US sanctions against Iran, EU Blocking Regulation and where it leaves businesses in the Middle East

News / / Dubai

The issue of Iran sanctions is highly topical since the US administration announced its decision to re-impose US nuclear-related sanctions against Iran. In this article we discuss the issues that are relevant to businesses in this region.

The issue of Iran sanctions became very topical since the US administration announced its decision to re-impose US nuclear-related sanctions against Iran, which were suspended from 16 January 2016 (known as the snap-back). Further to this decision, the first tranche of the US sanctions was re-instated on 7 August 2018 and the second tranche on 5 November 2018. This caused a lot of questions in the industries that we serve in this region.

The US has re-imposed secondary sanctions, which are sanctions that apply to non-US companies and individuals. The primary sanctions directed at the US entities have largely remained in place throughout the suspension period. This means that businesses based outside of the US will be those most affected by the snap-back.

For the large part, the US sanctions regime as reinstated, is similar to the one that applied before the suspension in 2016. However, there are some modifications. In particular, the new administration has indicated its intention to enforce the re-imposed sanctions vigorously and is expecting higher levels of compliance than the previous administration.

In contrast to the united front held by the US and the European Union prior to the 2016 suspension, on this occasion the EU disagrees with US policy in relation to Iran and has taken steps to ensure that the EU entities do not comply with the re-imposed US sanctions. On 7 August 2018, the EU issued an updated Blocking Regulation (Regulation (EC) No. 2271/96 as updated by Commission Delegated Regulation (EU) No. 2018/1100) making it illegal for EU operators to comply with US secondary sanctions against Iran.

The EU Blocking Regulation applies to EU operators who are defined as EU nationals resident in the EU, EU residents unless located in their native country, EU incorporated companies, EU nationals and shipping companies outside the EU controlled by EU nationals if their vessels are registered in the EU and any natural person within the EU acting in a professional capacity.

The EU Blocking Regulation purports to offer some protection to EU operators against the severe consequences of non-compliance with the US sanctions.  The Blocking Regulation provides that any foreign judgment, award or decision based on US sanctions is unenforceable in the EU and that the EU parties can claim compensation before EU courts for any damages caused by US sanctions. Notwithstanding these protections, we know that the US sanctions can have a devastating effect on company business and the prospects of recovering those losses under the EU Blocking Regulation are not straightforward.

The EU Blocking Regulation does not require EU operators to continue doing business with Iran at all cost. EU operators can ask for an authorization to comply with US secondary sanctions if not doing so would seriously damage their interests or those of the EU. Crucially, EU Operators will not be forced to continue business with Iran if they decide not to on the basis of their assessment of the economic situation.

In summary, for US entities and their subsidiaries, Iran is effectively closed for business, although it is essential to obtain US law advice in each specific situation. Businesses based in the Middle East that do not fall under the ambit of the EU Blocking Regulation are advised to observe the US secondary sanctions and to avoid engaging in activities prohibited by those sanctions. However, the position of those subject to the EU Blocking Regulation, is difficult because they are likely to find themselves caught between the two regimes and have to be very careful in navigating this situation.