The European Union’s blocking statute against extraterritorial legislation: an effective instrument for protecting the EU’s economic interests?
Date : 31 July 2023
The Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, was adopted on November 22, 1996.
Its aim is to protect European Union nationals as well as “any legal person” within the Union against the effects of an administrative, judicial, or arbitral decision based on an extraterritorial sanction’s regulation. The extraterritorial application of a rule can be defined as “the situation in which the State that originated the rule purports to apply it to a person – individual or company – of foreign nationality in order to punish acts committed outside the territory of that State”.
The list of laws, regulations and other legislative instruments with extraterritorial application is annexed to the regulation. These are essentially US economic sanctions against Iran, Cuba, and Syria. If “economic and/or financial interests” of the legal person are directly or indirectly affected by the extraterritorial provisions or by administrative, judicial, or arbitral decisions based thereon, it is obligatory to notify the European Commission within 30 days of the date on which the natural or legal person obtained the information. In addition, the persons affected must not comply with the “requirement or prohibition” including judicial sanctions, based on these regulations. The Commission may, however, issue an authorization to comply if non-compliance “would seriously damage their interests or those of the Community”. Ultimately, it is up to the Member States to determine the penalties for breaches of the Regulation, which must be “effective, proportionate and dissuasive“.
In theory, the European Union’s blocking statute makes it possible to protect European companies against laws with extraterritorial reach. However, it appears that its scope and use have not achieved the objective initially set, namely, to neutralize the effects of foreign legislation (I). Therefore, the European Union has reached an inflection point where it is now necessarily adapting its legislative arsenal to an increasingly hostile environment (II).
- The ineffectiveness of the European Union’s blocking statute
In practice, the scope of Regulation No 2271/96 is neutralized by the possibility given to European operators to request authorization from the European Commission to comply with foreign sanctions. This option was introduced in 2018 in response to the reintroduction of US sanctions against Iran. The European Commission feared that European companies would comply unilaterally and abandon trade with Tehran. It was against this backdrop that the Regulation reappeared. The litigation arose because it was impossible for European companies to choose between complying with US sanctions and complying with the European Union’s blocking statute.
In a Grand Chamber judgment of 21st December 2021, the CJEU interpreted Article 5 of Regulation No 2271/96. The case concerned an Iranian state bank (BMI) with a branch in Germany. It had entered several service contracts with Telekom, a German telecommunications company. In 2018, Telekom terminated all its contracts with BMI, following the US withdrawal from the Vienna Agreement on the Iranian nuclear programme and the reinstatement of sanctions against Iran. BMI was on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN). BMI appealed to the Hamburg Regional Court to force Telekom to continue providing the service. This action was dismissed, and the termination was held to comply with Article 5 of Regulation (EC) 2271/96. The referring court decided to stay the proceedings and referred four questions to the CJEU for a preliminary ruling.
The questions were:
- Did Article 5 apply in the absence of any instruction from a foreign authority?
- If so, could the European operators referred to in Article 11 terminate their contracts without giving reasons?
- In the event of abusive termination, was the termination ineffective or subject to a fine?
- If the termination was ineffective, could the operators request a waiver justified by the economic losses in the United States linked to the continuation of the contract?
The judgment concluded that:
- Article 5 of the Regulation must be interpreted as meaning that it prohibits European operators from complying with requirements based on the sanctioning regulations, “even in the absence of an order directing compliance issued by the administrative or judicial authorities of the third countries which adopted those laws”.
- More specifically, European operators do not need either authorization to comply with the sanction regulations (provided for in Article 5), or a statement of reasons, to terminate contracts concluded with persons or entities listed on the SDN. However, it will be up to the European entity during proceedings and in the event of suspicion “to establish to the requisite legal standard that his or her conduct was not intended to comply with those laws”.
- Finally, the cancellation of contracts by a European operator to comply with the sanction’s regulations must be proportionate. In particular, the objective of protecting the legal order and the interests of the EU must be balanced against the risks of economic loss for the operator associated with maintaining contractual relations with the person subject to the sanction.
European legal precedents have subsequently confirmed that Regulation (EC) 2271/96 no longer appears to be an effective instrument for blocking laws with extraterritorial reach. On the contrary, European operators are encouraged to comply with US sanctions.
In a judgment of 12 July 2023, the General Court of the European Union upheld the Commission’s decisions to authorize Clearstream Banking AG to comply with US sanctions against Iran.
In this case, IFIC Holding AG, a German company indirectly owned by the Iranian state, had not received dividends in respect of its holdings in various German companies. Clearstream Banking AG had suspended the payments and blocked the funds, following IFIC’s listing on the SDN in 2018. Since 2020, the European Commission has authorized the bank to comply with US sanctions. IFIC then applied to have the Commission’s decisions authorizing it to comply with the sanctions annulled. The General Court dismissed IFIC’s action and held:
- That the Commission’s authorization decisions do not have retroactive effect.
- That the Commission did not commit an error of assessment by failing to take account of the applicant’s interests or by not examining whether less restrictive alternatives existed.
- That the limitation, for the applicant, of its right to be heard by the Commission in the context of the adoption of those decisions was necessary and proportionate, having regard to the objectives pursued by Regulation 2271/96.
In fact, the use of the European regulation by European companies contradicts its ratio legis. They are complying massively with the US sanctions and using the regulation to legitimize breaches of contract with Iranian entities. Rather than forcing European operators not to comply with the sanctions, the CJEU is encouraging companies not to take any risks and to comply with US regulations. This highlights the obsolescence of the legislative framework established by the Commission in 1996. This has revealed the necessity to strengthen the protection of the Union’s interests against foreign economic offensives.
- The urgent need to strengthen the European Union’s economic interests
Insofar as the European Union’s blocking statute regulation remains ineffective, other instruments for protecting the Union’s economic interests should be used.
Since 2021, the European institutions have been considering how to respond to economic coercion measures adopted by third countries. In a geopolitical context marked by the return of strategic competition, the Commission presented the first European economic security strategy on Tuesday 20 June 2023. The strategy identifies economic dependence and the use of restrictive trade measures by third countries as major risks for the continent.
To counter economic coercion, the Council and the Commission have agreed to propose a legal framework for the Member States. If “a third country seeks, through measures affecting trade or investment, to coerce the Union or a Member State into adopting or refraining from adopting a particular act”, the EU and the Member States would now be able to adopt countermeasures until trade is restored. The new anti-coercion regulation would strengthen the Union’s legislative arsenal through a multi-stage procedure:
- Examination by the European Commission to determine whether a third country has engaged in economic coercion.
- The Commission’s proposal to the Council for an implementing measure establishing the existence of a situation of economic coercion regarding the third country concerned, requesting that it be ended, and that compensation be paid for the damage suffered.
- If the Council takes this decision, the Commission must then enter dialogue with the third country.
- As a last resort, the Commission may adopt the economic measures listed in Annex I to the Regulation.
- increased customs duties
- import or export licenses,
- restrictions on services or public procurement.
It is interesting to note that this draft regulation is part of the same dialogue process as the 11th package of sanctions against Russia, adopted on 23 June. To prevent third countries from circumventing the sanctions, the Commission can now target countries that it suspects of re-exporting goods from the EU to Russia. However, such a measure may only be submitted as a last resort, after all diplomatic options have been considered. The same applies to Regulation (EU) 2022/1031 on the award of public contracts to third-country operators. The restrictive measures applied by third countries in awarding public contracts prompted the EU to forge a reciprocity mechanism. This gives the Commission the power to investigate and even penalize obstacles deemed to be “serious and recurrent“. However, coercive measures can only be considered after consultation with the third country.
Ultimately, European, and national economic legislation is adapting to a fragmented international context. Indeed, the law is frequently used by states as an instrument of foreign policy, enabling them to obtain economic gains (economic lawfare).
Finally, it is interesting to note that last year France has updated its own blocking statute, prohibiting French companies, on pain of penalty, from communicating sensitive data intended to be used in proceedings instigated by foreign authorities based on extraterritorial regulations. While the 1996 European Union’s blocking statute places the burden of complying or not with foreign injunctions on operators, recent regulations create measures that target third countries. This targeting is unprecedented, given the EU’s declared desire to pacify trade relations with its partners. Faced with an upsurge in economic coercion from third countries, the EU has been obliged to now protect its interests and assert itself as a standard-setting power.
 Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom: OJEU L 309, of the 29th of November 1996, p. 1.
 L. COHEN-TANUGI, « L’extraterritorialité, nouvel horizon du droit », Commentaire, vol. 182, n°2, 2023, pp. 375-379.
 National Defense Authorisation Act for Fiscal Year 1993; Cuban Liberty and Democratic Solidarity Act of 1996; Iran Sanctions Act of 1996; Iran Freedom and Counter-Proliferation Act of 2012; National Defense Authorization Act for Fiscal Year 2012; Iran Threat Reduction and Syria Human Rights Act of 2012; Iranian Transactions and Sanctions Regulations.
 Directors, managers, and other persons with management responsibilities.
 Article 2 Regulation No 2271/96
 Article 5 ibid
 Article 9 ibid
 Commission Implementing Regulation (EU) 2018/1101 of 3 August 2018 laying down the criteria for the application of the second paragraph of Article 5 of Council Regulation (EC) No 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.
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 §51 CJEU, grand chamber, Dec. 21, 2021, case C-124/20
 §68 ibid
 By three decisions of the European Commission authorizing the bank to comply with the US sanctions, in accordance with paragraph 2 of Article 5 of Regulation No 2271/96: Implementing Decisions C(2020) 2813 of 28 April 2020, C(2021) 3021 of 27 April 2021, C(2022) 2775 of 26 April 2022.
 § 127 General Court, July. 12., 2023, Case T-8/21
 § 80 Ibid
 § 120 Ibid
 General Secretariat for Defence and National Security (SGDSN), National Strategic Review 2022 55p. This document provides an overview of the international risks facing France, and sets out a strategy, approved by the President of the French Republic, defining the ambitions for dealing with them.
 European Commission, European Economic Security Strategy, Adressing weaponization of economic dependencies and economic coercion, 2023, p.8.
 European Union Council, « Proposal for a Regulation of the European Parliament and of the Council on the protection of the Union and its Member States from economic coercion by third countries », article 1, 1.
 Article 3, Proposal for a Regulation
 Article 4 ibid
 Article 5 ibid
 Article 7 ibid
 Article 12f § 3, Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine: OJEU No L.229, 31 July 2014, p.1 : “Annex XXXIII shall only include third countries that have been identified by the Council as having systematically and persistently failed to prevent the sale, supply, transfer or export to Russia of goods and technology, as listed in that Annex, exported from the Union, despite the Union’s prior outreach and assistance to the country in question”.
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 Parliament and Council Regulation (EU) 2022/1031 of 23 June 2023 on the access of third-country economic operators, goods and services to the Union’s public procurement and concession markets and procedures supporting negotiations on access of Union economic operators, goods and services to the public procurement and concession markets of third countries (International Procurement Instrument – IPI): OJEU, No L 173, 30 June 2022, § 8
 Article 5, Regulation No 2022/1031
 Article 5 § 2 Ibid
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