Dealing with US-Iran sanctions in the EU

The US has re-imposed all of its sanctions against Iran, and they are once again in full effect as of 5 November 2018 (see our news report from that date). Some sanctions claim extraterritorial applicability, i.e. even outside the territory of the United States and even to transactions with no US involvement (secondary sanctions). The EU wishes to uphold the nuclear agreement with Iran, the Joint Comprehensive Plan of Action (JCPOA). For this purpose, it updated the Blocking Regulation effective as of 7 August 2018 (see our news report from that date). The Blocking Regulation prohibits enterprises registered in the EU from complying with the US-Iran sanctions. This confronts enterprises in the EU with the dilemma of contradictory legal requirements.

Current handling of the Blocking Regulation

The Blocking Regulation does not prohibit abandoning transactions related to Iran for factual or commercial reasons that are unrelated to the US sanctions, e.g. because a part can only be procured from the USA and supply of this part will be discontinued if the part is forwarded to Iran. Although in principle prohibited, some EU enterprises have openly cited compliance with US law. Such compliance  is only in line with the Blocking Regulation in case the EU has granted an exemption, thus permitting it to comply with US secondary sanctions.

However, first experiences have shown that this exemption provided for in the Blocking Regulation is only granted on rare occasions. Although various preliminary discussions have taken place, only ten formal applications have been lodged with the EU Commission. According to the Commission's information, enterprises have the option to first clarify in preliminary discussions with the US Office of Foreign Assets Control (OFAC) whether the envisaged transaction is subject to US sanctions at all. Such discussions do not as yet fall under the prohibition of the Blocking Regulation. Under certain circumstances, with the corresponding authorisation from the Commission, enterprises are even encouraged to attempt to procure an exemption from the applicability of the US sanctions. During the process of requesting such an exemption, the enterprise must observe particularly Arti-cle 4 a of Regulation (EU) 2018/1101 and demonstrate why its own interests in particular are especially endangered, for example if the enterprise has already had contact with OFAC or has been the target of US sanctions before. All things considered, it must be assumed that very few exemptions will be granted. This creates particular difficulties for enterprises that wish to continue at least some of their business dealings with Iran. According to EU law, such enterprises would be prevented from clearly communicating to their employees what transactions are prohibited under US law because this would mean that they were complying with US sanctions as understood under the Blocking Regulation.

Consequences of violations of the Blocking Regulation in the EU Member States

The consequences of violations differ widely across the EU Member States. This is not surprising, considering that the Member States are responsible for prosecuting violators of the Blocking Regulation.

Fines are the standard punishment, but their maximum amount varies widely (e.g. slightly less than EUR 100,000 in the Netherlands and Italy, around EUR 600,000 in Spain or up to the equivalent of almost EUR 1 million in Sweden). In some Member States (such as the United Kingdom), there is no cap on fines. In Germany, a negligent violation is punishable by a fine of up to EUR 250,000, a violation with intent by up to EUR 500,000. Some Member States also provide for criminal consequences (e.g. Denmark, the Netherlands, Swe-den, United Kingdom). It is interesting to note that violations of the Blocking Regulation are not punishable at all in Belgium although SWIFT, which is responsible for implement-ing international messaging and payment exchanges between banks, has its headquarters there.

From a civil-law perspective, there are strong indications that contractual provisions that violate the Blocking Regulation would be deemed void in all EU Member States. In Germany, the invalidity of the contractual provision would most likely arise from section 134 German Civil Code, and German jurists can draw on their experience with section 7 German Foreign Trade and Payments Regulations. In all Member States, it must be assumed that signed contracts involving Iran cannot be terminated, revoked or otherwise cancelled on grounds that they are prohibited under US sanctions.

Dominance of the US sanctions and EU special purpose vehicle

As anticipated since August 2018 and apparently confirmed in the first few weeks after 5 November 2018, European policy does not have much clout to counter the economic effects of the US-Iran sanctions. EU enterprises are increasingly retreating from Iran; even SWIFT has recently excluded several Iranian financial institutions, including all those that are subject to secondary sanctions. SWIFT did not explain its actions by explicitly citing the applicability of US sanctions. Instead, it referred to a possible destabilisation of the global financial system.

Nevertheless, what keeps the Iranians in the game is not just the other signatories' renewal of their commitment to the JCPOA, but also the special purpose vehicle (SPV) announced by the EU. The purpose of this entity is to make all trade permitted by the EU in fact possible. For this purpose, the SPV is to function as a barter clearinghouse with no coupling to the US dollar system. Not only EU Member States and Iran but also third countries that import Iranian oil, such as China or India, could have a clearing or similar type of account. These countries, along e.g. with Italy and Greece, currently even have exemptions from the US-Iran sanctions. Well-informed sources have indicated that it is far from certain that the USA would immediately slap sanctions on the SPV. Nevertheless, it does not currently appear likely that the SPV will actually become a reality in the near future, much to Iran's declared displeasure. In other words, the window of time for upholding the JCPOA is getting smaller. No one knows what will happen next; we will keep you updated.