Reactivation of EU Blocking Regulation will increase Trade Compliance Risks

EU Heads of State have agreed that the EU is to remain committed to the Iran nuclear deal. The EU Commission was given a green light to reactivate the so-called EU Blocking Regulation. The 1996 legislation originally targeted the U.S. trade embargo on Cuba. The Commission will now include the re-imposed U.S. secondary Iran sanctions. The aim is to have the amended EU Blocking Regulation in force before 6 August 2018.

In a nutshell, the EU Blocking Regulation has four mechanisms:

1. Obligation of non-compliance: No EU company shall comply, whether directly or indirectly, with U.S. secondary sanctions. In that regard, the scope of application is more comprehensive than the corresponding provision in German law. While Art. 5 of the EU Blocking Regulation prohibits any compliance with U.S. secondary sanctions, Sec. 7 of German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – “AWV”) contains only a prohibition of boycott declarations. EU companies may submit an exemption request to the Commission. Such a request requires sufficient evidence that non-compliance would cause serious damage to the company or the EU.
2. "Claw-back" clause: EU companies may recover damages caused by the application of U.S. secondary sanctions. It is important to note that this provision does not provide for recovery of damages from EU Member States. Indeed, Chancellor Merkel said that compensating all businesses in a comprehensive way was not realistic.
3. Obligation to inform: EU companies whose economic or financial interests are affected by U.S. secondary sanctions have to inform the Commission accordingly. This obligation applies to directors and persons with management responsibilities.
4. No enforcement of court decisions: No judgment by a court or decision of an administrative authority from outside the EU that gives effect to U.S. secondary sanctions shall be enforceable in the EU in any manner.

Implications for Iran business: The reactivated EU Blocking Regulation puts German companies with business ties to the U.S. and Iran between a rock and a hard place. On the one hand, a breach of Art. 5 of the EU Blocking Regulation constitutes an administrative offence under German law, cf. Sec. 82, para. 3 of the AWV. Ceasing commercial activity in Iran only for purposes of complying with U.S. secondary sanctions can be punished with a fine of up to EUR 500,000. On the other hand, non-compliance with U.S. secondary sanctions may effectively cut off business from the U.S. market and financial system and trigger severe consequences under U.S law.

Given this conflict of laws, German companies are well advised not rush to pull out of business activities in Iran. Instead, they should thoroughly analyze the implications of the EU Blocking Regulation when contemplating any actions to comply with U.S. secondary sanctions. Risk management is key in these times.

Our Trade Compliance Expertise

The Competition, EU and Trade team of Taylor Wessing has a broad range of experience in representing companies with regard to sanctions against Iran. We provide comprehensive and proactive advice to all trade compliance issues following the re-imposition of U.S. sanctions. On specific U.S. issues, our trade experts work closely with a U.S. law firm. We have also successfully partnered together with local experts in Iran.