Last May, the US government withdrew from the Iran nuclear deal known as the Joint Comprehensive Plan of Action (JCPOA). As a result, Iran-related sanctions imposed by the US (which had previously been suspended as part of JCPOA) were reinstated.
This has relevance for EU businesses as a number of the US sanctions apply to non US persons and entities acting outside of the US. In response, and as part of its commitment to the JCPOA, the EU has updated the EU Blocking Regulation in order to counteract the application of US sanctions in the EU.
What is the EU Blocking Regulation?
The core purpose of the Blocking Regulation (officially known as Regulation 2271/96) is to counter the impact of legislation made by other countries that reaches beyond that country’s borders to those in the EU. It was originally introduced in the context of US sanctions against Cuba but the Annex to the Regulation has been updated to include other sanctions since.
Last August the Blocking Regulation was updated. The update prohibits any EU person (which is widely defined for the purposes of the Regulation) from complying directly or indirectly (including through a subsidiary or other intermediary) with certain US/Iran sanctions (unless it has EU authorisation). It also seeks to provide protection to EU persons by:
- banning the enforcement or recognition of any foreign judgment or order that gives effect to these US sanctions; and
- containing a right to recover damages for any EU person suffering loss as a result of somebody complying with theses US sanctions.
The Blocking Regulation itself does not impose any penalties for the breach of its requirements – the EU leaves the specifics of penalties to its member states. The potential consequences of failing to comply with the Blocking Regulation vary significantly between member states. In the UK, it is a criminal offence to breach the Blocking Regulation and a breach carries the risk of an unlimited fine.
While the EU Blocking Regulation seeks to reaffirm the EU’s commitment to the JCPOA and protect EU businesses from the impact of the US’s decision to re-impose sanctions, the effectiveness of the protection is questionable.
The consequence of the re-imposition of the US sanctions and the updated Blocking Regulation puts EU businesses affected by the sanctions in a difficult position as the laws are in direct conflict. Non-compliance with the US sanctions can result in EU businesses being targeted with US sanctions and those businesses may have difficulty in accessing the US financial system. On the other hand, an offence will also be committed by an EU person under the Blocking Regulation for complying with the relevant US sanctions.
Operators in the EU that do business in Iran have a difficult choice on how to proceed. They will need to consider carefully any decision to withdraw from business involving Iran in order to balance their obligations under the Blocking Regulation with potential risks under US sanctions. Depending on the extent of the exposure to either regime, businesses could also consider engaging with the EU Commission to determine whether they could be granted an authorisation to comply with the Iran-related sanctions.
It is common for loan agreements now to include provisions to ensure the borrower group complies with sanctions. The term ‘sanctions’ is usually defined widely and, as well as UK, EU and UN sanctions, compliance with US sanctions is also generally required. The decision is one for each lender to make but many European banks are carving out the Blocking Regulation from the obligation to comply with U.S sanctions (i.e. the obligation to comply with US sanctions is only to the extent it would not result in a breach of the Blocking Regulation).