On November 5, 2018, the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") re-imposed U.S. nuclear-related sanctions on Iran that had been lifted under the Joint Comprehensive Plan of Action (the "JCPOA"). As a response to this, the European Union earlier this year, updated the 1996 regulation known as "the Blocking Statute”, with the aim to counteract the extraterritorial effects of the re-imposed American sanctions on EU persons.
The U.S. sanctions and the EU Blocking Statute have had and will continue to have considerable ramifications for international trade with Iran. This newsletter is designed to provide an overview of the re-imposed U.S. sanctions and the updated EU Blocking Statute, and to give an understanding of the practical implications of the U.S. sanctions and the EU counteraction from a Norwegian perspective.
U.S. sanctions in short
The U.S. sanctions that were re-imposed on November 5, 2018, were the second and final set of U.S. sanctions to be reactivated by the U.S. government as a result of their withdrawal from the JCPOA.
To a certain extent the sanctions are given extraterritorial effect, meaning that also non-US persons doing business in or with Iran or Iranian persons/businesses may be subject to sanctions under U.S. law. Thus, any person or company resident in Norway or the EU doing business involving Iran should consider whether the U.S. sanctions may apply to their business.
The first round of U.S. sanctions, re-imposed as of August, 7, 2018, included sanctions on:
- the purchase or acquisition of U.S. dollar banknotes by the Government of Iran;
- Iran’s trade in gold or precious metals;
- the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;
- significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
- the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
- Iran’s automotive sector.
The second round of sanctions, re-imposed as of November 5, 2018, included sanctions on:
- Iran’s port operators, and shipping and shipbuilding sectors;
- petroleum-related transactions including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
- the provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions;
- the provision of underwriting services, insurance, or reinsurance; and
- Iran’s energy sector.
Also, entities removed from the OFAC Specially Designated Nationals (SDN) list as part of the JCPOA Implementation in January 2016 were re-designated as SDNs. There has also been a large number of new designations. In total over 700 persons were added to the SDN list on November 5. In addition, General License H, which allowed foreign entities owned or controlled by U.S. persons to engage in activities with Iran consistent with the JCPOA, has been revoked.
This being said, it should be noted that, some activates are still permissible. For example, OFAC states in its FAQs that non-US, non-Iranian persons are allowed to receive payments for debts or other obligations owed to them by an Iranian counterparty. Where a non-US, non-Iranian person has delivered goods, services, loans or credits to Iran that were permissible under the sanctions in effect at the time, undertaken pursuant to a written agreement entered into before May 8, 2018, and provided in full before the end of the applicable wind-down period, repayment under the terms of the agreement may be permissible.
Also, certain activities with Iran are not covered under the U.S. sanctions. These include dealings by non-US persons with entities and individuals in Iran that are not SDNs, provided that those dealings are also in sectors of the Iranian economy that are not currently targeted under sector-specific secondary sanctions.
Enforcement risk for non US-companies
The US government is authorized to impose a variety of sanctions penalties, up to and including being added to the List of Specially Designated Nationals and Blocked Persons (SDN list), on any EU or other non-US person who is (i) determined to have knowingly facilitated certain significant transactions for or on behalf of, or otherwise provided material support to, Iranians on the SDN list; or (ii) determined to be conducting certain activities that are targeted by US secondary sanctions.
US secondary sanctions penalties typically result in restrictions on dealings related to the United States, including exclusion from the US financial system or the loss of US correspondent banking account rights, but generally do not include fines or monetary penalties.
The EU Blocking Regulation
The EU Blocking Regulation has been in place since 22 November 1996 and is a reaction to the US embargo of Cuba, as well as certain US sanctions targeting Iran and Libya. Under the EU Blocking Regulation, EU persons are generally prohibited from complying with any requirement or prohibition of a non-EU sanctions law listed in the Annex to the Regulation.
On 7 August 2018, as part of its package of measures to encourage EU businesses to continue to trade with Iran, pursuant to the terms of the JCPOA, the EU updated the EU Blocking Regulation to reflect the latest US developments. Through implementation of the Blocking Regulation, the EU is seeking to counter the effects of the re-imposed US sanctions on EU residents and companies.
Key aspects of the blocking regulation that should be noted are as follows:
Applicability and requirements
The EU Blocking Regulation applies to all EU persons, including all (i) EU-incorporated companies; (ii) EU residents/nationals; (iii) shipping companies owned by EU nationals, with vessels registered in an EU state; and (vi) non-EU nationals resident in the EU or in respect of their acts in a professional capacity in the EU (EU Operators).
EU Operators are prohibited from complying with all legislation listed in the Annex, unless resolved via discussion with, or authorized by, the European Commission. This prohibition covers active compliance and compliance by deliberate omission, as well as direct and indirect (through a subsidiary or an intermediary) compliance with this legislation. For example, requesting a license from the US to maintain compliance with US sanctions is a prohibited act of compliance.
In exceptional cases the European Commission may authorize full or partial compliance with the measures listed in the Annex if noncompliance would "seriously damage" EU Operators’ interests or those of the European Union. A specific procedure applies to obtain such an authorization and the Implementing Regulation setting out this procedure provides guidance on the criteria that will be taken into consideration.
An EU person who complies with US sanctions in breach of the Regulation may face two potential consequences:
1. Penalty under the law of the relevant EU Member State, which may include effective, proportional and dissuasive criminal/civil liability, fines or other consequences. For example:
- In the UK breach of the Blocking Regulation constitutes a criminal offence which may result in an unlimited fine on conviction.
- In Germany breach constitutes an administrative offence and may lead to fines of up to 500,000 EUR.
- In Italy, the administrative sanction is a fines up to 92,962.31 EUR.
2. Any person who suffers losses as a result of the EU person’s compliance with US sanctions in breach of the Regulation is entitled to claim damages against the EU person.
Obligation to report to the EU commission within 30 days
EU Persons are obliged to notify the EU Commission or relevant member state authority within 30 days of discovery of any events arising from the legislation contained in the subject to the Blocking Statute which would affect their economic or financial interests.
Non-EU court judgments enforcing prohibited extraterritorial legislation are nullified
The Blocking Regulation nullifies any non-EU decision, such as a court order or arbitration award, enforcing legislation, or acts and provisions adopted pursuant to such legislation, contained in the Annex.
Implication for Norwegian persons and companies
Norwegian companies and persons doing business involving Iran should, in the same manner as EU companies, consider whether the U.S. sanctions apply to their business. However, Norway is not a member of the EU and has so far not implemented any Norwegian blocking regulation applicable to Norwegian persons or companies. Therefore, provided there is no EU nexus making the EU blocking regulation applicable, a Norwegian company will not have the same difficulties in following US secondary sanctions as an EU company.
Recommendations going forward
EU and Norwegian persons should be careful to conduct appropriate due diligence before engaging in any sort of trade with Iran or Iran-related parties going forward. In general the following recommendations can be made:
- Before doing any further business in Iran or with Iran-related parties, identify any potential implication of both the U.S. sanctions and the EU Blocking statute before carrying out or continuing such business, and consider acquiring legal advice to ensure that you will not incur any liability if such business is carried out.
- Any decision to carry out or not carry out business in Iran or related to Iran should be carefully documented and recorded. Especially, records should be maintained by EU operators to document the reasons for any decision which is made to stop work or cease business operations in Iran on the basis of the EU operator’s own assessment of the economic situation, as opposed to the US extraterritorial sanctions which are the target of the EU Blocking Regulation.
- Companies or persons subject to the Blocking Regulation, who believe that they might face a claim for damages from another entity incorporated within the European Union provided they stop to perform under a contract due to US sanctions, should consider to seek an authorization under the Blocking Regulation to follow the US sanctions. By doing this, it may be possible to comply with U.S. sanctions without incurring any fines/claims for breach of the EU blocking regulation.
Thommessen is monitoring the situation closely, and will circulate further updates on any significant developments. For more information on how the re-imposed U.S. sanctions and the EU Blocking Regulation could affect your company specifically, contact Hugo-A. B. Munthe-Kaas at Thommessen's Corporate Trade Compliance Group.