EU Blocking Statute: Toward Enhanced Enforcement?

What is the European Union (EU) Blocking Statute?

• Adopted in 1996, the EU Blocking Statute aims to protect EU operators against extraterritorial sanctions adopted by third countries, that is, against sanctions affecting the operations of the EU operators despite not having a nexus to the regulating country (Blocked Sanctions). Blocked Sanctions currently cover certain U.S. sanctions against Cuba and Iran listed in the Annex to the EU Blocking Statute.
• The EU Blocking Statute counters Blocked Sanctions by (1) prohibiting EU operators from complying, directly or indirectly, with any requirements or prohibitions resulting from Blocked Sanctions or actions based thereon or resulting therefrom; (2) nullifying the effects in the EU of foreign court rulings or administrative decisions based on Blocked Sanctions; and (3) allowing EU operators to recover damages caused by Blocked Sanctions. In case of risk of serious damage to the interests of EU operators or the EU, the EU operators concerned may exceptionally request to the European Commission (Commission) for an authorization to comply with Blocked Sanctions. EU operators should also notify the Commission of their economic and financial interests affected by Blocked Sanctions.
• The EU Blocking Statute applies to EU operators, that is, (1) EU nationals, even when acting from abroad, and (2) entities incorporated in the EU, including EU subsidiaries of U.S. holdings. The EU Blocking Statute does not apply to entities established in the U.S. even if owned by EU operators. EU operators, however, should bear in mind that they are required to comply, directly or indirectly, with the EU Blocking Statute. Depending on circumstances, they could hence be deemed in breach of the EU Blocking Statute for acts of their U.S. subsidiaries.

How has the EU Blocking Statute been implemented and enforced to date?

• So far, the EU Blocking Statute has proven of limited efficacy. Its implementation and enforcement is left to EU Member States, with some imposing criminal liability, others mere administrative fines, and some not imposing fines at all, for breaches of the EU Blocking Statute. The exact scope of some of the rights and obligations set out in the EU Blocking Statute might seem ambiguous, and there have been a limited number of disputes concerning the EU Blocking Statute before EU courts, leaving EU operators with little practical guidance on compliance. Those ambiguities, combined with the overall strong U.S. sanctions enforcement landscape, have made EU operators, when forced to choose, inclined to comply with U.S. Blocked Sanctions in lieu of the EU Blocking Statute.
• A report of the Commission published in September 2021 on the implementation and application of the EU Blocking Statute (Report) outlined the challenges relating to an effective application of the EU Blocking Statute. The Report indicates that between August 1, 2018, and March 1, 2021:
  
  a. The Commission received only about 63 notifications concerning the impact of Blocked Sanctions on EU operators (35 related to U.S. sanctions against Cuba, and 28 related to U.S. sanctions against Iran). According to the Commission, these notifications suggest that despite the EU Blocking Statute, Blocked Sanctions continue to (1) significantly affect EU operators (e.g., by restricting access to daily banking or causing business partners to terminate business relationships) and (2) disincentivize investments and business in the countries targeted by Blocked Sanctions.
  
  b. There have been 10 recent or ongoing disputes concerning the EU Blocking Statute before EU Member State courts (including France, Germany, Italy, and the Netherlands). These cases demonstrate the tension between countering Blocked Sanctions and leaving EU operators free to take business decisions based on a risk assessment they deem appropriate. In a few reported cases, nonetheless, EU Member State courts ordered compliance with the EU Blocking Statute by, for example, resuming contracts terminated because of Blocked Sanctions.
  

Will the recent ruling of the Court of Justice give teeth to the EU Blocking Statute?

• On December 21, 2021, the Court of Justice of the EU (CJEU) for the first time clarified some of the provisions of the EU Blocking Statute, including the prohibition to comply with Blocked Sanctions (Bank Melli Iran v Telekom Deutschland GmbH, C-124/20).
• The question before the CJEU concerned a dispute whereby a German company (Telekom Deutschland GmbH) had terminated its contracts with the German branch of Iranian Bank Melli following the reimposition of U.S. sanctions against Iran in 2018. The CJEU provided the following clarifications:
  
  a. The prohibition to comply with Blocked Sanctions is broad. To be triggered, the prohibition does not require that a foreign judicial or administrative authority orders an EU operator to comply with Blocked Sanctions. It suffices that the EU operator itself takes actions to avoid potential legal consequences under Blocked Sanctions. According to the CJEU, a narrower scope of the prohibition would defeat the objective of the EU Blocking Statute to counter the effects of Blocked Sanctions.
  
  b. The EU Blocking Statute can be directly invoked in civil proceedings before EU Member State courts. In particular, (foreign) complainants may challenge before Member State courts actions by EU operators that give effect to Blocked Sanctions under the EU Blocking Statute. The reason for this, according to the CJEU, is that the EU Blocking Statute is a regulation directly applicable in all EU Member States and sets out a clear, precise, and unconditional prohibition to comply with Blocked Sanctions.
  
  c. The EU Blocking Statute does not require EU operators to show that their business decisions are compliant with the EU Blocking Statute in their interactions with business partners. However, if there is a prima facie case that an EU operator complied with Blocked Sanctions in breach of the EU Blocking Statute, the EU operator would need to establish to the requisite legal standard that its action was not intended to comply with Blocked Sanctions. While the CJEU did not elaborate on what “the requisite legal standard” is, Advocate General Gerard Hogan, in his legally non-binding opinion of May 12, 2021, suggested that an EU operator would need to “demonstrate that it is actively engaged in a coherent and systematic corporate social-responsibility policy (CSR) which requires them, inter alia, to refuse to deal with any company having links with” the regimes targeted by Blocked Sanctions.
  
  d. The EU Blocking Statute does not preclude, as a remedial measure, the annulment of an act carried on in breach of the EU Blocking Statute (e.g., an order to resume a business relationship terminated to comply with Blocked Sanctions), subject to proportionality. The interests protected by the EU legal order, including the objective pursued by the EU Blocking Statute, must be balanced with an EU operator’s freedom of doing business and the probability that the EU operator is exposed to severe economic losses. In carrying out such balancing exercise, courts should consider whether the EU operator sought authorization to comply with Blocked Sanctions before the Commission.

• This CJEU’s preliminary ruling is expected to have significant implications for the application and enforcement of the EU Blocking Statute – though not without challenges. The CJEU’s ruling (1) may encourage (foreign) parties to challenge actions by EU operators intended to comply with Blocked Sanctions, (2) stresses that EU operators cannot simply evoke their freedom of doing business to opt to comply with Blocked Sanctions, and (3) reminds EU operators that they can seek authorization by the Commission to comply with Blocked Sanctions where not doing so would have serious detrimental effects. It, however, leaves a few questions open, including what would be the legal standard for EU operators to be considered compliant with the EU Blocking Statute.
  

Reforms in the making?

• Besides the case law mentioned above, the Commission is considering (i) ways to reform the EU Blocking Statute to reinforce its effectiveness and (ii) introducing additional tools to further strengthen the EU response to Blocked Sanctions.
• In a communication of January 19, 2021, for a strategy to promote the EU’s resilience in economic and financial matters (Communication), the Commission announced that it was considering reforming the EU Blocking Statute, including by (1) adding deterrence and counteracting mechanisms and (2) streamlining the application of the EU Blocking Statute, including by reducing compliance costs for EU operators. Following the Communication, the Commission published an impact assessment and launched a public consultation to seek stakeholders’ feedback. It is now expected to table a proposal for reforming the EU Blocking Statute in the second quarter of 2022. Likely amendments to the EU Blocking Statute include the following:
  
  a. Powers for the Commission to apply deterrent and counteracting measures against third countries applying Blocked Sanctions or persons benefiting from Blocked Sanctions, including (1) restrictions from access to the EU capital markets and/or EU public tenders, (2) visa limitations for individuals, and (3) financial or other support to EU operators engaging in trade prohibited under Blocked Sanctions.
  
  b. Measures to simplify compliance with the EU Blocking Statute, including (1) clarification of the prohibition to comply with Blocked Sanctions, with a possible specific focus on strategic sectors, (2) streamlined processing of requests for authorization to comply with Blocked Sanctions, and (3) easing of damage recovery.
  
  
• The Commission is also considering further tools to strengthen the EU response to Blocked Sanctions and general economic coercion by third countries:
  
  a. The Communication refers to tools to ensure uninterrupted flow of essential financial services, including payments, between the EU and persons subject to Blocked Sanctions. Such tools would allow EU businesses to conduct transactions without having to rely on foreign (e.g., U.S.) financial systems, with the risk of being caught by Blocked Sanctions. Following the re-imposition of U.S. sanctions against Iran in 2018, a few EU Member States, with the support of the Commission, had launched the Instrument in Support of Trade Exchanges (INSTEX), a special-purpose vehicle to facilitate payments for legitimate trade between the EU and Iran. INSTEX may be an example of the tools the Commission envisages.
  
  b. The Communication also refers to investment screening as an additional tool for the EU and its Member States to counter the effects of Blocked Sanctions. In 2019, the EU adopted a regulation establishing a coordination mechanism between EU Member States and the Commission for screening investments on national security and public order grounds (see Sidley Update of March 2019 and Sidley Update of September 2021). The Communication suggests that when reviewing relevant investments, competent authorities should take account of the likelihood that a transaction results in the unlawful application of Blocked Sanctions to an EU target. For instance, the fact that, following the transaction, the EU target could become more prone to abide by Blocked Sanctions may endanger its capacity to maintain critical infrastructure in the EU or ensure security and continuity of supply of critical inputs to the EU.
  
  c. On December 8, 2021, the Commission also published a proposal for an anti-coercion instrument (ACI). The ACI is meant to counter interference in the legitimate sovereign choices of the EU or its Member States by third countries that apply or threaten measures affecting trade or investment to coerce a particular course of action. The ACI would apply to a broad range of third party measures, potentially including Blocked Sanctions. Based on the current proposal, having (1) determined that a third party measure is a coercive measure, and (2) failed to resolve the matter by engaging with the third country concerned (e.g., via direct negotiations, mediation, or international adjudication), the Commission could adopt countermeasures necessary to protect the interests and rights of the EU and its Member States. Countermeasures could take the form of, among others, tariff or quantitative restrictions to imports or exports, restrictions on services or investments, or exclusion from public procurement; they could be adopted against the third country concerned or certain individuals or businesses.