In the context of the Trump Administration’s “maximal pressure” approach to the U.S. sanctions against Iran, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued on May 3, 2019 its Framework for OFAC Compliance Commitments or OFAC Guidelines.

The OFAC Guidelines are a welcomed resource as they clarify OFAC’s expectations of companies’ compliance behavior and offer insight into the authority’s enforcement strategy and concerns. In particular, the OFAC Guidelines offer advice on how companies should develop the five “essential components” of their sanctions compliance program, namely: commitment from management, risk assessment, internal controls, testing and auditing, and training.

The specific guidelines offered for each element follows well-established and well-accepted compliance practices in other domains, such as anti-corruption.

The OFAC Guidelines will be considered all over the world, and in particular in Europe, as the U.S. sanctions regime includes secondary sanctions whereby non-U.S. entities that do not comply with U.S. policies may be excluded from the U.S. market and financial systems.

However, the OFAC Guidelines provide no insight into how European Union companies should respond to their recommendations. Such companies find themselves in a difficult position, particularly in light of the EU Blocking Regulation.

First promulgated in 1996, the EU Blocking Regulation was the EU’s response to U.S. unilateral sanctions imposed on certain countries, including Cuba. The Blocking Regulation prohibited any EU person or entity from complying with certain U.S. sanctions in order to limit the United State’s extraterritorial application of its law, which was viewed by some as a breach of European sovereignty.

After President Trump announced the U.S. withdrawal from the 2015 Joint Comprehensive Plan of Action or JCPOA and a snapback to the pre-JCPOA version of the U.S. sanctions regime in May 2018, the EU reinvigorated its Blocking Regulation by including the new U.S. sanctions on Iran as a regime to which EU entities are prohibited from adhering. The result is that EU companies currently conducting business transactions with Iranian entities cannot cease to do so in order to comply with the U.S. sanctions regime without risking a breach of EU law.

This is why, thus far, EU companies may be tempted to favor “informal compliance” with U.S. sanctions over “formal compliance,” that is complying without expressly referring to a formal compliance program and invoking an economic reason for their refusal to transact with Iran. This approach is logical because, currently, designing a formal compliance program that follows the OFAC Guidelines may be used in a European court as proof of an intention to comply with U.S. sanctions, and therefore to breach EU law.

That said, the enforcement record of the EU Blocking Regulation has been limited thus far. The EU Blocking Regulation leaves the determination of sanctions and enforcement to each member state. Certain governments have proven to be more aggressive than others in this respect. For example, the UK adopted the Extraterritorial U.S. Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order in February 2019, which provides for an unlimited fine. Other countries have introduced maximum fines, including the Republic of Ireland (€500,000), Germany (€500,000) and Spain (10,000,000 Pesetas (approximately €60,000)). Notably, the Republic of Ireland’s 2018 amendment to its national law even allows for a three-year prison sentence for breach of the EU Blocking Regulation. 

At the other extreme, countries like France and Luxembourg have yet to introduce any national legislation on this issue and are not yet in a position to prosecute violations of the EU Blocking Regulation. Belgium only recently in May 2019 promulgated the Belgian Act implementing the EU Blocking Regulation which can impose an administrative fine on both companies and individuals, including a company’s Board or committee members and effective managers.

No European country has demonstrated that it is seeking to aggressively enforce national laws related to this issue. However, the fact that certain countries — notably the UK and the Republic of Ireland — have adopted new or amended existing laws related to the Blocking Regulation indicate a renewed interest in this topic, particularly given the severity of the potential sanctions that can be incurred. In addition, the Czech Republic, which already has in place a relevant law, is seeking to supplement it and is currently drafting legislation to specifically implement the EU Blocking Regulation.

Unlike the FCPA, for example, U.S. economic sanctions are not sustained by an international legal and ethical consensus, but are motivated by U.S. policy goals. Their extraterritoriality is all the more difficult to accept in Europe. When advocating compliance to these sanctions internally, European compliance officers in many cases will rely on a cost/benefit analysis rather than on shared values. Corporate policy debates within EU companies may thus be expected to revolve often around three key questions:

  • Do the benefits of conducting business with Iran outweigh the risks of potential sanctions on the company and/or its officers?
  • Can our company afford to be cut off from the U.S. market and financial system?
  • Is there a way around U.S. sanctions that would allow us to continue trading with Iran in compliance with both U.S. and EU law?

The third question refers to creative attempts by various institutions to find a mechanism through which an EU entity can bypass U.S. sanctions in order to continue doing business with Iranian entities.

For example, at the start of this year, the European signatories to the JCPOA, (France, Germany and the UK) developed INSTEX, a special purpose vehicle through which a European entity exporting a good to Iran could receive payment for this exchange from a European entity importing a good from Iran through a European institution; this would effectively allow the companies to bypass using an Iranian institution, the Iranian Rial or the U.S. Dollar. However, INSTEX is not yet fully operational, and nobody to our knowledge has publicly certified that it will be compliant with both U.S. and EU law.

In this regard, further guidance from OFAC on what differentiates, in its view, trade with Iranian entities that is outside the scope of U.S. sanctions from trade that illegitimately circumvents the sanctions in breach of U.S. law would be most welcome. This, along with specific consideration to the situation created by the EU Blocking Statute, would make OFAC guidance even more useful to companies this side of the Atlantic.

(Originally published on FCPA Blog, with co-author Ann Y. Du).