementation measures produce binding legal effects between private parties. The authors' view is that it would be unwise to enter into any new contract of insurance or reinsurance after 26 July 2010 (as well as any variations or renewals of existing contracts), as the forthcoming EU measures (probably a Council Regulation) are very likely to have the effect that post 26 July 2010 agreements would violate the prohibition in Article 12, rendering any such agreement unlawful. An EU national court, being an emanation of a Member State, would therefore be bound to give effect to the Council forthcoming Regulation and declare such an agreement prohibited by Article 12 unlawful, as a matter of national civil law. This may have the consequence of rendering the agreement null and void, and unenforceable.
The precise civil law effects of a Council Decision under the Treaty of European Union are not settled EU law, not least because of the new constitutional realities flowing from the Treaty of Lisbon, the risk of civil law illegality and the imminent introduction of criminal sanctions indicate that a complete termination of new insurance or reinsurance contracts for listed Iranian persons and entities is the only safe course of action.
Conclusion
The EU Council's decision of 26 July 2010 contains the most far-reaching package of EU economic sanctions on Iran to date and in certain key respects goes well beyond the UN resolution.
The new constitutional architecture of the treaty of the European Union, further to the Lisbon treaty's revision, and in the absence of any legal precedents, means that the legal effects of the EU Council's are still uncertain.
However, in light of the clear prohibition enshrined in Article 12 of the Council decision, it's the authors' view that the EU insurance sector should carefully consider its impact upon its existing and (in particular) its new (re)insurances and facilities that may provide cover to Iranian individuals or entities post 26 July 2010.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
