US Secondary Sanctions Increasingly Causing European Disputes, Lawyers Say

A rise in U.S. secondary sanctions is increasingly leading to issues in Europe about how companies perform global sanctions compliance while simultaneously avoiding violating the European Union’s blocking regulations, trade lawyers said. Until the U.S. changes its sanctions approach -- which is possible under the Biden administration -- those disputes are expected to continue rising, the lawyers said.

Although businesses in Europe have for years faced challenges navigating sanctions conflicts with the U.S. due to the EU’s blocking statute, which prohibits European companies from complying with extraterritorial sanctions (see 2002190038 and 1906240014), disputes are becoming more frequent. Susannah Cogman, a corporate lawyer with Herbert Smith, specifically pointed to a May opinion issued by the Court of Justice of the European Union, which said a German company should not have been allowed to cancel a contract with an Iranian bank only because it wanted to comply with U.S. sanctions laws (see 2105130067).

Although Cogman noted the opinion was’t binding, it could carry significant weight for future business disputes involving U.S. sanctions laws. “Clearly, this ability for Iranian parties effectively to sue and to require reasons to be given” for canceling a contract “may make navigating sanctions perhaps more difficult than it was,” Cogman said during a July 29 podcast by the law firm. “The blocking regimes do create significant problems for companies who wish to have a global policy of [U.S. sanctions] compliance.”

Cogman said similar disputes will likely continue to arise in Europe, adding that she’s aware of “a number of cases” that pit blocking regulations compliance against U.S. secondary sanctions. “We see that as an area of continued activity and risk,” she said.

The disputes may also extend beyond Europe. Cogman said blocking regulations are being discussed in Russia and have also been implemented in China and Hong Kong, which recently passed a law to prevent its companies from complying with U.S. sanctions (see 2106150030). That law is expected to give Beijing broad discretion to penalize companies for obeying extraterritorial restrictions against China (see 2107080057). “The EU blocking regulation, I think, isn't very effective, other than creating a headache for companies,” Cogman said. But “that dynamic may be different in some other jurisdictions.”

Jonathan Cross, a sanctions lawyer with Herbert Smith Freehills, said it's possible President Joe Biden would issue an executive order or guidance to establish a new sanctions policy, which could alleviate some concerns surrounding secondary sanctions. The Treasury Department’s review of its sanctions tools, which started earlier this year, is said to have arisen from concerns that the U.S. has overused its sanctions instruments and could result in a more multilateral, strategic sanctions framework (see 2107290042). “At least with respect to the EU, if that does eventuate,” Cross said during the podcast, “that might mitigate some of these conflicts going forward.”

But if there are no changes to U.S. secondary sanctions policy, the EU could take steps to strengthen its blocking regulations, Cogman said. She pointed to a European Commission announcement in January that outlined a new strategy to protect the EU from “unfair and abusive” extraterritorial practices. "The precise measures they're planning are unclear and will be subject to analysis,” she said. “But certainly the direction of travel from the EU perspective is: What further can we do to block the effectiveness of these measures?”