A recent opinion from the Court of Justice of the European Union ("CJEU") has potentially opened up for scrutiny the ways in which UK and EU companies had previously sought to resolve the sanctions dilemma created by the US sanctions regime and the EU Blocking Statute.
Historically, EU and UK companies have taken a conservative approach when dealing with entities or individuals that are subject to US sanctions, preferring to sever ties rather than risk penalisation by the US. However, following a recent opinion from the CJEU, they may now need to prove that any decision to de-risk their business does not breach the restrictions contained in the EU Blocking Statute.
The Blocking Statute is part of EU law retained by the UK, so this opinion from the CJEU is directly applicable and will have repercussions for individuals and companies operating from the UK. Under UK law, a breach of the Blocking Statute is a criminal offence and carries the penalty of an unlimited fine.
The EU Blocking Statute
The US has had sanctions in place against Cuba and Iran for many years.
Most of the restrictions in these sanctions only applied to those operating within the US jurisdiction. However, some targeted the activities of foreign companies outside of the territorial United States. The EU saw this as the US overstepping its jurisdiction, and an unacceptable restriction on international trade. In response, in 1996 the EU enacted the Blocking Statute, Council Regulation (EC) No. 2271/96.
This legislation aimed to protect EU citizens and companies from the effects of the extraterritorial application of specific US sanctions by prohibiting them from complying with the sanctions without authorisation from the European Commission. In practical terms, however, it places European and UK companies on the horns of a dilemma, caught between two conflicting legal regimes.
The Opinion from the Court of Justice of the European Union
On 12 May 2021, Advocate General Gerard Hogan of the CJEU issued his opinion in Bank Melli Iran, Aktiengesellschaft nach iranischem Recht v Telekom Deutschland GmbH (Case C‑124/20).
In this opinion he advised the CJEU on the approach to be taken by national courts when applying the EU's Blocking Statute. This opinion is therefore significant for any companies (or individuals) wishing to do business in the jurisdictions covered by the Regulation.
The case involved a German telecommunications company, Telekom Deutschland GmbH, which has significant US operations, and an Iranian bank, Bank Melli Iran. These parties entered into a framework agreement for the provision of telecommunications services. Following the Trump Administration's decision in 2018 to reinstate certain sanctions against Iran, Bank Melli was again placed on the sanctions list. Within 11 days of this designation, Telekom Deutschland gave notice to Bank Melli, and a number of other clients with connections to Iran, purporting to terminate all contracts between them with immediate effect. Bank Melli then initiated proceedings claiming this termination constituted an infringement of the Blocking Statute.
The claim worked its way through the German courts to the Hamburg Higher Regional Court, which requested a preliminary ruling on the interpretation of the Blocking Statute from the CJEU.
In his opinion the Advocate General came to the view that the provisions of the Blocking Statute were engaged. He therefore considered that Telekom Deutschland would need to provide sufficient, justified reasons for terminating the contract, which were not contrary to the Blocking Statute. Otherwise, this would indeed be a breach of the Blocking Statute, and the national court should order the company to maintain the contractual relationship. The Advocate General noted that this was a difficult position, with the consequence that companies "would then be obliged to remain contractually bound to a customer whose custom it no longer desires", but concluded that this was nevertheless the effect of the Regulation.
Historically, European companies have employed approaches similar to that taken by Telekom Deutschland, cutting ties with Iranian entities in order to avoid penalties for breaches of US sanctions on the basis of ill-defined reasons.
However, if Advocate General Hogan's opinion is adopted by the CJEU, this approach may well be challenged. As a result, companies can expect to face greater scrutiny as to their compliance with the terms of the Blocking Statute. It did not escape the Advocate General's notice that Telekom Deutschland sought to terminate its contract with Bank Melli within two weeks of the renewed sanctions coming into force, and that it wrote in similar terms to other customers with significant Iranian connections.
To protect their position as far as possible, companies need to ensure that any de-risking decision is taken for well-defined reasons. The Advocate General's opinion identified that many companies may have ethical qualms about doing business with countries such as Iran. However, in order to demonstrate that any decision to terminate a contract was made on these grounds, the company would need to show that it had actively engaged in a coherent and systematic corporate social responsibility policy. In short, this opinion means that companies need to not simply give reasons for a de-risking decision, but may also have to justify it.
It is therefore important for companies doing business in jurisdictions covered by the Blocking Statute to be aware of the friction between these two legal regimes and to seek advice at an early stage to mitigate any risks.