EU Blocking Regulation Update: Response to US Iran Sanctions

June 12, 2018

Following the U.S. decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) and reimpose sanctions on Iran, the EU has confirmed its full commitment to keep the agreement alive for the remaining parties, as long as Iran continues to comply. The EU announced on 18 May a package of measures to support this position. These were: 

  • the reactivation of the EU Blocking Regulation1
  • enabling the European Investment Bank to finance activities in Iran; 
  • strengthening EU sectoral cooperation with and assistance to Iran; and 
  • urging EU Member States to consider one-off bank transfer to the Central Bank of Iran. 

The European Commission has now published its proposed update of the Blocking Regulation2. The update is subject to a two month approval period, meaning that it could come into force on 6 August 2018, the same date that the first U.S. secondary sanctions will formally come back into effect. 

What Has Led to This Measure? 

To put this measure in context, most of the restrictions which the U.S. will reimpose in relation to Iran are “secondary sanctions” measures, i.e., measures that are aimed at limiting the conduct of non-U.S. persons, even where such conduct has no U.S. nexus at all (U.S. persons have, with limited exceptions, been prohibited from dealing with Iran or with Iranian persons/entities since 1995). So the U.S. decision in effect will put EU companies at risk of being subjected to U.S. sanctions for doing business with Iran which is not prohibited by EU law. Not all business with Iran will be subject to secondary sanctions, but the cautious approach of EU banks to any Iran business (which is also a product of past broad interpretation and aggressive enforcement of U.S. sanctions by OFAC) serves to amplify their effect such that even business activity which should not raise legal concerns can be hard to pursue. 

There is a precedent for the current developments. In 1996, the EC (as it then was) adopted a “blocking regulation” that made it illegal for EC companies to decline certain business on the basis of compliance with U.S. sanctions, and rendered any U.S. fines imposed on EC companies under certain legislation unenforceable. The EC also brought a WTO challenge to the validity of the U.S. restrictions. On that occasion, the EC was able to secure some exemptions to the U.S. restrictions3 such that the legal effectiveness of the Blocking Regulation was never tested. It remained on the statute book but essentially unused4, and became increasingly irrelevant because the U.S. legislation to which it applied was superseded. 

Since then, the U.S. has refined the way it achieves an extra-territorial effect for its restrictions. Secondary sanctions do not seek to fine non-U.S. companies, but rely on the assumption that the risk of being shut out of the U.S. financial system is unacceptable for most larger EU companies. In effect the secondary sanctions require EU businesses to make a choice between doing business in Iran and doing business in the U.S. Most (but not all) will likely chose the latter. 

What Does the New Proposed EU Blocking Regulation Do? 

The Commission’s proposal does not change the body of the EU Blocking Regulation; it simply updates the list of U.S. sanctions laws to which it applies. So the key substantive measure is (still) that EU persons may not (unless authorized) comply (either directly or through deliberate omission) with any prohibition based on or resulting from the U.S. measures specified in the Annex to the Regulation, or from actions based on or resulting from those measures. Any authorisation for compliance (which would be sought from the Commission) should be on the basis that non-compliance would seriously damage the applicant’s interests or those of the EU. 

A Choice Between U.S. and EU Compliance 

Taken at face value, this is an imprecise but potentially very broad prohibition which will force many companies into a simple but unattractive choice between U.S. and EU compliance. The U.S. financial system is relevant to very many EU businesses. Where such a business decides not to have, or not to continue, business in or with Iran that would have been in scope of the U.S. secondary sanctions, it risks being caught by this EU prohibition. But, conversely, a decision to develop or continue such business in Iran puts it at risk of being shut out of the U.S. financial system or the U.S. market more generally. EU guidance could help to address the imprecision, but cannot avoid the compliance incompatibility that firms caught by it will face. 

It is instructive to look at sanctions enforcement history. OFAC’s reputation as an aggressive implementer and enforcer of U.S. sanctions is such that non-U.S. companies have tended to take the U.S. secondary sanctions threat very seriously. Conversely, EU sanctions enforcement generally has been mild and very limited (although a few Member States, including the UK, are now showing an intention to be more proactive), and the enforcement of the Blocking Regulation has been virtually non-existent. It would be unsurprising therefore if most firms, faced with a choice between complying with the U.S. secondary sanctions and complying with the EU blocking regulation, will err in favour of the former. However, in the current context, the EU may be keen to ensure that EU companies take a different view this time. 

A Measure with Teeth or Symbolic Gesture? 

The European Commission and its Member States will have been well aware when they made their decision to reactivate and update the Blocking Regulation, of the position it would put firms in, and the perceived greater threat of U.S. measures. They will therefore have known that if they want EU companies to prioritize compliance with it over compliance with U.S. secondary sanctions, they will have to offer either or both of (i) a genuine and credible threat of enforcement of the prohibition by Member State authorities with serious consequences, and/or (ii) some protection from the threat of U.S. secondary sanctions for EU companies that do comply with the EU Blocking Regulation. 

It remains to be seen whether the EU intends to back up the adoption of a revised regulation with these steps which would give it real teeth, or whether the symbolism of being seen to have put such a measure in place was all that was intended. In the current climate of tension between the EU and US, it would not be surprising if the EU were to ensure that, this time, the blocking regulation were more proactively enforced; the choice for EU companies therefore is complex, with few legally risk-free options available. 

A Request for Exemptions 

At the same time as publishing the revision of the Blocking Regulation, the EU (and UK, France and Germany) released a joint letter5 sent to the U.S. Treasury Secretary Mnuchin and Secretary of State Pompeo, by which they seek waivers to the U.S. secondary sanctions in the following areas: 

  • for EU companies that initiated or concluded their contracts after JCPOA Implementation Day (16 January 2016); 
  • for key sectors, such as energy, automotive, civil aviation and infrastructure, pharmaceuticals and healthcare; 
  • to enable banking and financing channels with Iran to be maintained and for Embassy bank accounts; and 
  • extension of the winding-down periods and prolongation of General Licence H, which currently authorizes foreign subsidiaries of U.S. companies to engage in most business with Iran. 

Recent U.S. positioning does not suggest that there is a strong likelihood of such waivers being granted; the U.S. has been both clear and forceful in its statements of its intentions as regards Iran sanctions6, and a look at the position of the U.S. as regards its steel and aluminium tariffs, where EU pleas for exemptions have fallen on deaf ears, does not suggest that it is likely to grant exemptions here. If such exemptions were granted, it may, as in 1996, be enough to persuade the EU to quietly drop any threat of actual enforcement of the Blocking Regulation. But the prospects of such a rapprochement do not currently look positive. 

How Dechert Can Help 

With experienced sanctions professionals in both London and Washington D.C., Dechert’s International Trade practice advises companies on the full range of sanctions matters, and stands ready to assist EU companies considering operations in or with Iran (or considering ceasing such operations) as to how best to manage the competing compliance risks. 


1) Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.
2) The proposed amending regulation and the annex is available via the European Commission.
3) See for example EU-US Summit Reaches Sanctions Deal, Eurecom, June 1998.
4) In once case in 2007 charges were filed (by Austria in relation to Cuba) but were later dropped.
5) Joint E3 letter to Steven Mnuchin and Mike Pompeo on JCPoA.
6) See for example, Sec of State Pompeo’s comments on 21 May 2018: “sanctions are going back in full effect and new ones are coming. Last week we imposed sanctions on the head of Iran’s central bank … The Iranian regime should know that this is just the beginning. These will indeed end up being the strongest sanctions in history when we are complete.”

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