On June 6, the European Union Commission adopted a delegated regulation amending the Annex to Council Regulation (EC) No. 2271/96 of 22 November 1996.  Council Regulation (EC) No. 2271/96 is the notorious EU blocking regulation which forbids individuals and companies in EU member states from complying with the U.S. embargo on Cuba.   The Annex to that Regulation specifies the laws and regulations that are blocked.  The delegated regulation will add U.S. sanctions on Iran to the Annex, and it will go into force on August 6 unless, between now and then, the EU Council or Parliament objects.

As you might imagine, I think that this is a misguided, if not preposterous, response to the U.S. withdrawal from the Iran nuclear deal.  The blocking regulation, as currently applied to Cuba, has had no effect on the U.S. embargo on Cuba and has instead put businesses in the untenable position of having to decide whether to break U.S. law or EU law.  And, of course, we all know what decision businesses in this position have invariably made in the past and will continue to do so even in the face of the expanded scope of the blocking regulation.

And the reason for that is clear:  OFAC has imposed significant penalties for violating the Cuba sanctions even where the Company was required by the EU blocking regulation to violate those sanctions.  OFAC has ignored the existence of the statute and not even considered it a mitigating factor.  In fact, it could be argued that in at least one case it has considered it an aggravating factor if the European company was attempting to comply with the blocking regulation.  Companies measure the risk of the wrath of OFAC against the toothless enforcement of the EU blocking regulation and decide to bow down to their OFAC overlords, not their European ones.

The U.S. sanctions on Iran can apply to European companies in three situations.  First, the sanctions apply if the European company is a foreign subsidiary of a U.S. company.   Second, they apply if the European company causes the export of goods or services from the United States to Iran.  Third, there are “secondary” sanctions that will apply to certain activities unconnected to the US, like engaging in significant transactions with the Iranian shipping, ship-building and energy sectors.  The laws and regulations added to the blocking regulation would prohibit compliance with the U.S. sanctions in all three instances.

On the other hand, the Annex does not reach all instances of U.S. sanctions on Iran.  Many Iranian entities, such as Bank Saderat, Mahan Air and the Islamic Revolutionary Guard Corps are designated under the Global Terrorism Sanctions Regulations which are not mentioned in the amended Annex. Tidewater Middle East, which operates the port at Bandar Abbas, is designated under the Weapons of Mass Destruction Proliferators Sanctions Regulations, also not added to the amended Annex.

As with all blocking statutes, enforcing this will be a headache.  Article 5 provides that “no person referred to in Article 11 shall comply, … actively or by deliberate omission, with any requirement or prohibition … based on … the laws specified in the Annex.” So let’s say that an EU company decides not to invest in an Iranian oil field project. Was that because of the sanctions or because the company thought it was a bad investment for reasons unrelated to the sanctions, say fear of corruption or geopolitical risks? Suppose an EU company complies with a request from a US customer to provide a certificate that the goods being sold originate from an EU Member State. Is providing that certificate complying with the US law prohibiting U.S. companies from acquiring goods of Iranian origin or just accommodating a US customer’s desire for EU-origin goods?

Of course, the group of companies that the amendment really puts in a pickle are EU subsidiaries of U.S. companies. Article 11 states that the regulation applies to any “legal person incorporated within the Community.” Section 560.215 of the Iranian Transactions and Sanctions Regulations, now added to the Annex, makes it illegal for such EU subsidiary to engage in a transaction with Iran if it would be illegal for a U.S. person to engage in that same transaction.  These two provisions mean that sooner or later these companies will be in the unenviable position of deciding which law to break. And we know which law they will chose to break already, don’t we?

So what exactly does the EU think it’s accomplishing here? The blocking regulation has been in effect with respect to Cuba for 22 years with no appreciable effect on the Cuba embargo. Do the wise men and sages of the European Commission expect that Trump, when he hears of their bold amendment of the Annex, will burst into tears and beg to rejoin the Iran nuclear deal? Do they think this Amendment will cause OFAC to tear the Iranian Transactions and Sanctions Regulations into tiny pieces and scatter them over the Potomac River? Because none of these things is going to happen. You know what will happen? Sanctions lawyers will have a lot more work. That’s it.

Morale of the story (from Louis XIV): “C’est toujours l’impatience de gagner qui fait perdre.”