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The ultimate sanction

The ultimate sanction

Sanctions: myths busted. How they work in practice

While the EU and US may be aligned on Russian sanctions, they are directly opposed on others, and are unlikely to be aligned on all such measures in the future. Brian McMahon navigates the sea of sanctions. 

The Russian invasion of Ukraine has led to a range of sanctions by the European Union on Russian companies and individuals. The sanctions imposed on Russia by the EU are not the first sanctions by the EU. For example, prior to any of the latest sanctions, the EU had sanctioned entities such as the ‘Islamic State’ group.

The ultimate sanction

The ultimate sanction

Not many Irish businesses have dealings with the Islamic State, however, whereas the size and importance of the Russian economy has meant that the Russian sanctions have a real and immediate impact for many Irish businesses and professionals.

Of course, the EU and its member states are not the only countries that impose sanctions, and any solicitors advising their clients on compliance with sanctions have to keep in mind not only the EU and Irish sanctions regimes, but also the regimes of other countries – in particular, that of the United States.

Sanctions – what are they?

In the words of the European Commission, EU sanctions may target governments of non-EU countries, as well as companies, groups, organisations, or individuals through arms embargoes, travel bans, asset freezes, or other economic measures, such as restrictions on imports and exports.

Member states, including Ireland, are responsible for the implementation and enforcement of EU sanctions, as well as for identifying breaches and imposing penalties.

Of course, the EU is not the only world power to use sanctions nor, indeed, is it the first or the largest imposer of sanctions. That honour must fall to the US, where sanctions have been used as a foreign-policy tool for decades and where, following the collapse of the Soviet Union in 1989 – an event that left the US with comparatively huge economic power – their use by the US expanded greatly.

The post-September 11 period saw the US expand its sanctions’ regime further to exploit its control of the world’s reserve currency, the US dollar, to create what are known as ‘secondary sanctions’.

Primary and secondary

The EU limits itself to primary sanctions, which prohibit parties in Europe engaging in transactions with sanctioned entities. The US has expanded its sanctions’ regime beyond primary sanctions, to secondary sanctions.

These are much more extensive, and act to prohibit parties in the US from engaging in transactions with third parties anywhere in the world that engage in transactions with sanctioned entities.

Many entities based in the EU will have numerous contacts with the US, and will need to retain access to the US market and the US financial system, and to maintain an ability to conduct business in US dollars. Secondary sanctions put all these requirements at risk, since they prevent any US entity from engaging in business with an EU entity that does business in breach of US sanctions.

Secondary sanctions effectively present companies based in the EU with the choice of continuing to deal with the sanctioned entity, or maintaining access to the US market and dollar-denominated system. Faced with this choice, companies will almost inevitably choose
the US.

Sanctions on Iran

At the moment, the US and the EU are relatively closely aligned on the sanctions applicable to Russia. But they are not always so closely aligned and, in fact, in the recent past, the EU and the US have adopted contrary positions on certain sanctions, most particularly in relation to Iran.

In 2015, the EU and US agreed with Iran to lift sanctions in return for moves related to nuclear disarmament. With the election of Donald Trump to the US presidency, however, the US reneged on its agreement and reimposed sanctions, including secondary sanctions, on Iran. This action, in addition to severely undermining the agreement with Iran, exposed the relative weakness of the EU in the face of US sanctions.

No sooner had the US imposed secondary sanctions than EU companies, notwithstanding EU support for economic engagement with Iran to bolster the nuclear-disarmament agreement, quickly shied away from any dealings with Iran.

The French oil giant Total abandoned its investment in Iran’s oil fields, and the Belgian Society for Worldwide Interbank Financial Telecommunication cut off Iranian access.

The European Commission has stated that the American action in imposing secondary sanctions is “contrary to international law, that it threatens the integrity of the single market and the EU’s financial systems, reduces the effectiveness of the EU’s foreign policy, and puts strain on legitimate trade and investment in violation of basic principles of international law”.

The EU response to what amounted to a de facto challenge to foreign policy independent of the United States was largely twofold. Firstly, the EU established a ‘special-purpose vehicle’ named INSTEX, designed to process payments between Iran and its international trading partners, and thereby facilitate trade that would otherwise be inhibited by American sanctions.

The EU also revived the 1990s-era Blocking Statute (Council Regulation 2271/96), which prohibits compliance with the US sanctions. The Blocking Statute aims to protect EU operators by nullifying the effect within the EU of any foreign decision, including court rulings, based on the foreign sanctions annexed to the statute.

The statute prohibits EU persons from complying with such sanctions, and allows affected EU persons to recover damages caused by the sanctions (though not, of course, from the US government, which benefits from State sovereignty).

The law also allows parties to seek derogations from the European Commission from the obligation to comply with the statute, and requires EU persons and companies to inform the commission if the targeted sanctions affect their economic or financial interests.

Bank Melli Iran case

The Court of Justice has ruled on one case concerning the Blocking Statute: the case of Bank Melli Iran v Telekom Deutschland GmbH.

Following the reintroduction of sanctions against Iran by President Trump, Bank Melli Iran – an Iranian bank with a branch in Germany, whose main business was to settle foreign trade transactions with Iran – was made subject to US primary sanctions on 5 November 2018. At the time, the bank had a contract with Telekom Deutschland GmbH for the provision of telecommunication services.

The contract itself was of insignificant value, about €2,000 per month, but Telekom Deutschland is a subsidiary of Deutsche Telekom, a company with a significant presence in the US market, where it generates over 50% of its turnover.

On 16 November 2018, Telekom Deutschland terminated its contract with the bank and, on 28 November, the bank sued Telekom for breach of the Blocking Statute, claiming that the termination of the contract was motivated solely by the desire to comply with US secondary sanctions annexed to the statute.

Initially, the bank secured an injunction from the regional court in Hamburg, requiring Telekom to continue to provide services until the end of the contractual notice period, and then sought a further order compelling Telekom to continue to provide the service, even after the termination date.

This request was refused by the regional court, and appealed by the bank to the Hanseatic Higher Regional Court in Hamburg, which referred a number of questions concerning the Blocking Statute to the Court of Justice.

In responding to the questions raised, the court agreed with Advocate General Hogan that the Blocking Statute applies not only where US authorities compel or direct a European entity to comply with its sanctions, but also to spontaneous decisions by such an entity to comply, as in the Telekom case.

The court also broadly agreed with the advocate general on the question of giving reasons for termination, and it held that, where all the evidence indicates, prima facie, that the reason was to comply with secondary sanctions, then the regulation requires that the burden of proving otherwise is put on the terminating party.

Appropriate sanction

On the final question of the appropriate sanction for breach of the Blocking Statute, the advocate general felt compelled to go so far as to say that, because the statute created rights for persons subject to primary sanctions (Bank Melli in this case), and in order to ensure consistent and effective enforcement of the statute, any decision to terminate a contract simply to comply with sanctions should be regarded as invalid and ineffective, and the national courts must order the party to continue the contractual relationship in question.

On the question of whether this outcome was a proportionate restriction on the freedom of enterprise under article 16 of the Charter of Fundamental Rights, the advocate general felt that the option to apply for a derogation under the statute was sufficient to ensure that any prohibition did not infringe a substantive freedom.

The court, on the other hand, gave some scope to avoid the drastic consequences that could flow from the advocate general’s view, and held that it was for the national courts to strike a balance between the requirement to pursue the objectives of the Blocking Statute (which would favour continuing the contract) and the economic losses a party would incur by doing so, and whether those would result in disproportionate effects.

The court did note, however, that Telekom Deutschland did not apply for a derogation under the statute, a fact that it suggested was relevant in assessing proportionality.

Commission consultation

In early 2021, the European Commission announced that it was considering amending the Blocking Statute to make it more effective in deterring and counteracting the application of secondary sanctions on EU operators.

The commission’s subsequent public consultation confirmed that, overall, the Blocking Statute had not been successful in protecting European entities from the consequences of secondary sanctions. The consultation indicated that the statute suffers from a lack of awareness and enforcement among the judiciary, and its effectiveness was compromised by complexity and expense.

Respondents to the consultation suggested strengthening the effectiveness of the statute through restrictions on access to the EU market and punitive damages targeted at specific sectors or specific operators, as well as exploring resolutions through diplomacy and international organisations.

The future

The reaction to Russia’s invasion of Ukraine shows how prominent a part sanctions may play in the future and, while the US and the EU may be aligned on Russian sanctions, they are not aligned – indeed, they are directly opposed – on other sanctions, and are unlikely to be aligned on all sanctions in the future.

To make the situation even more complicated, the commission’s consultation noted how China has exploited its predominance in technology to introduce secondary sanctions similar to America’s. With the commission considering expanding the Blocking Statute, economic conflict seems likely.

For Ireland, an EU member state with an open economy and deep economic ties to the United States and growing ties to China, the conflicting sanctions’ regimes of these three major economic powers – and the possibility that the conflict between them will intensify – could come to present a particularly difficult challenge. Irish solicitors will be at the forefront of negotiating the delicate path through these conflicting and powerful interests on behalf of their clients.

Look it up



  • 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 (Blocking Statute)
  • EU Charter of Fundamental Rights, article 16

Brian McMahon is a solicitor and head of contentious matters in An Post. This article is written in a personal capacity.

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