Sanctions, Brexit and the Blocking Regulation: what's changed?
As discussed in our earlier post, the EU Blocking Regulation (Regulation 2271/96) applied in the UK as part of its sanction regime as a member of the EU. This article looks at changes to this element of the UK's sanctions regime following its exit from the EU, and highlights considerations when drafting related provisions in a loan agreement.
EU legislation on Sanctions:
In 2018, the US Government’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA) resulted in sanction measures being re-applied by the US against Iran. This is of particular importance because these sanctions directly restricted US companies and persons from dealing with Iran, and (due to secondary US sanctions) also indirectly restricted non-US companies and persons including EU businesses.
In response of the US Government’s withdrawal from JCPOA, most countries which supported the JCPOA confirmed their commitment to the JCPOA. In response, the EU updated its Blocking Regulation which, amongst other things:
- prevents any EU operator from complying with specified foreign laws in any way (in particular, complying with the US sanctions against Iran) (Article 5); and
- requires EU persons to inform the European Commission if their economic and/or financial interests are affected, directly or indirectly by the specific foreign laws referred to in the Blocking Regulation (Article 2).
The main purpose of the Blocking Regulation is to remove the impact of legislation made by other countries in order to protect EU operators engaged in international trade in an effort to counteract the application of US sanctions in the EU.
UK Legislation on Sanctions following Brexit:
Post-Brexit, the Blocking Regulation and its Implementing Regulation (Commission Implementing Regulation (EU) 2018/1101) (Implementing Regulation) form part of the EU law retained in the UK under the European Union (Withdrawal) Act 2018.
Following the end of the Brexit implementation period, the Protecting against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2020 came into force. These regulations amended the Blocking Regulation and its Implementing Regulation as transposed into UK domestic law. The retained EU regulations and the domestic implementing legislation, as amended, together form the UK’s ‘Protection of Trading Interests Legislation’ (the PTIL).
Similar to the Blocking Regulation, it is still a criminal offence to breach the PTIL and carries the risk of an unlimited fine.
Considerations when drafting loan documentation:
Whilst the PTIL seeks to continue to protect UK businesses and persons from the impact of the US’s decision to re-impose sanctions on Iran, it is difficult to foresee how effective the PTIL will be in practice. Many UK businesses and persons will continue to have the difficulty in balancing their obligations under the PTIL with potential risks under US sanctions. The PTIL does not negate from the fact that UK businesses have to choose between doing business in the US and doing business in Iran.
It is usual for lenders to include sanction compliance clauses in loan documents to provide appropriate contractual commitments by the borrower group. For example, a lender may require representations that confirm a borrower group has complied with and will continue to comply with, all relevant sanctions.
What are relevant sanctions?
This will depend on the jurisdictions involved in the transaction. If the transaction is primarily UK based, UN and UK sanctions will be included and prior to Brexit, EU sanctions would also be included. Other sanction regimes may be included in the definition of ‘relevant sanctions’ but this depends on where the parties might do business/ have group companies located.
Lenders tend to err on the side of caution and use consistent standard clauses in their loan documents where possible. The general approach is that the wider the definition of sanctions the better, with any requested changes being considered on a transactional basis depending on the relevant jurisdictions impacting the transaction and the borrower group. It should be noted, however that for many lenders the ability to amend sanction clauses in their loan documents on a case-by-case basis may be very limited or even prohibited by wider internal guidance.
Post-Brexit, we can still expect lenders to usually want reference to EU sanctions to remain and to be included in their standard clauses. Just as reference to the Blocking Regulation was usually required to address conflict between US and EU sanctions, we are now likely to see a similar specific carve-out to clarify that the US sanctions won’t apply to the extent they breach the PTIL.
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