* Authors: Judith Alison Lee, Co-Chair, International Trade Practice, email@example.com; Adam Smith, Esq., firstname.lastname@example.org; and Patrick Doris, Esq., email@example.com. All of Gibson Dunn.
[Part II was published in yesterday’s Daily Bugle.]
(III) EUROPEAN UNION DEVELOPMENTS AND ENFORCEMENT
In 2018, the European Union (“EU”) broadly stayed the course it set in 2017 and modestly extended the scope of its sanctions programs on Iran and Russia. Additional sanctions were adopted, namely with respect to Venezuela and Mali.
The most significant sanctions-related development this year at the EU level has been that, following the unilateral withdrawal of the United States from the JCPOA, the so-called “EU Blocking Statute” was expanded, prohibiting EU nationals from complying with requirements or prohibitions contained in those sanctions or applied by means of rulings under those sanctions. While there has not been enforcement action to date, the first lawsuits and judgments making reference to the EU Blocking Statute have begun to emerge. This divergence between U.S. and EU policy on Iran sanctions has caused and is likely to cause in the future significant compliance hurdles for multinational companies.
(A) Legislative Developments
In response to the U.S. decision to abandon the JCPOA, on August 6, 2018 the European Union enacted Commission Delegated Regulation (EU) 2018/1100 (the “Re-imposed Iran Sanctions Blocking Regulation”), which amended the EU Blocking Statute. The EU Blocking Statute is a 1996 European Commission Regulation (EC) No 2271/96 that was designed as a countermeasure to what the EU considers to be the unlawful effects of third-country (primarily U.S.) extra-territorial sanctions on “EU operators.” The combined effect of the EU Blocking Statute and the Re-imposed Iran Sanctions Blocking Regulation is to prohibit compliance by EU entities with U.S. sanctions which have been re-imposed following the U.S. withdrawal from the JCPOA.
The EU Blocking Statute applies to a wide range of actors including:
– any natural person being a resident in the EU and a national of an EU Member State;
– any legal person incorporated within the EU;
– any national of an EU Member State established outside the EU and any shipping company established outside the EU and controlled by nationals of an EU Member State, if their vessels are registered in that EU Member State in accordance with its legislation;
– any other natural person being a resident in the EU, unless that person is in the country of which he or she is a national; and
– any other natural person within the EU, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control of an EU Member State, acting in a professional capacity.
Accompanying the Blocking Statute, the EU issued a Guidance Note: Questions and Answers: adoption of update of the Blocking Statute, which notes that subsidiaries of U.S. companies formed in accordance with the law of an EU Member State and having their registered office, central administration or principal place of business within the EU are subject to the EU Blocking Statute; although mere branch offices of U.S. companies, without separate legal personality, are not.
The EU Blocking Statute requires (Article 2) parties to which it applies whose economic and/or financial interests are affected, directly or indirectly, by certain extra-territorial U.S. sanctions laws (including those re-imposed in 2018) or by actions based thereon or resulting therefrom, to inform the European Commission accordingly within 30 days from the date on which it obtained such information. With respect to companies, this obligation applies to the directors, managers and other persons with management responsibilities. We refer to this as the “Notification Obligation.”
The EU Blocking Statute also prohibits (Article 5) EU operators from complying, whether directly or through a subsidiary or intermediary, and whether actively or by omission, with any prohibition or requirement contained in a set of specific extra-territorial laws or any decisions, rulings, or awards based on those laws. However, the EU Blocking Statute does also provide for authorization to engage in such activities.
The U.S. sanctions laws to which the EU Blocking Statute applies are explicitly listed, and include six U.S. sanctions laws and one set of U.S. regulations (OFAC’s Iranian Transactions and Sanctions Regulations).
The Blocking Statute entered into effect on August 7, 2018 and does not allow for any grandfathering of pre-existing contracts or agreements. The EU Guidance noted above indicates that EU operators are prohibited from even requesting a license from the United States to maintain compliance with U.S. sanctions. Requesting such permission-without first seeking authorization from the European Commission or a competent authority in a Member State to apply for it-is tantamount to complying with U.S. sanctions.
The Blocking Statute also provides that decisions rendered in the United States or elsewhere made due to the extraterritorial measures blocked by the EU Blocking Statute cannot be implemented in the EU. This means, for instance, that any court decision made in light of the extraterritorial measures cannot be executed in the EU, even under existing mutual recognition agreements.
Finally, the EU Blocking Statute allows EU operators to recover damages arising from the application of the extraterritorial measures. Though it is unspecified how this would work under the various laws of the EU member states, it appears to allow an EU operator suffering damages because of a company’s compliance with the U.S. sanctions to assert monetary damage claims. For instance, if a European company has a contract to provide certain goods to Iran, non-fulfillment of that contract to comply with U.S. sanctions would be a violation of the Blocking Statute. However, if some of the European company’s goods are supplied from companies that decided to comply with U.S. sanctions and, therefore, refuse to further supply these goods, this may result in the European company not being able to meets its obligations vis-à-vis its Iranian customer. In such a case, the Iranian company could sue the European company for breach of contract, and the European operator could in turn sue its supplier for the damages caused due to the supplier’s compliance with the extraterritorial U.S. sanctions.
We have described the generally available possible options for affected companies here.
As an EU Regulation, the EU Blocking Statute is directly applicable in the courts of any Member State without the need for domestic implementing legislation. However, it is the competent domestic authorities of the EU Member States (not the European Commission) that are responsible for the enforcement of the EU Blocking Statute, including implementation of penalties for possible breaches. Such penalties are laid down in national legislation and vary by Member State. Some EU member states have in place, or have introduced, criminal offences applicable to violations of the EU Blocking Statute (notably the UK, Ireland and Germany); others maintain administrative penalties, but not criminal offences (notably Spain and Italy). Certain member states, notably France and Belgium, appear not to have introduced legislation to implement the EU Blocking Statute.
Since March 2014, the EU has progressively imposed EU Economic and EU Financial Sanctions against Russia. The EU Russia Sanctions were adopted in response to deliberate destabilization of (particularly Eastern) Ukraine and the annexation of Crimea.
EU Russia Economic Sanctions include an arms embargo, an export ban for dual-use goods for military use or military end users in Russia, limited access to EU primary and secondary capital markets for major Russian majority state-owned financial institutions and major Russian energy companies, and limited Russian access to certain sensitive technologies and services that can be used for oil production and exploration.
In particular, in broad alignment with U.S. sanctions, EU Russia Economic Sanctions prohibit the sale, supply, transfer, or export of products to any person in Russia for oil and natural gas exploration and production in waters deeper than 150 meters, in the offshore area north of the Arctic Circle and for projects that have the potential to produce oil from resources located in shale formations by way of hydraulic fracturing. The provision of associated services (such as drilling or well testing) is also prohibited, while authorization must be sought for the provision of technical assistance, brokering services, and financing relating to the above.
However, there are certain noteworthy differences in the nuances. The above-detailed latest round of U.S. Russia Sectoral Sanctions due to CAATSA have created some disparities between the U.S. and the EU regimes. The EU Russia Economic Sanctions are currently in place until July 31, 2019. Also, the EU Russia Financial Sanctions were further extended in September 2018 until March 15, 2019. As of now, 164 people and 44 entities are subject to a respective asset freeze and travel ban.
For those subject to EU Financial Sanctions, EU member states may authorize the release of certain frozen funds or economic resources to satisfy the persons and their dependents’ basic needs, for payment of reasonable professional fees, for payment for contracts concluded before the sanction and for claims secured to an arbitral decision rendered prior to the sanction.
In a recent development, the EU on January 21, 2018 targeted with EU Financial Sanctions two senior Russian military intelligence officials and two of their officers accused of the poisoning of a former Russian double agent in Britain, Mr. Skripal, and his daughter.
The EU still does not recognize the annexation of Crimea and Sevastopol by Russia, and the EU imposed broad sanctions against these territories in 2014. The EU Crimea Sanctions included an import ban on goods from Crimea and Sevastopol, broad restrictions on trade and investment related to economic sectors and infrastructure projects in Crimea and Sevastapol, an export ban for certain goods and technologies to Crimea and Sevastapol and a prohibition to supply tourism services in Crimea or Sevastopol. On June 18, 2018, the EU Council extended the EU Crimea Sanctions until June 23, 2019. These restrictions are similar to those in place in the United States.
Following the U.S. lead on Venezuela sanctions, on November 13, 2017, the EU had decided to impose an arms embargo on Venezuela, and also to introduce a legal framework for travel bans and asset freezes against those involved in human rights violations and non-respect for democracy or the rule of law. Subsequently, on January 22, 2018, the EU published an initial list of seven individuals subject to these sanctions.
On June 25, 2018, the EU added an additional eleven individuals holding official positions to the EU Venezuela Financial Sanctions for human rights violations and for undermining democracy and the rule of law in Venezuela.
Though these measures are not yet as severe as U.S. measures on Venezuela-and the EU stated that the sanctions can be reversed if Venezuela makes progress on these issues- the Council was also explicit previously in its warning that the sanctions may be expanded if the situation worsens.
On November 11, 2018, the EU Venezuela Sanctions were prolonged until November 14, 2019.
(4) North Korea
As noted in last year’s sanction update and above with respect to U.S. measures, the events on the Korean Peninsula in 2017 also gave rise to significant new EU measures against North Korea. While the first half saw a further increase in EU North Korea Financial and Economic Sanctions, the second half of 2018 eased some of the tension due to, inter alia, high-level meetings between South and North Korean, the United States, and China, without however (yet) changing the EU North Korea Sanctions Framework.
On January 8, 2018, the EU Council added 16 persons and one entity to the EU North Korea Financial Sanctions, making them subject to an asset freeze and travel restrictions. This decision implemented a part of the sanctions imposed by the UN Security Council on December 22, 2017 with resolution 2397 (2017).
On January 22, 2018, the EU Council autonomously added 17 citizens of the DPRK to the EU North Korea Financial Sanctions, due to their involvement in illegal trade activities and activities aimed at facilitating the evasion of sanctions imposed by the UN.
On February 26, 2018, the EU implemented further UN Security Council resolution 2397 (2017) and accordingly expanded its EU North Korea Economic Sanctions regime and strengthened the export ban on North Korean refined petroleum products by reducing the amount of barrels that North Korea may export from two million barrels to 500,000 barrels per year; banned imports of North Korean food and agricultural products, machinery, electrical equipment, earth, stone, and wood; banned exports to North Korea of all industrial machinery, transportation vehicles as well as iron, steel, and other metals; introduced further sanctions against vessels where there are reasonable grounds to believe that the vessel has been involved in the breach of UN sanctions; and demanded the repatriation of all North Korean workers abroad within 24 months.
On April 6, 2018, the EU added one person and 21 entities to the EU North Korea Financial Sanctions, implementing a decision of March 30, 2018 by the UN Security Council Committee. Also, the EU has implemented the asset freeze targeting 15 vessels, the port entry ban on 25 vessels and the de-flagging of 12 vessels.
On April 19, 2018, the EU-in yet another round of autonomous EU North Korea Sanctions-added four persons to the EU North Korean Financial Sanctions. The four individuals were targeted due to their involvement in financial practices suspected of contributing to the nuclear-related, ballistic-missile-related or other weapons of mass destruction-related programs of North Korean.
By the end of 2018, accordingly, 59 individuals and 9 entities were designated autonomous by EU North Korea Financial Sanctions; and in addition, 80 individuals and 75 entities are subject to EU Financial Sanctions due to the implementation of respective sanctions of the UN.
On September 28, 2017, the European Union Council Decision (CFSP) 2017/1775 implemented UN Resolution 2374 (2017), which imposes travel bans and assets freezes on persons who are engaged in activities that threaten Mali’s peace, security, or stability. Interestingly, the imposition of this regime was requested by the Malian Government, due to repeated ceasefire violations by militias in the north of the country. Affected persons will be determined by a new Security Council committee, which has been set up to implement and monitor the operation of this new regime, and will be assisted by a panel of five experts appointed for an initial 13-month period. For a long time no individuals were actually designated.
On December 20, 2018, the Security Council Committee added three individuals to its Mali sanctions list: Ahmoudou Ag Asriw, Mahamadou Ag Rhissa, and Mohamed Ousmane Ag Mohamedoune. Each of them were targeted with a travel ban.
On January 10, 2019, the EU implemented these UN listings in respective EU Mali sanctions by Council Implementing Decision (CFSP) 2019/29. As a result of this implementation, the above-mentioned individuals will now be subject to EU-wide travel bans.
(1) Mamancochet Mining V Aegis
On October 12, 2018, the High Court handed down a judgment making reference to the EU Blocking Statute. The case, which involved a non-U.S. subsidiary of a U.S. insurance entity, could provide importance guidance for U.S. companies and their EU, or at least UK, subsidiaries.
The case arose from a dispute between UK-based insurers that are owned or controlled by U.S. persons and their customer, regarding the scope of contractual provisions excusing the parties from performance if transactions pursuant to the contract created sanctions exposure. The insured had submitted a claim under its marine insurance contract to recover the cost of goods stolen in Iran. The insurance underwriters asserted they were not required to pay that Iran-related claim pursuant to a provision in the insurance contract excusing performance if “payment…would expose that insurer to any sanction, prohibition or restriction” under applicable sanctions.
The court held that, prior to the revocation of General License H on November 4, payment of a valid claim by the insured did not “expose” the insurers to sanctions because it would not breach applicable sanctions. While General License H was in effect, non-U.S. subsidiaries of U.S. entities would not be prohibited from engaging in such transactions. These transactions would have only breached sanctions-and therefore created sanctions exposure-after November 4, when non-U.S. subsidiaries of U.S. persons were no longer generally authorized to engage in transactions involving Iran. For the UK Commercial Court, conduct creating the risk of sanctions exposure-rather than actual exposure through breach of applicable restrictions-did not excuse the insurers’ performance. Had the insurers wanted to suspend performance when faced only with risk of sanctions exposure, the court suggests they could have expressly indicated that performance would be excused if “payment…would expose that insurer to any risk of being sanctioned.”
The case suggests that insurance providers and brokerages, should be precise and comprehensive when describing the sanctions-related circumstances that trigger suspension or excuse-of-performance clauses and must describe clearly the effect of such provisions when triggered.
These clauses must also clearly describe the effect of their invocation. In this case, the contract provided that “no (re)insurer shall be liable to pay any claim . . . to the extent that the provision of such . . . claim . . . would expose that (re)insurer” to applicable sanctions. The court found this provision would only suspended the insurers’ payment obligations, rather than terminate them. This suggests that, just as insurers should be precise in describing the circumstances that trigger these excuse-of-performance clauses, they must also be precise in describing the effect of those provisions when they are triggered.
In this case, the insured also sought to rely upon the EU Blocking Regulation in the event that the insurance underwriters were otherwise entitled to rely upon the sanctions clause to resist payment. While this issue did not arise for determination, the court noted, rather than held, that considerable force was inherit in the argument that the EU Blocking Regulation is not engaged where the insurer’s liability to pay a claim is suspended under a sanctions clause such as the one in the policy at hand. In such a case, the court noted, the insurer is not “complying” with a third country’s prohibition but is simply relying upon the terms of the policy to resist payment.
(2) EU Blocking Statute Challenge by Rotenberg
In October, Russian oligarch Boris Rotenberg filed a law suit with the Helsinki District Court against Nordea, Danske Bank and Svenska Handelsbanken. Rotenberg claims that the banks refused to provide certain services in order to comply with secondary U.S. sanctions. The case is pending.
In France, “l’affaire Lafarge” remains the most prominent enforcement action. In June 2018, the French judiciary initiated a formal investigation to examine whether LafargeHolcim had paid nearly $13 million to the Islamic State to protect one of its cement plants in Syria. The corporation as a legal entity has been charged by a panel of three French judges appointed by the Paris High Court with violating the European embargo on oil purchases. In addition, the charges also include financing a terrorist organization, endangering the lives of former employees and complicity in crimes against humanity.
Belgian authorities started prosecution of three Belgian companies AAE Chemie, Anex Customs and Danmar Logistics and two of their managers. Allegedly, the firms exported chemicals used to produce sarin gas to Syria without applying for the necessary export licenses. Prior to the proceedings, the Belgian Finance Ministry had offered a financial settlement but the companies refused. The trial started in Antwerp in May 2018, a verdict is expected for January 2019.
The German government is facing resistance against its recent decision to halt arms exports to Saudi Arabia. While not based on EU sanctions, but rather based on a political decision, the result for German defense suppliers remains the same. German defense suppliers recently announced a plan to sue for damages resulting from the ban of all arms exports to Saudi Arabia.
The ban was established in November 2018 after details about the murder of journalist Jamal Khashoggi surfaced. The restrictions apply to exports that had previously been approved by the German government.
(4) The United Kingdom
There have been a number of enforcement actions in respect of sanctions and export control violations completed in 2018, the two most significant of which are:
(i) terms of imprisonment ranging from six months suspended (on a married couple associated with a small UK company Pairs Aviation) to 2½ years in respect of UK businessman, Alexander George, convicted of exporting certain military aircraft items to Iran, through companies in a number of jurisdictions, including Malaysia and Dubai; and
(ii) the imposition by the Financial Conduct Authority in June 2018 of a financial penalty of almost £900,000 (reduced by 30 percent on account of early settlement) on Canara Bank for systems and controls inadequacies relating, inter alia, to sanctions. This matter related to that institution’s trade finance operations.
There were also three prosecutions of UK companies in 2018 in respect of unlicensed exports of military or dual-use goods, including chemicals and metals, with relatively modest fines imposed.
[Part IV will be published in tomorrow’s Daily Bugle.]