How EU Businesses Are Responding To US Sanctions On Iran

April 03 2019

Kartik Mittal, Senior Solicitor at Zaiwalla & Co, discusses the contents of the EU Council's Blocking Statute and its effect on the response of EU companies to US Sanctions on Iran.

It has been 40 years since the last shah of Iran was deposed and the Islamic Revolution began. The world has moved a long way since the tumultuous events of February 1979, as demonstrated by a long overdue improvement in economic and political relations between Iran and most Western countries. Under the Joint Comprehensive Plan of Action agreed by the five permanent members of the United Nations Security Council and Germany, and implemented in January 2016, UN sanctions were lifted in return for limits on Iran’s nuclear program.

But 10 months later came the election of Donald Trump as U.S. president. In May 2018, he announced that the U.S. would unilaterally scrap the JCPOA agreement. By contrast, the EU stated that that it would aim to preserve the JCPOA and actively encourage the Iranian government not to permit U.S. efforts to destroy it. The process of updating the EU Blocking Statute — i.e. the list of U.S. sanctions on Iran within its scope — was launched by the European Commission at the end of May, when it added the extraterritorial sanctions that the U.S. had announced it would be reimposing on Iran.

The EC responded as follows: Under the EU budget guarantee, it launched a formal process to remove obstacles for the European Investment Bank to finance activities in Iran; it strengthened its ongoing sectoral cooperation with and assistance to Iran, including facilitating financial assistance through the Development Cooperation or Partnership Instruments; and it encouraged EU member states to explore possible one-off bank transfers to the Central Bank of Iran, which would allow the Iranian authorities to receive their oil-related revenues.

Following a two-month scrutiny period by the European Parliament and the council, the update was published and entered into force on Aug. 7, 2018. This happened the day after the United States, via President Trump, introduced an executive order to reimpose secondary sanctions targeting Iran. By way of response, the updated statute aimed to counter the effects of U.S. sanctions that had been reimposed on EU companies. The EU also reaffirmed its position in supporting the continued lifting of nuclear-related sanctions against Iran under the international nuclear deal.

The updated statute forms part of the EU’s support for the "continued full and effective implementation" of the JCPOA, ‘"including by sustaining trade and economic relations between the EU and Iran," which were normalized when nuclear-related sanctions were lifted. As the first batch of reimposed U.S. sanctions on Iran took effect in August, the stated aim of the updated statute was "to mitigate the impact of these sanctions on the interests of EU companies doing legitimate business in Iran."

So what are the key components of the statute? In summary, the EU council took measures to protect individuals and companies of EU member states. EU nationals (including those outside the EU), residents and companies (EU parties) are prohibited from complying with, actively or by deliberate omission the Aug. 7 U.S. sanctions. The EC also issued a guidance note which confirms that the main objective of the statute is to protect EU parties engaging in "lawful international trade and/or movement of capital as well as related commerce activities with third countries in accordance with EU law."

The statute further recognizes that EU parties remain free to choose whether to conduct business activities in Iran "on the basis of their assessment of the economic situation." It applies as of Aug. 7, even if relevant contracts were signed prior to that date.

Other notable clarifications include:

  • Any foreign judgment or administrative decision based on the listed U.S. sanctions is unenforceable in the EU. Member state authorities must shield EU parties from any decision requiring, for example, seizure or enforcement of a penalty in the EU in this context.
  • EU parties can claim compensation before the courts of EU member states for any damages caused by application of the listed U.S. sanctions.
  • Although EU subsidiaries of U.S. companies must comply, EU branches of U.S. companies do not have to since they do not have a legal personality that is distinct from their parent company.
  • EU parties should report to the EC (or through their relevant member state authority) within 30 days of any event resulting in an impact on their economic or financial interests, directly or indirectly, due to the specified U.S. sanctions.
  • The EC can exceptionally authorize compliance with the listed U.S. sanctions if noncompliance would "seriously damage" the interests of EU parties or the EU as a whole, although that does not include "every nuisance or damage suffered" as a result of the listed U.S. sanctions.

The EC guidance note therefore makes it clear that the act of applying for an exemption from U.S. authorities to continue activities in Iran would itself be a breach of EU law unless the EU authorizes the operator to make such an application for an exemption to the U.S. authorities. Accordingly, the statute sends a strong signal that the EU does not support the unilateral decision by the U.S. to abandon the JCPOA and to impose sanctions on Iran.

Whilst EU businesses are given substantial protection under the statute, it does not, rightly, compel them from continuing their business activities in Iran: they are free to choose whether they want to start working, continue or cease doing business in Iran.

The current situation puts EU companies in a difficult situation. The statute makes it unlawful to comply with U.S. measures while a breach of U.S. measures will be actionable in the U.S. Some big EU companies, such as TOTAL and Reuters, have already taken a commercial decision to suspend their business with Iran and it seems likely that large EU businesses with substantial U.S. exposure will continue to do so. However, the statute will provide some level of comfort for small and medium scale EU businesses with minimal or no U.S. presence, since it provides the necessary protections to negate any actions taken by U.S. authorities.

This article was published in Law360 and can be found here (behind paywall).

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