UK: On The Horns Of A Compliance Dilemma: Returning US Secondary Sanctions And The EU Blocking Statute

Last Updated: 10 July 2018
Article by Nadiya Nychay and Jason Miller

On June 6, 2018 the European Commission (Commission) adopted a delegated regulation updating the EU's blocking statute, Council Regulation (EC) No 2271/96 (the Regulation).  If it enters into force, this update—part of a broader effort by the EU to salvage the Joint Comprehensive Plan of Action (JCPOA or Iran Deal)—will expand the Regulation's scope to encompass the returning US secondary sanctions on Iran.

In this Client Alert, we address the background to this update, what it comprises and what effects it may have on businesses like yours.

Background

The JCPOA is a 2015 accord pursuant to which Iran curtailed its nuclear weapons program in exchange for international sanctions relief.  In implementation of the JCPOA, the US suspended its secondary sanctions on Iran, measures that target third state actors—such as European companies—for doing business in and with the country.  Freed from the threat of US secondary sanctions, many EU businesses entered the Iranian market (US businesses by contrast remained prohibited from doing business with Iran even after the JCPOA).  

On May 8, 2018, the US administration announced America's exit from the JCPOA, with its secondary sanctions to come back into force in two stages over the next six months.  The EU, which remains committed to the Iran Deal, released a statement the following day expressing its deep regret regarding this US action.[1]

The US withdrawal represents an existential threat to the JCPOA.  If, under the Sword of Damocles of US secondary sanctions, EU businesses by-and-large wind down their Iranian operations, Iran will be denied one of the JCPOA's primary benefits—commerce with Europe—potentially leaving it without sufficient incentive to stay in the deal.

To save the Iran Deal, the EU has started the process of updating the Regulation in order to prevent EU persons and entities from complying with the returning US sanctions on Iran.  In essence, the Regulation makes it illegal for those in the EU to comply with identified US secondary sanctions, and promises to mitigate the pain from the US penalties that may follow from such non-compliance.  Specifically, the Regulation:

  • Forbids EU persons and companies from complying, actively or by deliberate omission, with those US secondary sanctions contained in an annex to the Regulation, under threat of penalties to be determined by Member States in implementing legislation
  • Allows EU persons and companies to recover damages arising from such sanctions
  • Nullifies the effect in the EU of any foreign court judgements based on such sanctions

The Regulation was originally adopted in 1996 to deal primarily with secondary sanctions on Cuba.  By updating the Regulation's annex to encompass the returning secondary sanctions on Iran, the EU hopes that European businesses are sufficiently incentivized to disregard these US measures, thus adequately maintaining the JCPOA's economic benefit to Iran, keeping the deal alive.

The process to activate the Regulation started informally at an EU leader's meeting in Sofia on May 16, 2018 and formally two days later when the Commission launched its update process.  The update adopted by the Commission on June 6 as a result of this process is discussed below.

The Update

The update adopted on June 6 replaces the existing annex to the Regulation with one that lists, among others, the returning secondary sanctions on Iran.  If and when an updated Regulation containing this annex enters into force, EU persons and companies will be prohibited from complying with the following US sanctions on Iran:

  • The Iran Sanctions Act of 1996, to the extent that it prohibits, among other things:

    • Investing in Iran at least US$20 million during a period of 12 months that directly and significantly contributes to the enhancement of the Iranian ability to develop their petroleum resources
    • Providing to Iran goods, services or other types of support any of which is worth USD 1 million or more, or of aggregate value of US$5 million or more over a period of 12 months, that could directly and significantly facilitate the maintenance or expansion of Iran's domestic production of refined petroleum products or its ability to develop petroleum resources located in Iran
    • Providing to Iran goods, services or other types of support any of which is worth USD 250,000 or more, or of aggregate value of US$1 million or more over a period of 12 months, that could directly and significantly contribute to the maintenance or expansion of Iran's domestic production of petrochemical products
    • Providing to Iran (a) refined petroleum products or (b) goods, services or other types of support which could directly and significantly contribute to the enhancement of Iran's ability to import refined petroleum products, any of which is worth US$1 million or more, or of aggregate value of US$5 million or more over a period of 12 months
    • Participating in a joint venture for the development of petroleum resources outside of Iran established on or after 1 January 2002 and in which Iran or its Government has particular interests
    • Being involved in the transport of crude oil from Iran or concealing the Iranian origin of cargo consisting in crude oil and refined petroleum products
  • The Iran Freedom and Counter-Proliferation Act of 2012, to the extent that it prohibits, among other things:

    • Providing significant support, including by facilitating significant financial transactions, or goods or services, to or on behalf of certain persons operating in the ports, energy, shipping, or shipbuilding sectors in Iran, or any Iranian person included in the list of specially designated nationals and blocked persons
    • Trading with Iran in significant goods and services used in connection with the energy, shipping or shipbuilding sectors of Iran
    • Purchasing petroleum and petroleum products from Iran and conducting financial transactions related with them, in specific circumstances
    • Conducting or facilitating transactions for the trade in natural gas to or from Iran
    • Trading with Iran in precious metals, graphite, raw or semi-finished metals, or software that may be used in specific sectors or involve certain persons; or facilitating a significant financial transaction in connection with such trade
    • Providing underwriting services, insurance and reinsurance related to specific activities, including but not limited to those under points (i) and (ii) above, or to specific categories of persons
  • The National Defense Authorization Act for Fiscal Year 2012, to the extent that it prohibits, among other things:

    • Conducting or facilitating any significant financial transaction with the Central Bank of Iran or another designated Iranian financial institution
  • The Iran Threat Reduction and Syria Human Rights Act of 2012, to the extent that it prohibits, among other things:

    • Providing underwriting services, insurance or reinsurance to certain Iranian persons
    • Facilitating the issuance of Iranian sovereign debt, or of debt of entities controlled by the latter
    • Engaging in any transaction directly or indirectly with the Government of Iran or any person subject to the jurisdiction of the Government of Iran prohibited by US law
    • Providing specialized financial messaging services to, or enabling or facilitating direct or indirect access to such messaging services for 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 they prohibit, among other things:

    • Reexporting any goods, technology, or services that (a) have been exported from the USA and (b) are subject to export control rules in the USA, if the export is made knowing or having reason to know that it is specifically intended for Iran or its Government

Next Steps

The European Parliament and Council now have two months to object to the delegated regulation containing the updated annex before it enters into force.  If no objection is raised, which is quite likely to be the case given the emphatic support for the Iran Deal in the EU, the update will enter into force on August 6, 2018—the date the first group of US secondary sanctions are scheduled to come back into effect.

Considerations for European Businesses

The Regulation's expansion threatens to place EU businesses active in Iran in an untenable compliance dilemma: if they comply with European law, they are exposed to US penalties, and if they comply with US law, they are exposed to European penalties.

Faced with this dilemma, the first and best solution for an EU business would be to secure appropriate licensure from the US allowing it to follow the EU regime, or from the EU allowing it to follow the US regime. Such licensure would allow one to successfully navigate between the Scylla of US secondary sanctions and the Charybdis of the EU blocking statute.

As to the US, such licensure would issue from the Office of Foreign Assets Control (OFAC), the US sanctions regulator housed within the Department of the Treasury.  Up until now, OFAC has not issued any guidance stating or implying that it will grant specific licenses allowing EU businesses to remain active in Iran. Further, Treasury Secretary Steven Mnuchin has indicated in congressional testimony that the US administration has "communicated with [its] European partners" that it will be enforcing secondary sanctions.[2] This would be consistent with the apparent US strategy of exerting maximum pressure on Iran to bring it back to the negotiating table to draft a new nuclear agreement that fixes the JCPOA's perceived flaws.

As to the EU, such licensure would issue from the Commission.  In this regard we note that the Regulation explicitly contemplates the possibility that EU persons and companies may be authorized by the Commission to comply fully or partially with US secondary sanctions to the extent that non-compliance would seriously damage their interests or those of the EU.

If, however, such licensure is not available, EU businesses faced with no good options may wish to employ a risk-based approach in order to identify their least bad choice.  This would involve determining whether following the US or EU regime poses a larger threat to one's bottom line.  Considerations in this regard could include the relative severity as between the penalties called for in the relevant Member State's implementing regulations and the penalties called for by the specific secondary sanction at issue.  A related consideration would be an assessment of one's exposure to such penalties.  An exposure assessment as to US secondary sanctions would likely involve, e.g., an evaluation of your businesses' US holdings, as many secondary sanctions call for the freezing of US assets.

Another aspect of this approach would be assessing the relative risk of enforcement as between the Regulation and US secondary sanctions.  A relevant consideration in this context would be that many Member States, including Belgium, France, Greece and Luxembourg, lack (thus far) the statutory instruments to enforce the Regulation.  Another potentially relevant consideration would be that in the 22 years the Regulation has been on the books, no Member State has ever levied civil or criminal penalties for its violation.  However, one should be wary of placing too much weight on this last point, as the specific political conditions in place now as to Iran may not resemble what has existed in the past as to, e.g., Cuba.

What Should Your Business do now?

If your business is active in Iran, you should first consider whether your activities fall within the scope of the returning US secondary sanctions and the expanded Regulation.  If so, you should also consider whether it is possible to complete any time-bound activities before the first group of US secondary sanctions and the expanded Regulation are scheduled to come back into force (i.e., August 6, 2018).  You may also wish to consider using any contractual rights to terminate performance before this time that may be available to you based on the impending return of US sanctions or the expansion of the blocking statute (as, e.g., may be allowed under various "sanctions snapback" clauses).  Finally, you may wish to consider how to best approach the relevant governing body for a license, and/or performing the risk-based assessment described above.

The Dentons International Trade and Sanctions Compliance practice groups will continue to monitor and report on this evolving situation.  We remain available to answer any questions related to the expanded blocking statute and the return of US sanctions on Iran that you may have, and to assist you or your business with any sanctions concerns.

Footnotes

1 See, Declaration by the High Representative on behalf of the EU following US President Trump's announcement on the Iran nuclear deal (JCPOA), consilium.europa.eu/en/press/press-releases/2018/05/09/declaration-by-the-high-representative-on-behalf-of-the-eu-following-us-president-trump-s-announcement-on-the-iran-nuclear-deal-jcpoa/.

2 See United States Senate Committee on Appropriations, Subcommittee on Financial Services and General Government, Hearing of Tuesday May 22, 2018, "Review of the FY2019 Budget Request for the US Department of the Treasury." Available at: https://www.appropriations.senate.gov/hearings/review-of-the-fy2019-budget-request-for-the-us-department-of-the-treasury.

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