By Merhnoosh Aryanpour 

EU Blocking Regulations: a recap and revisit

September 24, 2018

After 8 May, 2018, it became immediately clear that the Blocking Statute would be Europe's key strategic tool for attempting to counter the adverse consequences of the American withdraw from the JCPOA and America's reimposition of the sanctions previously lifted under the nuclear deal between Iran and the world powers.

Since the May 2018 announcements from Europe that it would, as part of a broader support package to Iran, amend EU Council regulation 2271/96 (the so-called Blocking Regulation or Blocking Statute) to cover U.S.'s extraterritorial secondary sanctions against Iran, the EU has made good on its promises, implementing the aforementioned change which, effective 7 August, makes it unlawful for EU Operators to comply with such sanctions.   The amendment to the Blocking Statute also, by extension, provides for EU Operators to seek recompense for damage caused by or related to sanctions through filing claims before EU courts against the U.S. (or other parties whose actions in compliance with U.S. sanctions damaged the EU Operator).  

But what therefore is an 'EU Operator'?  In short, it is a natural or legal person residing or registered in the EU, including EU-based subsidiaries of foreign companies (but not their branches).  Therefore, an EU Operator could include:

- Any natural person being a resident in the Union and a national of a Member State
- Any legal person incorporated within the EU, presumably, therefore,  including companies which are owned or controlled by a non-EU parent company 
- Any national of an EU member state established outside the Union and controlled by nationals of a Member State
- And, presumably, by extension, an EU government entity, or any entity owned or controlled by  an EU state entity 
What does it mean to say that compliance by an EU Operator with OFAC extraterritorial sanctions on Iran is "unlawful"?
According to the language of the Blocking Statute, it shall be the case that each member state shall implement proportionate and dissuasive measures to ensure that EU Operators are properly incentivized not to terminate their business with Iran in compliance with OFAC strictures.   In practice, only a handful of EU member states have actual regulations which penalize their own companies and citizens; German national regulations assess a penalty of 500.000 EUR per violation of the Blocking Statute; Austria's equivalent regulations specify a fine of just 1.000.000 Schillings (the equivalent of 75.000 EUR).  
In reality, it is not clear the extent to which the EU, or EU member states, might actually wish to fine their own Operators, but what is clear is that the EU will likely provide much stronger support for bringing America to heel before EU courts, if it becomes necessary and/or workable under the Blocking Statute.
How could that happen?

Consider the following circumstances:
1. Large EU-based company, under threat of penalties from OFAC, abandons an Iranian project in which it had made significant investments
2. Medium-sized EU-based company, which had had a contract with another larger EU company which was doing business with Iran, suffers a meaningful economic loss from the abrogation of contract by the other EU Operator in compliance with OFAC sanctions
3. EU-based subsidiary of an Iranian company, whereby the Iranian parent had a contract with a large EU-based company which abandoned its Iranian project, suffers an economic loss.
4. Large EU-based company which has a contract with an Iranian counterparty, and in compliance with the Blocking Statute, does not withdraw from such contract, and as a consequence, is sanctioned by OFAC.
In case 1, the large EU-based company withdraws of its own accord contrary to the Blocking Statute, and while it does suffer a loss of investment from its project, it is not clear whether such a company could successfully sue before EU courts since it could be argued that its damage was self-inflicted; it may be possible to attempt to make the case that threat of economic damages from OFAC might have been, based on precedent, so high, that the EU Operator was forced, by reasonable prudent behaviour, to suspend or exit its project.
By contrast, in case 2, the medium-sized company may have a plausible case not only against the U.S., against whose assets it could potentially win a seizure and sale judgement before EU courts, but also against the other large EU company which terminated its Iranian contract and caused the harm to the medium-sized company.  What is unknown in such a circumstance is whether the EU would proceed to fine the larger EU operator, or whether, as an adjunct to the first case, it might make damage awards to both the large and medium sized companies.

In case 3, which is perhaps the most interesting of all, it may in fact be possible for the subsidiary of an Iranian parent organization to utilize the blocking statute to its benefit whereby the EU Operator is able to seek damages; it can be argued whether this is a perversion, or an exact implementation, of the spirit of the Blocking Statute, but there can be no doubt that even for an Iranian parent, the EU incorporated subsidiary is an EU Operator and is, by dint of those regulations, allowed to sue the U.S. before EU courts.  It begs the question by extension whether, if more and more Iranian companies were to form EU subsidiaries, which would put them under the Blocking Statute jurisdiction, this would permit a sort of back door entry into a kind of class action suit against the U.S. government, since it is not unreasonable to surmise that any large Iranian multinational might otherwise have been able to benefit from international contracts with even American subsidiaries in Europe, formerly permitted to engage in Iranian business under general license H, to say nothing of broad-based business with EU Operators.  It is not certain, however, whether a company must have been an EU Operator at the time of the reimposition of sanctions by OFAC; the Blocking Statute appears silent on this point.
Finally, in case 4, quite clearly, this would be the strongest set of circumstances for a major litigation against the U.S. wherein significant U.S. assets in the EU, be it government bond holdings or real estate or else, could be up for grabs in an adverse outcome for the defendant.

With this short scenario analysis in mind, the next point becomes, what are the obligations of EU Operators to ensure that they are able to take advantage of the provisions of the Blocking Statute.

According to the provisions of the Statute, the EU Operators are;
- Obligated to notify the European Council within 30 days of the incurrence of the damage or loss associated with non-compliance with U.S. sanctions, and
- By contrast, if they wish to make the case that they need to comply extraordinarily with such U.S. sanctions, they should do so upon notification of the appearance of the threat of sanctions for non compliance 
- Nonetheless permitted to withdrawal from Iranian operations if their exit or suspension is a case of commercial matters and not sanctions.
Thus, when evaluating the efficacy, and the implications, of the Blocking Statute, we can evaluate it from the lens of each of the parties noted in the above four cases.
Large EU Operators with international businesses will be most likely to notify the EU that they cannot adhere to the Blocking Statute and must comply with OFAC as an exceptional allowance.  Lamentably for Iranian parties, there is no provision within the Blocking Statute for non-EU Operators to sue under its protections, neither against U.S. parties nor against other EU Operators.  Nonetheless, Iranian actors should be vigilant that EU counterparts are not simply using bogus commercial extenuations to justify contract withdrawal, suspensions or termination.  It may sometimes be difficult to determine whether an EU Operator attempts to raise a matter on economic grounds, which is in fact one that boils down to sanctions.
In addition, it remains to be tested out whether an EU Operator owned or controlled by an Iranian party could utilize the Blocking Statute as described above, but it is evident that the threat of fines/penalties by the EU on EU Operators that do not comply with the Blocking Statute is not to be overlooked.

Why?  Because regulations related to sanctions are as much about reputation as they are about economic consequences.  One of the reasons why OFAC has been so successful in ensuring that companies all over the world abide by U.S. imposed regulations which are well outside the American jurisdiction is that, aside from stiff fines, no company wants to say that it was singled out by OFAC.  Large banks, financial institutions, oil companies, and technology companies, all of which have been over the years sanctioned by OFAC, are used to multibillion dollar losses in business, but much like nuclear vs conventional weapons, when it comes to allocating the cause of the loss, sanctions is one of the most stigmatized.

That is, it is easier for a large energy company to say that they have been fined billions of dollars for an oil spill due to gross negligence, than it is to say that they were fined even 50 or 100 million dollars for dealing with, even indirectly, a sanctioned entity or transacting in energy products with a sanctioned country.  

This is as curious as the reaction of most ordinary who might somehow be more afraid of the threat of an atomic bomb, which has only been twice used on civilians in world history, than conventional ballistics which every day kill thousands of people.
Nonetheless, such psychological asymmetry must be duly recognized, and so what can work well, over time, albeit,  in favour of the effectiveness of the blocking statute is that to be singled out by the EU for such violations becomes in its own way, both in the EU and within Iran, a significant black mark.

That can be fomented if people come to realize that, although as of now the financial consequences for an EU operator who violates the statute are ostensibly less than that of OFAC violations, the reputational risk could be even greater.  OFAC coordinates with any number of international watch dogs and activist groups to pressure companies not to do business with Iran and to abide by American sanctions, and quite similarly, it is entirely possible that from the European and the Iranian side, those kinds of third parties can be equally effective in besmirching the reputations of EU Operators who, quite in opposition to the regulations of their own jurisdiction, choose to walk away from Iran.

More broadly though, many questions remain to be answered, including:
- How aggressive will EU courts be in making damage awards against the U.S. in cases brought by EU Operators?
- How harsh will EU regulators be in penalizing their own companies for Blocking Statute violations
- How much latitude will EU courts grant to EU operators owned by Iranian companies to sue before EU courts?
- How lenient will EU regulators be in allowing EU Operators to get exemptions from compliance with the Blocking Statute?
- How quickly can Iranian and EU parties effectively attach a reputational stigma to those companies walking away from Iran, in contravention of the statute?
Only time will tell, and what is important to remember is that the global dominance by OFAC was not built overnight, nor was it entirely by design; the fusion of dollar dominance in the global financial system led to OFAC's regulatory reach, and the former standing of the U.S. as one of the most upright countries in the world  supplemented and cemented what has now become a dollar-based stranglehold on world finance, both transactionally and regulatorily; now with the globe looking for alternatives to the U.S. as the world's policeman and with the world tiring of the dollar's universality, it is entirely possible that the Blocking Statute takes on a life of its own, with implications beyond mere regulatory censure.
How and whether that happens will depend in part on the leanings of EU courts, the steadfastness of EU Operators, and the activist inclinations of parties in both the EU and Iran, who should know that, just as OFAC sanctions are regulations for which violations have consequences, material and intangible, so too is the Blocking Statute.

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