The US "secondary sanctions" against Iran - risks for EU companies

On 5 November 2018, the second stage of US sanctions against Iran, which had been suspended since January 2016, was reinstated. As the US sanctions are aimed at preventing non-US companies from doing business with Iran, they have a far-reaching impact on EU companies doing business with Iran.

On 8 May 2018, the US President announced the unilateral withdrawal of the USA from the Joint Comprehensive Plan of Action (JCPOA), which had been adopted on 14 July 2015 between China, France, Russia, the United Kingdom, the USA, Germany and the European Union on the one hand and Iran on the other, and had entered into force on 16 January 2016. The JCPOA provided for Iran to curtail its nuclear programme and subject itself to the control of the International Atomic Energy Agency, while the other contracting parties gradually relaxed sanctions against Iran. Following the termination of the JCPOA, all US sanctions against Iran are supposed to again enter into force to the same extent as before the JCPOA.

For reasons of protection of confidence, however, the USA had granted the economic operators so-called "wind-down periods" during which they were allowed to wind down their Iran transactions, which they had entered into in accordance with the requirements of the JCPOA, in an orderly manner. Following the expiry of the first wind-down period on 6 August 2018, when part of the US sanctions against Iran had already taken effect again, the remaining US sanctions have now also entered into force again following the expiry of the second wind-down period on 5 November 2018.

Consequences of the termination of the JCPOA

The renewed entry into force of the US sanctions has only a minor impact on US companies. Since 1995, the USA has had a total embargo against Iran, which basically prohibits "US persons" from doing business with Iran. The JCPOA had not changed anything about this; therefore, its termination is of no importance in this respect. Instead, the re-entry into force of the US sanctions following the termination of the JCPOA has mainly affected non-US companies. For example, the USA claims to prohibit transactions without any US nexus in certain cases and to sanction their execution by non-US persons (so-called "secondary sanctions"). The USA had committed itself in the JCPOA to (only) lifting these secondary sanctions, and these very secondary sanctions have now returned to full force after the end of the wind-down periods. While US and EU sanctions against Iran were largely similar before the JCPOA came into force, the wide extraterritorial extension of US sanctions law is now particularly noticeable for EU companies because US law now prohibits them from doing business that they are allowed to do under EU law.

Content and scope of the secondary sanctions

The US "secondary sanctions" against Iran do not prohibit non-US persons from doing any kind of business related to Iran. Only transactions with certain persons listed on the Specially Designated Nationals and Blocked Persons List (SDN list) of the USA with the addition "subject to secondary sanctions" and transactions relating to certain economic sectors are prohibited. While at the end of the first wind-down period sanctions relating to trade in Iranian rials, Iranian government bonds and gold or precious metals, sanctions against the Iranian automotive sector, as well as sanctions relating to the sale, supply, or transfer of graphite, raw materials, or semi-finished products, and software for the integration of industrial processes to Iran had once again entered into force, on 5 November 2018 US sanctions concerning the shipping, shipbuilding and port sectors, the oil and petrochemicals sector, the energy sector and the insurance and banking sectors once again took effect.

Furthermore, all persons who had been removed from the SDN list as of 16 January 2016 (including the National Iranian Oil Company, Iran Air and the Islamic Republic of Iran Shipping Lines) were again listed "subject to secondary sanctions" as of 5 November 2018. In particular, all major Iranian banks (such as the banks Melli, Mellat and Saderat as well as the Europäisch-Iranische Handelsbank) were again listed. As a result, the practical handling of payment transactions for Iran businesses, which non-US persons may continue to carry out under the US secondary sanctions, has also become very difficult. Most EU banks refuse to process any payments related to Iran because they fear that they themselves will become the target of US sanctions, and a large number of Iranian banks have been disconnected from the SWIFT system.

EU countermeasures

The EU has announced and taken countermeasures to counteract the extraterritorial extension of US sanctions law (which the EU regards as being contrary to international law). For example, the EU expanded the annex of the so-called Blocking Regulation (Regulation (EC) No. 2271/96), which came into force on 29 November 1996, by adding the new US sanctions through Delegated Regulation (EU) 2018/1100 of 7 August 2018. The Blocking Regulation states that US decisions (including court rulings) based on the extraterritorial US legal acts against Iran listed in the annex to the Blocking Regulation will not be enforced in the EU (Art. 4). Furthermore, the Blocking Regulation prohibits EU companies from complying with requirements or prohibitions based on the US "secondary sanctions" against Iran listed in the annex to the Blocking Regulation (Art. 5); violations of this prohibition may be punished in Germany with a fine of up to EUR 500,000 per violation. In addition, the Blocking Regulation allows EU operators to recover damages caused by the application of the laws specified in the annex "from the natural or legal person or any other entity causing the damage or from any person acting on its behalf or intermediary" (Art. 6), without stating though how and against whom such claims may be brought. Whether the Blocking Regulation will have the intended effect - continuation of business with Iran by EU companies - remains to be seen and will ultimately depend on its implementation in practice. A particular problem with regard to the intended effect of the Blocking Regulation against the extraterritorial extension of US sanctions law is that US sanctions against EU companies that violate US secondary sanctions can have direct effects even without enforcement of US sanctions decision by EU Member State authorities. For example, the EU companies concerned can themselves be placed on a US sanctions list, with the result that US persons will no longer be allowed to do business with these companies. Such a listing not only results in a complete exclusion from the US market, but also in significant impediments to participation in the US-dominated international financial system.

In addition to the Blocking Regulation, a further measure currently under discussion at level of the EU is the establishment of a Special Purpose Vehicle (SPV) to enable EU companies to make payments for Iranian transactions outside the usual financial channels dominated by the US dollar. As a clearing house, the SPV shall set off claims of Iranian and EU companies against each other. For example, if an Iranian company supplies goods to an EU company A and EU company B supplies goods to Iran, the money that company A would actually have to pay to the Iranian company could be used to settle company B's claim. The participation of third countries in the SPV is also being discussed. Whether and in what form the SPV will ultimately come into being, however, is still unclear. If it came into being the SPV could indeed facilitate or make possible financial transactions for Iran-related business. EU companies, however, continue to expose themselves to the risk of being punished as "foreign sanctions evaders" if they use the SPV to engage in transactions with Iran that are prohibited under US law.

Bottom line

The renewed entry into force of the US "secondary sanctions" and the reactivated Blocking Regulation represent a legal dilemma for EU companies doing business with Iran. If they withdraw from Iran because of the US secondary sanctions, they violate the requirements of the Blocking Regulation; if they continue their business with Iran, they expose themselves to the risk of being punished under US law. Although it is not possible at this stage to predict to what extent the US will attempt to enforce its secondary sanctions against EU companies and how the EU countermeasures will be implemented in practice, EU companies wishing to continue their business in Iran, which is permitted under EU law but prohibited under US law, are walking on thin ice. Against this background, these companies are well advised to conduct their business in Iran only with appropriate expert legal support.

Dr Katja Göcke, LL.M., Attorney at law

December 2018