US Economic Sanctions against Iran: How can other Trading Countries Protect Legitimate Business?
US and the Iran nuclear deal
President Trump is reimposing the full range of United States economic and trade sanctions against Iran following his unilateral decision in May 2018 to pull the US out of the Joint Comprehensive Plan of Action (the so-called Iran nuclear deal). That deal was reached with Iran in July 2015 by the Obama Administration together with France, Germany, China, Russia, the United Kingdom and the EU. Iran agreed to eliminate its stockpile of medium-enriched uranium, cut its holding of low-enriched uranium by 98%, and reduce by about two-thirds the number of its gas centrifuges for 13 years, as well as accepting other nuclear-related restrictions. In return sanctions in force against Iran were eased, though not eliminated.
This article considers how Trump’s action may impact on traders in other countries including America’s allies, and how such other countries can protect their commercial interests against excessive jurisdictional reach of the United States.
When the US sanctions are once again jacked up to full operation they will prevent US persons and US-owned or controlled entities from doing business with Iran. Authorisations to do business that were previously granted to operators whose interests would otherwise be seriously damaged by compliance with sanctions are rescinded. Trump has further threatened that international businesses which continue to trade with Iran will be shut out of the US market.
The precise coverage of the US sanctions is not clear, and will almost inevitably come before the courts. Meanwhile it appears that if the term “US persons and US-owned or controlled entities” is held to extend to all persons doing business in the United States, damage to international business could be widespread. Faced with the threat of being shut out of the American market, major European companies with important US interests including Total, Maersk, Daimler, Renault and Peugeot have already announced that they are withdrawing from Iran, or suspending or reducing operations there.
US jurisdictional reach
For decades the United States has claimed the right to exercise legal jurisdiction not only over foreign subsidiaries or branches of US firms, but also over operations of foreign businesses which were carried on outside US territory but held to have “effects” in the US. This is known as “extraterritorial jurisdiction”. In the present context of Iran, targeted activities might typically include a European (or Indian, or Japanese, or other) company financing a project in Iran through the US banking system; a European car manufacturer with important US interests which is also engaged in a joint venture in Iran; or a non-US company using American technology under licence to develop a project in Iran. Globalisation of business and supply chains however has vastly increased the interrelatedness of international companies, so that it is often not possible nowadays to define their operations in terms of national territories.
Where investigations or proceedings regarding alleged breaches of US law are conducted by US authorities, those authorities or the US courts may seek to subpoena witnesses outside US jurisdiction, with the threat of criminal or civil penalties if they do not comply. For example, during the 1960s and 1970s US investigators would sometimes arrive unannounced in the offices of companies, or US subsidiaries or branches, in the UK and demand to interview individuals in those companies and seize documents.
Activities over which the US claims to exercise jurisdiction extraterritorially may, according to the circumstances and the legal provisions concerned, attract criminal or civil penalties, or in some cases maybe both. For example, the Export Administration Act of 1979 (now formally expired but renewed annually under emergency economic powers) could be invoked, and criminal proceedings threatened, to prevent a foreign engineering company from using sensitive US technology for the purposes of a project in a territory which was subject to US sanctions.
In the US a series of laws starting with the so-called Sherman Act of 1890 may be invoked against foreign companies that are suspected of engaging in prohibited anticompetitive or monopolistic practices (“trusts”) which affect the US, even if the activities are conducted abroad. Where civil actions regarding anticompetitive behaviour are brought by private interests in the US against other private entities, including foreign undertakings, the law permits a complainant to sue the alleged perpetrators for so-called “triple damages”, that is for three times the amount of the damage actually assessed to have been suffered.
EU and UK response to extraterritorial jurisdiction
In the case of trade with Iran, EU representatives have pledged to protect European enterprises from unwarranted jurisdictional incursions by foreign countries (meaning chiefly the US) by using an existing EU “blocking statute” designed to provide legal cover for European enterprises by requiring them not to comply with extraterritorial actions taken against them. This Europe-wide protection, which is discussed below, will be available to UK firms only up to the point of Brexit, scheduled for 29 March 2019.
UK law to counter extraterritorial jurisdiction
Fortunately for the United Kingdom, it is already provided with its own national tool on these lines independently of EU law. In 1964 emergency legislation was passed by Parliament to prevent US authorities from carrying out on British territory an investigation into alleged anticompetitive practices in North Atlantic shipping, and from seizing documents from UK citizens in circumstances which were seen as a violation of UK national jurisdiction. That Act was superseded in 1980 by wider-ranging legislation known as the Protection of Trading Interests Act (“the 1980 Act”). The trigger for this legislation was a worldwide antitrust case launched in the US by the Westinghouse Corporation, which had incurred heavy losses during the 1970s by miscalculating the trend of international prices for uranium. Westinghouse sought to recoup its losses by accusing some twenty international uranium producers in the UK, Canada, Australia and South Africa of a price-fixing conspiracy and suing them for triple damages, amounting potentially to billions of dollars. The stakes for the defendant companies, and for the national economies concerned, were enormous. Faced with subpoenas addressed by the US courts directly to persons in the UK, and by an American federal judge who purported to set up his court in the US Embassy in London, the British Government stipulated that only limited investigations could be conducted in the UK, under strict Government supervision. It then legislated to provide a statutory basis for dealing with such situations.
Provisions of the Protection of Trading Interests Act
The 1980 Act is cast in general terms, though the stimulus for it was repeated disputes with the US over jurisdictional reach. The Act contains two groups of provisions:
- It permits a UK minister to give directions to a person doing business in the UK not to comply with an international trade measure or requirement from a foreign country that would have extraterritorial effect in the UK and be damaging to the security, international relations or trading interests of the UK.
- Separately, it provides that where a judgment for multiple damages has been assessed in a foreign court against a company or business in the UK, the UK defendant has the right to sue the original plaintiff in the UK courts for the return of the penal (i.e. non-damages) element of the original foreign judgment.
The 1980 Act has been used several times to protect trading interests in the UK against unacceptable exercise of US jurisdiction, not only in the uranium antitrust case but for example when the US tried in the early 1980s to prevent construction of a gas pipeline from the Soviet Union to Western Europe by blocking access to US technology; and in 1997 to protect UK trading interests from US actions to enforce sanctions against Cuba, Iran and Libya. The law aims to provide persons in the UK who may be pursued extraterritorially by foreign authorities with the so-called “act of state” defence (i.e. that they cannot comply with a foreign requirement because their national government will not let them). We are not aware that there has ever been a case in the British courts which invoked the provisions in the 1980 Act regarding reclaim of a penal element of civil damages, but the possibility remains available.
The EU and others follow suit
The UK law was quickly followed by legislation in similar terms (and often employing wording very close to that of the UK Act) adopted by Canada, Australia, South Africa and France.
In 1996 the European Union (under Council Regulation (EC) No. 2271/96) adopted a so-called “blocking statute” which is also on similar lines. The occasion for this was the coming into force in the US in March 1996 of the so-called “Helms-Burton Act”, named after its Republican sponsors Senator Helms and Representative Burton. The Act was in response to an attack by Cuban military aircraft against planes operated by a Miami-based search and rescue organisation, allegedly for violation of Cuban airspace. It strengthened the existing US embargo on economic relations and trade with Cuba by extending the coverage of the embargo to foreign companies trading with Cuba, and introduced penalties for foreign persons “trafficking” in property in Cuba that had formerly been owned by US citizens but confiscated by Cuba.
The Act had potentially draconian extraterritorial reach. EC Regulation 2271/96 set out to counter it with four main provisions:
- EU persons were required to notify the Commission if they were targeted by US measures specified in the Regulation (i.e. measures against Cuba);
- Courts and authorities in the EU were required absolutely not to recognise decisions of courts, tribunals and administrative authorities located outside the EU in respect of measures specified in the Regulation;
- EU persons were prohibited from complying with requirements or prohibitions by foreign authorities which related to blocked foreign measures listed by the Regulation;
- EU persons who suffered damage or loss from the enforcement against them of foreign measures specified in the Regulation were given the right to sue in the EU courts for the recovery of damages and legal costs from the persons or agencies who had inflicted such damages and costs.
Regulation 2271/96 initially targeted a list of US measures relating to enforcement of the embargo against Cuba. In 2014 the EU Council of Ministers gave delegated power to the Commission to add fresh measures to the Regulation in addition to those already listed as blocked. This change is obviously intended to enable the Commission to take emergency, or at least quick, action. The Commission must notify such additions to the Council and the European Parliament, and these come into force automatically at the end of two calendar months provided that neither the Council nor the Parliament has objected.
On 7 August 2018 the Commission used this new power to update the 1996 Regulation, by specifying US sanctions against Iran in addition to those against Cuba already listed, and prohibiting EU firms from compliance with US extraterritorial measures designed to enforce those sanctions. In the absence of objections from the Council or the Parliament, the new blocking powers related to Iran will come into force on October 7. A saver is included under which EU businesses whose interests would be seriously damaged by the prohibition may nonetheless apply to the EU for permission to comply with the relevant US requirements.
The European Commission has stressed that the new order is designed to protect “EU persons” from US extraterritorial action in the Iran case. After Brexit, presumably as from 29 March 2019, the UK will fall out of this EU protection and will have once again to counter US jurisdictional incursions on a national basis with threatened or actual invocation of its own 1980 Act.
Efficacy of blocking statutes, and other action
Despite the length of time that “blocking” statutes have been in existence, they have not been used often enough to permit clear a judgment as to their efficacy. The power for a government to prohibit foreign authorities from conducting investigations on its territory and seizing documents etc. can be readily and effectively used. It may also have the benign effect of encouraging the initiating country to resort to requests for assistance through its courts to the courts of the target country, or to cooperation with the authorities of the targeted country, on the basis of international comity. It is less probable that major shifts in national policy can be brought about by this means.
Meanwhile all WTO member countries which believe that they have been subjected to improper trade action by another member or members retain their right to seek dispute settlement proceedings through the WTO. The problem here is that dispute cases take time – typically up to a year. National and EU blocking statutes in principle provide for faster action. Also, in the hypothetical case of an action in the WTO against the extraterritorial effects of US sanctions against Iran the US defence would undoubtedly rest on national security grounds. The WTO has been extremely shy of passing judgments on members’ national security issues: indeed, when the US Helms-Burton Act was passed the EU did initially secure the establishment of a WTO dispute panel, but subsequently dropped the proceeding.
A company faced with an extraterritorial legal demand from a foreign power and at the same time with a prohibition from its own government on complying with that demand is going to find itself in a very uncomfortable situation. It is to be hoped that the effect of “blocking statutes” in such cases will be to encourage the various interests to negotiate for a practical compromise. On the national level, the government of a country on the receiving end of unacceptable extraterritorial action must carefully balance, on one hand, its interests in preserving the legal business and freedom of action of domestically-based companies against, on the other hand, the downside of wider international dispute and political damage. As already noted, a number of big European companies already appear to have concluded that standing up against US sanctions on Iran is too risky. Ultimately any action under blocking statutes, however economically and legally justified, has to take account of politics too.
And now Russia…?
The US announcement in early August 2018 that sanctions are to be imposed against Russia because of the novichok poisoning case in Salisbury, UK, must naturally be welcome political support to the UK Government. Tricky legal and policy problems might however arise where, potentially, the US took extraterritorial action to enforce those sanctions but that action had the effect of constraining or damaging commercial activities which the UK regarded as legal.
-  Firm diplomatic action by the UK Government put an end to such abuses. An early warning system was established whereby US agencies notified the UK authorities in advance of their wish to conduct investigations in the UK, and the UK had the opportunity to object.
-  Not surprisingly, few if any triple damage suits get carried through to the end as the stakes may just be too high. They are usually settled out of court for a negotiated, though lesser, amount. This is a good example of corporate blackmail.
-  After years of litigation and negotiation the case was eventually settled out of court by the defendants jointly paying Westinghouse a sum reported at the time to be around $45 million.
-  This can be interpreted to include UK subsidiaries or branches of foreign firms.