In a panel hosted by the Atlantic Council last week, the EU Ambassador to the United States, David O’Sullivan, stated that the European Union could block US sanctions on Iran if the United States pulls out of the Joint Comprehensive Plan of Action (“JCPOA”).

The US Congress built in a requirement under the Iran Nuclear Agreement Review Act (INARA) that the President certify every 90 days that Iran is in compliance with its nuclear-related obligations under the JCPOA.  President Trump (reluctantly) made a second certification of compliance on July 17, 2017.  However, after the July certification, officials in the Trump administration said that the President believes that the Iranians have not been fully compliant. The next certification is due October 15, 2017.

As previously summarized here, if President Trump certifies that Iran is in material breach of the JCPOA or if he declines to make the certification, then the ball would pass to the US Congress.  The INARA provides for expedited congressional consideration (i.e., within 60 calendar days) of any legislation re-imposing sanctions that may be introduced in Congress.

When EU Ambassador O’Sullivan was asked at the September 25th Atlantic Council conference what the European Union’s response would be if the United States re-imposed sanctions, he said (around 1:05:30 here) that:

[W]e have … the blocking statute which was actually adopted in reaction to sanctions originally against Cuba which does offer legal protection to European companies which are threatened by the extraterritorial nature of US sanctions in certain circumstances. And I’ve no doubt that if this scenario materializes, which it’s not clear it will, the European Union will act to protect the legitimate interest of our company {sic} with all the means of our disposal. But I repeat, we wait to understand what is going to be decided, why it is decided and what is the political logic of this.

In general, foreign blocking statutes attempt to counter extraterritorial trade restrictions by prohibiting compliance with the foreign trade restrictions. This concept is not new to the European Union.  The EU Blocking Regulation (EC No 2271/96) was adopted in 1996 largely as a countermeasure to the US extraterritorial sanctions against Cuba and Iran. Over time, as the European Union increasingly coordinated with the United States in combating Iran’s nuclear program, the EU Blocking Regulation came to focus on Cuba only.

One of the most notable cases under the EU Blocking Regulation was in 2007, when the Austrian government initiated an enforcement action against an Austrian bank that had closed accounts held by Cuban clients to comply with US sanctions against Cuba after it was targeted for acquisition by a US private equity firm.  The Austrian authorities dropped the case when the US private equity firm obtained a specific license from the US Department of Treasury, Office of Foreign Assets Control authorizing the Austrian bank to maintain the accounts.

While the EU Blocking Regulation is not new, it is somewhat surprising to see it invoked as an option to counter a sanctions measure before the measure is adopted. Ambassador O’Sullivan likely mentioned the regulation as part of an effort to convey to the Trump Administration that the European Union would strongly disagree with any effort to “tear up” the JCPOA and has options at its disposal to go its own way if necessary.

In the event that the United States pulls out of the JCPOA and the European Union invokes the EU Blocking Regulation, companies could face significant compliance challenges. EU companies in particular could find themselves in a position where they are engaged in trade with Iran that is perfectly lawful under EU and national law, but restricted under newly resurgent US secondary sanctions.  At that stage, compliance would be a matter of reading the tea leaves with regard to the likelihood of US enforcement of secondary sanctions and EU enforcement of the EU Blocking Regulation, set against the backdrop of diplomatic negotiations involving various stakeholders.  To say the least, compliance under such circumstances would be a complex undertaking.

As noted above, a lot would need to happen before the EU Blocking Regulation would be used to counter new US sanctions against Iran. The United States would need to certify that Iran is in material breach of the JCPOA, and Congress would need to pass new sanctions laws against Iran—two steps that are far from a given. Even then, the European Union would need to amend the annex to the EU Blocking Regulation to cover the new US sanctions laws. But if these dominoes fall, companies contemplating or engaged in Iran-related trade would need to take immediate notice.  Until then, we will wait until October 15 for the first domino.