Today, any operations within the shipping and trade industry, and in consequence, the insurance industry which supports it, must include knowledge of and ensuring compliance with international sanctions. Failure to do so can result in serious fines and possibly penal sanctions.
Where a company has any international footprint - which is largely unavoidable in the shipping and trade industry - it can find itself exposed to various sanctions from different jurisdictions. That can be largely managed by keeping on top of what sanctions apply in different scenarios – however considerable problems occur when those sanctions conflict with one another.
Generally it is accepted in international law that a state's laws should apply to its territory - that is, anything that might take place within in its territories by anyone or actions taken by its citizens/companies registered in that state wherever they may be acting. For example, a foreign company would be subject to the UK sanctions regime if it were undertaking business in the UK; equally, a UK company would continue to be subject to the UK sanctions regime even though it might be conducting business outside of the UK.
US law however runs contrary to this generally accepted position and certain sanctions, known as secondary sanctions, have 'extra territorial' effect. This means that non-US companies or citizens can be in violation of such sanctions, even though they are not operating in the US. Therefore even though their activities might be perfectly legal in the jurisdiction that they are from/registered, or where they are operating, they will be in breach of US secondary sanctions. The effect is that US law can dictate activities beyond its borders.
The application of US sanctions to subsidiaries of US-based corporations established in Europe dates back to the early 1960s, but it became more problematic in the 1990s as the US sought to expand the effectiveness of their sanctions against Cuba, Iran and Libya. At that point, the EU sought to combat them by proposing a “Blocking Regulation” (Regulation 2271/96) in 1996. At that time it was never enacted as disagreements were eventually settled politically. However, the see-saw relationship between the US and Iran has brought this problem back into the limelight when the US withdrew from the JCPOA and re-imposed its Iranian sanctions, including those with extra-territorial effect. The EU responded by activating the Blocking Regulation in August 2018.
The Blocking Regulation is intended to protect EU individuals and companies by nullifying the effect of decisions made by third countries and allowing them to clawback damages in certain circumstances where they are affected by the third country sanctions. However it also operates by itself prohibiting any EU individual or companies from complying extra-territorial legislation. This may result in action against a company or individual if it could be shown, for example, that a decision to cease dealings with an Iranian individual or company, was taken to comply with US sanctions rather than a ‘legitimate’ business decision.
It is up to individual Member States as to how they implement the Blocking Regulation and so penalties for non-compliance can vary – however in the UK and Ireland, for example, there is the possibility of criminal sanctions (albeit whether there would be appetite for such a penalty is another matter). It is also open for individual operators to rely on a company’s non-compliance with the Blocking Regulation in order to compel them to comply with the Blocking Regulation (and therefore potentially violate US sanctions). This would seem unduly harsh on a company caught in the middle of extra-territorial US sanctions and the Blocking Regulation.
An effective solution?
In 2018, when the US withdrew from the JCPOA and re-imposed its Iranian sanctions, the EU reactivated the Blocking Regulation. However, while it was officially effective again, was it, and has it ever been, actually effective? Faced with a choice of the consequences of the Blocking Regulation and the (much mightier and fiercer) OFAC, most would choose not to get on the wrong side of OFAC. This has always been a problem for the EU.
The shortfalls of the Blocking Regulation were recently brought into light by Bank Melli v Telekom Deutschland, in which the opinion of Advocate General Hogan delivered some guidance on the regulation whilst at the same time offering some fairly blunt criticism of it.
The matter concerned telecom services provided in Germany by a German company, Telekom Deutschland (Telekom), to Bank Melli (Melli), an Iranian bank operating in Germany. Those services were “indispensable to [Melli’s] business activities”. Following the US withdrawal from the JCPOA, Melli was placed on a US list of sanctions which came into effect on 5 November 2018. US extra-territorial sanctions then became potentially applicable to Telekom and so Telekom gave notice of termination of all contracts with Melli with immediate effect, and subsequently sent additional notice of ordinary termination at the earliest possible date.
No reason for the termination was given, although the proximity to the re-imposition of US sanctions was telling. Nor, it might be noted, was there any instruction from the US authorities in any way that Telekom should terminate their contract with Melli.
First instance decision and appeal
The court of first instance ordered the defendant to perform the contracts until the expiry of the ordinary notice periods. It held that the ordinary termination by the defendant of the disputed contracts was valid and, in particular, did not infringe Article 5 of the EU Blocking Statute.
Melli appealed the decision, claiming that Telekom’s ordinary termination was motivated solely by their desire to comply with US sanctions, in violation of the Blocking Statute. The appeal court raised a number of questions to the European Court of Justice, to which Advocate General Hogan gave his opinion before the European Court addresses the case.
Whether the Blocking Regulation would operate only where the EU operator (Telekom) was subject directly or indirectly to an official or court order from the US?
AG Hogan commented that “the objective is to counteract the effect of the foreign legislation itself and not simply the effects of decisions giving effect to the obligations provided for in these laws.” Accordingly, he found that the Blocking Statute “applies even in the event that an operator complies with such legislation without first having been compelled by a foreign administrative or judicial agency to do so.”
Whether the Blocking Regulation overrode German national law that if a contract was being terminated, a reason for doing so was not needed (in particular whether the reason was to comply with US sanctions)?
The Blocking Regulation does not expressly state that a party must give reasons to justify the termination, however AG Hogan considered that this must be inferred from it – otherwise a party could give effect to the US sanctions and then simply remain silent. That requirement in the Blocking Regulation would override any conflicting national law.
Whether the ordinary termination in breach of the Blocking Regulation should be found to be ineffective or could the purpose of the regulation be satisfied through other penalties, such as fines?
AG Hogan noted that:
- It is for the national courts to apply the provisions of EU law (but they should be “effective, proportionate and dissuasive”).
- The Blocking Regulation does not specify what the consequences should be, but the Member State remains obliged to give full effect to EU law and must “redress the situation” which has arisen from the unlawful act committed in violating the Blocking Regulation.
- The Blocking Regulation prohibits any compliance with applicable US sanctions and only penalising a company for doing so would run contrary to that.
In those circumstances, he held that any contract terminated in breach of the Blocking Regulation “should be regarded as invalid and ineffective, with the consequence that national courts are obliged to treat the contractual relationship as having continued on the same commercial terms as those previously existing.”.
AG Hogan gave the Blocking Regulation a broad meaning, in order that it would give effect to its principled intentions. However in his concluding comments, he very frankly stated that it gave him no pleasure to reach the decision that he did and that:
His opinion is not binding on the European Court of Justice (with its judgement still to follow) but it will of course take guidance from it. It is a finding that goes to highlight a serious risk for those operating in international trade (and their insurers). Companies are well advised to steer clear of the wrong side of OFAC but this opinion shows that by doing so, an entity may well face significant, and costly problems, in their own jurisdiction, including injunctions to continue to perform unless they can demonstrate that lawful termination was not related to US sanctions.
With Brexit now behind us, what is the relevance of the EU Blocking Regulation in the UK? Following the end of the transition period, the UK has implemented its own sanctions’ law and - for now - largely adopts the European position, including effectively adopting the Blocking Regulation (The Protecting against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2020). UK companies therefore have their own sanctions regime (including an almost identical Blocking Regulation). Moreover, many UK companies in this industry will have an international footprint and their operations in the EU will mean that their branches, subsidiaries or associate offices could also be exposed to the EU Blocking Regulation.
While the findings from AG Hogan - and indeed any decisions from the European Court of Justice - are no longer binding in the UK, the UK courts will no doubt still take this into consideration, meaning that UK companies could find themselves in similar difficulties as Telekom did.
Clients should be aware of the minefield that they are exposed to when dealing with sanctions. Many will have sanctions’ policies in place and thought should be given to how these are drafted and whether that might later be used as evidence against them in future actions. Careful wordings might mitigate against that risk. The same can be said for sanctions-related contractual provisions (as discussed in our article on Mamancochet Mining Ltd v Aegis Managing Agency Ltd ).
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