In August 2021, we published a post about the European Commission’s roadmap / inception impact assessment in relation to its review of the current Blocking Statute (Regulation 2271/96). On 31 August 2021, the European Commission closed the initial feedback period for this impact assessment and, as a next step, has now launched a public consultation process seeking further feedback on the Blocking Statute. The questionnaire can be accessed here and will remain open to all citizens and organisations (both in the EU and outside) until 4 November 2021.
By way of background, the Blocking Statute was originally enacted in November 1996, in response to US sanctions against Cuba, Iran and Libya. In its current version, it aims to provide protection against, and counteract the effect of, certain listed US sanctions laws with extraterritorial effect imposed in relation to Iran and Cuba. A summary of the main provisions of the Blocking Statute can be found in our June 2018 briefing. In particular (as discussed further below) the Blocking Statute imposes an obligation on EU persons to inform the Commission if extraterritorial sanctions directly or indirectly affect their economic or financial interests.
The new public consultation questionnaire invites feedback on the Commission’s proposed amendments to the Blocking Statute. These include implementing additional deterrence mechanisms and streamlining the application of the Blocking Statute, for example by reducing compliance costs for EU persons and businesses.
In addition to launching this public consultation, on 3 September 2021 the Commission published a report into the application and effects of the Blocking Statute. This report sets out the extra-territorial effects of the Blocking Statute that have been notified to the Commission for the period 1 August 2018 to 1 March 2021. In total, the Commission received 63 notifications (35 related to US sanctions against Cuba and 28 against Iran) from both individuals and companies based in 12 different Member States. The report categorises these notifications as follows:
- Adverse effects related to banking activities or other financial services: the Commission received 18 notifications in this regard and the adverse effects included: (i) the blocking of banking operations relating to Cuba or Iran, (ii) excessive delay in processing unrelated banking operations, (iii) termination of the banking relationship, and (iv) inability to open or have a functioning bank account.
- Adverse effects caused by one or several business partners: the Commission received 15 notifications in relation to adverse effects flowing from the unilateral termination of a business relationship by a business partner across a range of industry sectors, often in breach of contract. These effects included, for example, the inability to export/deliver goods to Iran/Cuba, and the report states that in some cases the express or implied reasons for the termination of these relationships related to Cuba/Iran being the country of incorporation of the parent company of the notifying EU company.
- Administrative and judicial proceedings in the US: in total, 28 notifying parties informed the Commission or the relevant national competent authority about litigation before a US judicial authority or proceedings before a US administrative authority. These included the commencement, or threat to initiate, proceedings relating to the alleged trafficking of expropriated properties in Cuba under the US Helms-Burton Act. The report notes that, in two cases, the US courts accepted to stay proceedings pending an application by the EU defendant for authorisation for the Commission under the Blocking Statute.
- Reluctance to engage in business in countries targeted by extra-territorial laws: very few companies notified the Commission of their reluctance to invest or engage in “legitimate and lawful” business in Cuba/Iran due to US sanctions. Certain notifying parties sought reassurance and support before making an investment decision. The report notes that there may be many more EU persons and companies sharing these concerns.
Interestingly, the Commission’s report also provides greater visibility on EU and national court proceedings regarding the Blocking Statute. At an EU level, there are two cases currently waiting to be heard. These involve: (i) a request for a preliminary ruling in relation to a dispute over the termination of telecommunications services (the applicant is an Iranian bank incorporated under Iranian law), and (ii) an action for annulment by the investment arm of Iran Foreign Investment Company challenging the Blocking Statute authorisation granted by the European Commission to Clearstream Banking AG on the grounds of infringement of the plaintiff’s right to be heard and infringement of the obligation to state reasons. The report states that, once decided, these cases will bring welcome clarity on how certain provisions of the Blocking Statute will likely be interpreted and implemented in the future.
At a national court level, the Commission was made aware of ten legal proceedings that made reference to the Blocking Statute. These took place in Germany, the Netherlands, Italy and France:
- Germany: the key case concerned a bank terminating its services to an international logistics company, citing the risk of the potential application of US extra-territorial sanctions. The German court held that this was lawful: the Blocking Statute did not oblige EU companies to continue trading with Iranian entities when doing so would “run against their commercial interests“.
- The Netherlands: the case concerned the supply of software by Exact B.V. (EBV) to PAM International N.V. (PAM) for distribution by PAM to companies in Cuba. EBV terminated its distribution agreement with PAM following EBV’s acquisition by a US-based investment company. However, the court ordered EBV to continue providing its services and noted that EBV might have breached the Blocking Statute by terminating the agreement.
- Italy: in the first case, a bank notified its client (a company controlled by partners in Iran) that it might terminate its banking services. The company initiated interim relief proceedings for an order that the bank must continue its services. An Italian court held that the bank terminating its services would amount to a breach of the Blocking Statute and issued a provisional injunction against the bank to prevent termination.
In the second case, an Italian company concluded a supply contract with an Iranian company that was later listed by the US as a specially designated national. The payment by the Iranian company was frozen by the Italian company’s bank. The Italian court ordered the release of the frozen funds, finding that the US sanctions had no effect in the EU, as per the Blocking Statute.
- France: after the conclusion of a contract for the provision of goods to Iran, a company was unable to receive payment and faced several closures of its bank account. Its bank invoked various reasons, including compliance with US sanctions but, in the most recent update provided to the Commission, the French court of first instance found that the bank should not have closed the company’s account and terminated the banking services without notice. However, it found that the termination itself was legitimate on the grounds that the bank faced economic and strategic constraints, including the possible imposition of US sanctions.
The Commission’s report therefore indicates a somewhat mixed picture in relation to Member State approaches to the Blocking Statute. The limited number of examples provided also supports the broader understanding among companies and their advisers that enforcement of the Blocking Statute has historically been relatively limited.
We will continue to monitor developments in this area, and encourage you to subscribe to be kept informed of latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.