The European Commission has started the process by which it would add US sanctions measures on Iran to the so-called Blocking Regulation (formerly Regulation 2271/96). This is in direct response to the US President’s withdrawal of his waiver relating to the JCPOA. The effect of the withdrawal was to reintroduce US sanctions that were in force prior to the JCPOA. US sanctions on Iran not only impact US companies and persons, but can, in certain circumstances be applied to non-US persons. The most important extension of US jurisdiction relates to non-US subsidiaries of US companies. However, the US also has powers to place so-called “secondary sanctions” on non-US persons. These can be placed on any person (i.e., including non-US persons acting wholly outside US jurisdiction) engaging in certain “sanctionable activities,” as defined by the relevant US laws and regulations. These “sanctionable activities” are detailed in OFAC’s recent FAQ document available here. The US Government has a considerable degree of discretion in determining whether to impose “secondary sanctions” on non-US persons engaging in these “sanctionable activities,” and this will likely depend in part on the nature and scope of the activities, the parties involved, etc.
Most countries, and all the other signatories of the JCPOA (UK, Russia, China, France and Iran) plus Germany have reaffirmed their adherence to the JCPOA.
What does the Blocking Regulation do?
The Blocking Regulation has four main elements.
First, it requires any EU person to notify the Commission of any effects on the economic and/or financial interests of that person caused by a measure blocked in the Annex.
Second, no judgment of a court or tribunal, and no decision of an administrative authority located outside the EU that gives effect, directly or indirectly, to the measure in the Annex, or to actions based thereon or resulting there from, shall be recognized or be enforceable in the EU in any manner. This is the main blocking measure.
Third, no EU person shall comply, whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the measures specified in the Annex or from actions based thereon or resulting therefrom. EU persons may be authorized, in accordance with the procedures provided in Articles 7 and 8, to comply fully or partially to the extent that non-compliance would seriously damage their interests or those of the Community.
Finally, an EU person shall be entitled to recover any damages, including legal costs, caused to that person by the application of the measures specified in the Annex or by actions based thereon or resulting therefrom. This is sometimes referred as the “clawback” measure.
What is the process now being undertaken?
Based on a 2014 amendment to Regulation 2271/96, the Commission now has power, delegated to it from the Council, to add measures to the Annex of 2271/96. The process by which it is to do this is as follows:
As soon as it adopts a delegated act, the Commission notifies it to the European Parliament and to the Council. That delegated act can only enter into force only if:
- no objection has been expressed either by the European Parliament or the Council within a period of two months of notification of that act to the European Parliament and to the Council; or
- before the expiry of that period, the European Parliament and the Council have both informed the Commission that they will not object.
The two month period shall be extended by four months at the initiative of the European Parliament or of the Council.
We assume that the Commission has notified the Parliament and Council of the measures to be added to the Annex, and unless either party objects, or both agree to the proposal sooner, the additions will take effect after 2 months
What is the practical implication of the Blocking Regulation?
The reinvigoration of the Blocking Regulation is an unwelcome development as it is intended to put EU businesses between a rock and hard place. Unfortunately, the US rock is far more compelling than the EU hard place, and very few EU businesses will rely on the Blocking Regulation to guarantee their ability to keep doing business in the US and Iran.
The Blocking Regulation was of very little use in curtailing US policy on Cuba, and almost certainly will not curtail US policy on Iran. The US financial system is now so important to global and EU businesses that it cannot easily be avoided. Even during the US adherence to the JCPOA, all Western banks were reluctant to do business with Iran, because of the risks posed under US law. This reluctance has now turned into positive dislike.
As noted above, the US is also stressing the possibility of secondary sanctions, which in principle force non-US businesses to choose between doing business in the US and doing business in Iran. The revivification of the Blocking Regulation will not affect that choice.