The European Union has taken steps to protect EU companies from any legal and financial repercussions from investing in Iran as a result of President Trump’s latest sanctions.

On 7 August the European Union put in place a “blocking statute” with immediate effect to nullify any potential U.S. legal action against European firms in connection with their investments in Iran after the United States re-imposed key sanctions on the Middle-Eastern country on the same day.

The latest sanctions will prevent the Iranian government from buying U.S. dollars, gold, software used in industrial processes, and from trading metals and minerals. A further set of sanctions blocking petroleum exports, shipping, and financial institutions from conducting transactions with the Central Bank of Iran will take effect in November.

To date, President Trump’s administration has issued 17 rounds of Iran-related sanctions, designating 145 companies and individuals.

The blocking statute enables EU-based firms to recover damages resulting from the U.S. sanctions by suing the Trump administration in national courts of EU member states.

The mechanism, however, also imposes duties on EU companies too that may not seem too palatable. For example, the blocking statute effectively bans EU businesses from complying with the U.S. sanctions. Firms that decide that they want to follow the Washington directive can only do so after gaining permission from the European Commission first. If they don’t, companies face the risk of being sued by EU member states.

The EU originally imposed a blocking statute in 1996 to curtail the effects of U.S. sanctions on Cuba that were extended extra-territorially under the Helms-Burton Act.

“The blocking regulation effectively asks EU companies and individuals to make a choice between the U.S. and the EU, and the harsh penalties being imposed in the U.S. for sanctions violations balanced against the lack of enforcement to date in the EU will make that choice for most an easy one.”
Lynne Moss, Senior Associate, Burness Paull

The United States has signaled its intent to take a harder line on Iran for some time and has also made it clear that it wants other countries to follow the same stance—or else. In May, President Trump withdrew the United States from an international 2015 deal that lifted some economic sanctions so long as Iran curbed its nuclear ambitions. Trump believes that the nuclear agreement—which permits Iran to continue nuclear research for “civilian purposes”—would not prevent it from finding ways to develop nuclear weapons.

His view is at odds with the European Union in particular. A joint statement released on 6 August from EU foreign policy chief Federica Mogherini and the foreign ministers of France, Germany and the United Kingdom says the nuclear deal—known formally as the Joint Comprehensive Plan of Action (JCPOA)—is “crucial” for global security.

The statement says: “We are determined to protect European economic operators engaged in legitimate business with Iran, in accordance with EU law and with UN Security Council resolution 2231. This is why the European Union’s updated Blocking Statute enters into force on 7 August to protect EU companies doing legitimate business with Iran from the impact of US extra-territorial sanctions.”

The European Union statement commits the remaining signatories of the JCPOA to “maintenance of effective financial channels with Iran and the continuation of Iran’s export of oil and gas.”

Lynne Moss, senior associate at U.K. law firm Burness Paull, does not believe that the EU’s blocking statute will offer much protection to EU companies in reality, adding that most firms will simply take the least painful option.

“The blocking regulation effectively asks EU companies and individuals to make a choice between the U.S. and the EU, and the harsh penalties being imposed in the U.S. for sanctions violations balanced against the lack of enforcement to date in the EU will make that choice for most an easy one,” says Moss. “The Blocking Regulation had little effect on US sanctions and policy on Cuba, and so its effect on Iran is likely to be minimal.”

“Even if EU companies choose to risk breaching the U.S. rules, western banks have been reluctant to have any involvement with Iran and so some would argue that the U.S. measures are already working, even without the EU’s intervention,” says Moss. “Some businesses with current interests in Iran have started winding down their activities in advance of the deadline on 4 November, and the European Union measures are unlikely to have much impact on that,” she adds.

With the U.S. administration taking a hard line on granting waivers from sanctions, many major companies from the oil and gas industry to car manufacturers and consumer goods firms have already announced that they are quitting the country. German exports to Iran alone fell by 4 percent in the first five months of 2018 after rising by 16 percent last year, the German Chamber of Commerce and Industry (DIHK) said.

Days after the United States imposed sanctions, German state-owned rail operator Deutsche Bahn announced that it is phasing out projects in Iran, and French oil firm Total has backed out of a consortium that included Iran’s Petropars to develop the world’s biggest gas deposit.

French carmaker Renault has also signaled that it will pull the plug on its Iran ambitions—even though the company does not sell cars to the United States. In July Renault Chief Operating Officer Thierry Bollore told analysts that “we are looking to new business opportunities, particularly in Africa, with strong growth to offset the missed opportunities in Iran.”

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