Why the EU Blocking Statute will not Save European-Iranian Trade

by  Jeremy Paner

The European Union recently updated its Blocking Statute[1] in response to the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA).  The EU revised this regulation to shield its companies from U.S. sanctions on Iran, in part by prohibiting European companies from complying with the sanctions it deems to be “extraterritorial” in nature.

Extraterritorial Sanctions

The U.S. government typically responds to assertions of extraterritoriality by noting that its Iran sanctions prohibitions are only applicable to European companies that “cause” U.S. companies to violate these sanctions.  In other words, the Iran sanctions prohibitions are generally limited to U.S. individuals and companies, including their foreign subsidiaries.  European companies that engage in certain dealings or transactions with Iran could be designated and placed on the SDN List or Part 561 List, but the prohibitions of those sanctions are generally limited to U.S. companies.  Therefore, from the perspective of the U.S. government, the EU Blocking Statute attempts to solve a non-existent problem, because U.S. law does not prohibit European companies from trading with Iran if there is no connection to the United States.

This position ignores the legal risk European companies face if they transact with sanctioned Iranian entities.  The threat of sanctions forces European companies to comply with both primary and secondary U.S. sanctions authorities, because engaging in sanctionable transactions could result in designation and listing on the SDN or Part 561 List.  It is usually impossible for a blocked European company to survive being targeted by the U.S. government.  U.S. sanctions directly sever blocked parties from the U.S. market, while the internal policies of most European companies prohibit transacting with parties sanctioned by the United States.

Business Decision Exemption

The EU Blocking Statute does not obligate European financial institutions or other companies to conduct business with Iran.  Banks and companies may refuse Iran-related business, if that rejection is a business decision and not compelled by compliance with U.S. sanctions.[2]

International non-governmental bodies have identified significant legal and business risks associated with Iran arising from corruption, money laundering, and financing of terrorism unrelated to U.S. sanctions.  For example, Transparency International highlights Iranian corruption in ranking Iran 130 out of a total 180 jurisdictions in its Corruption Perceptions Index 2017.[3]  In June 2018, the Financial Action Task Force (FATF) identified the Iranian financial system as having “strategic deficiencies” in its money laundering and financing of terrorism controls which requires “all jurisdictions to continue to advise their financial institutions to apply enhanced due diligence to business relationships and transactions with natural and legal persons from Iran.”[4] In short, Transparency International and FATF provide ample rationale for European financial institutions and companies to avoid Iran-related transactions in compliance with the EU Blocking Statute.

We will continue to closely monitor how the European Union reacts to the U.S. withdrawal from the JCPOA and publish updates as significant developments arise.

[1] Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, available here, updated annex available here.

[2] “EU operators are free to conduct their business as they see fit in accordance with EU law and national applicable laws.” “The purpose of the Blocking Statute is exactly to ensure that that such business decisions remain free, i.e., are not forced upon EU operators by the listed extra-territorial legislation, which the Union law does not recognise as applicable to them.” European Commission Guidance Note Questions and Answers: adoption of update of the Blocking Statute (2018/C 277 I/03), available here.

[3] Transparency International Corruption Perceptions Index 2017, available here.

[4] June 29, 2018 Financial Action Task Force Public Statement, available here.

Categories: EU Regulations