Why you should care
Businesses have a tough decision: Obey European or American rules.
The EU is finalizing its plans to mitigate punitive measures as the Trump administration prepares to impose a new wave of sanctions next month and in November. The first batch will target trading in cars, gold and other metals; the second Iran’s oil exports and transactions with the central bank.
The main weapon the EU has developed is an updated version of a “blocking statute” originally drawn up in the 1990s to counter U.S. sanctions on Iran, Libya and Cuba. The law forbids European companies from complying with the U.S. measures and allows them to recover damages arising from the sanctions “from the person causing them.”
But lawyers and diplomats say there are doubts over the effectiveness of a tool that has never been properly tested.
“It’s a European policy that’s totally in contradiction to the American policy: that doesn’t happen very often,” says Jean De Ruyt, a senior adviser at Covington & Burling, the international law firm, and a former Belgian ambassador to the EU.
Any important European company will be afraid … because the U.S. arm is long.
Jean De Ruyt, Covington & Burling
The dilemma was created after Donald Trump in May withdrew the U.S. from the 2015 nuclear agreement Iran signed with world powers, including the EU, the U.K., France and Germany. The European signatories are desperate to save the deal, and believe it is critical that the republic is still able to reap an economic dividend from the accord.
But Trump has suggested his administration will offer few waivers to companies. The U.S. president used his toughest language yet against the Islamic regime this week, warning Iran it would face severe “consequences” if it threatened America. Hassan Rouhani, Iran’s president, this weekend said that reimposing new sanctions would equate to a “declaration of war against” the nation.
There are also trade tensions between the U.S. and the EU over Trump’s decision to impose tariffs on steel imports to America.
Federica Mogherini, the EU’s foreign policy chief, acknowledged last week that the EU faced a “difficult exercise” in its response to the sanctions on Iran because of the “weight of the U.S. in the global economy and financial system.”
“But we are determined to preserve this deal,” she said.
Brett Hillis, partner and sanctions expert at Reed Smith, the international law firm, says there was nothing in the EU plans that would stop a “run for the hills” by European businesses active in Iran. He said the blocking statute was “a measure which indicates the EU’s displeasure but in no way goes far enough to move the calculus for European companies.”
Any punishment threatened in Europe for complying with the sanctions is likely to pale against the potential retribution in the U.S. for ignoring them. In 2015, a U.S. court ordered BNP Paribas, the French bank, to pay almost $9 billion in fines and forfeitures over alleged violations of sanctions against Iran, Sudan and Cuba.
European companies would also face the threat in the U.S. of action against individual executives, exclusion from public procurement and other opportunities lost because of reputational damage.
To enforce the blocking statute, European authorities would also need to prove a company had violated it by withdrawing from Iran. Businesses could advance a range of defenses, including that they were leaving the Islamic republic for commercial reasons.
European companies including Peugeot parent PSA and French oil major Total have already said they will halt their operations in Iran unless they secure a waiver. It emerged this month that the U.S. has rebuffed a European request for a carve-out from the renewed sanctions of crucial industries, including finance, energy and health care.
Roger Matthews, a senior lawyer at Dechert, says that if the EU were to give the blocking statute “enough teeth to have the effect they want, it’s just going to be a compliance nightmare with added legal expense.” He adds that European Commission guidelines expected soon should provide more clarity.
Other EU proposals to insulate companies by offering them non-dollar-denominated finance lines through institutions such as the European Investment Bank have run into troubles of their own.
Werner Hoyer, EIB president, said last week that it would “risk the business model of the bank” if it played an “active role” in Iran.
European diplomats hope they can still make progress in other areas, such as providing bilateral financing lines to Tehran and measures to make payments for oil directly to Iran’s central bank. The U.S. might also still soften its stance: Secretary of State Mike Pompeo hinted this month that Washington may yet grant individual country requests for sanctions waivers.
But without such carve-outs, the impact of the EU countermeasures is likely to be largely symbolic and insufficient to persuade many big businesses to engage with Iran. “Any important European company will be afraid,” says De Ruyt. “Because the U.S. arm is long.”
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