Clifford Chance

Recent events suggest that EU measures aimed at frustrating US sanctions on Iran are unlikely to be a match to the threats imposed by the Trump Administration on those who try to use them.

Following the US withdrawal from the Iran Nuclear Deal (or Joint Comprehensive Plan of Action "JCPOA") in August 2018, the EU doubled down, reaffirming its commitment to the full and effective implementation of the JCPOA, for as long as Iran continued to respect its obligations under the deal.

This affirmation was reflected in two different mechanisms: (i) Council Regulation (EC) No 2271/96 (the Blocking Regulation); and (ii) the Instrument in Support of Trade Exchanges (INSTEX) – a payment mechanism designed to facilitate legitimate European trade with Iran. Recent events, however, have potentially further undermined the effectiveness of either measure.

The EU Blocking Regulation

The Blocking Regulation has long been derided by business as nothing more than a compliance headache; offering no real form of protection against the extra-territorial application of the US laws it is intended to frustrate.

As many readers will be well aware, under Article 5 of the Blocking Regulation, EU operators are prohibited from complying "directly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition" of certain US extraterritorial sanctions against Cuba and Iran. Non-compliance may give rise to civil, and even criminal, liability.

As a result, EU operators within the scope of the Blocking Regulation need carefully to consider whether the actions they take fall foul of its provisions.  Recent enforcement action however demonstrates that there continues to be a very fine line to tread between compliance with the Blocking Regulation (which has yet to be enforced in practice) and breaching US sanctions (where the enforcement trend needs no introduction).

Anyone who may have doubted that the Blocking Regulation would act as an effective shield against US enforcement action would have had their concerns confirmed by the December 2019 OFAC settlement reached with a Swiss insurance group.  The group (through the UK subsidiary of a US holding company) provided travel insurance in respect of holidaymakers in Cuba.  In determining the base penalty, OFAC listed as an aggravating factor that certain of the company's business leaders and their regional legal and compliance team had knowledge that policies covering travel to Cuba were being issued and had reason to know of the US sanctions against Cuba, but failed to insert sanctions exclusionary clauses based on its "erroneous legal conclusions" regarding the effects of the Blocking Regulation.

There has not been any official EU reaction yet, nor do we currently expect one. There is no doubt that this warning shot from OFAC will loom large for any US owned or controlled companies considering conducting business in either Cuba or Iran going forward.

INSTEX

On 29 November 2019, Finland, Belgium, Denmark, the Netherlands, Norway, and Sweden announced their intention to become the newest shareholders in the Instrument in Support of Trade Exchanges (INSTEX). Founded by the UK, France and Germany in January 2019, INSTEX is designed to help facilitate legitimate European trade with Iran, thereby alleviating the effects of US sanctions on Iran by operating as a barter system, enabling trade with Iran without having to remit funds to or from Iran directly.

According to a joint statement, this recent addition  "further strengthens INSTEX and demonstrates European efforts to facilitate legitimate trade between Europe and Iran and is a clear expression of our continuing commitment to the [JCPOA]".

Whilst no doubt a political demonstration of European commitment to preserving the JCPOA, the real impact this will have on business remains to be seen.  It has not yet been put to practice, nor is it clear precisely how the system will work. Further, Sigal Mandelker, Undersecretary for Terrorism and Financial Intelligence at the US Treasury Department, wrote to the president of INSTEX in a letter dated 7 May 2019 noting "I urge you to carefully consider the potential sanctions exposure of Instex” and that “Engaging in activities that run afoul of US sanctions can result in severe consequences, including a loss of access to the US financial system".