By: Catrina Lambert-Crittenden

Economic sanctions, an increasingly popular foreign policy tool, are a mechanism to impose penalties on governments, people, or groups.[1]  Sanctions can take the form of tariffs, quotas, embargoes, and the seizure of assets.[2]  Typically, a sanctions regime applies to entities within a state’s control whether it is assets located within the country or items subject to restrictions to enter the country.[3] However, the U.S. sanctions regime is one that can have an “extraterritorial effect,” meaning it can apply to non-U.S. citizens and those located outside the U.S.[4]  The extraterritoriality of U.S. sanctions is highly novel, at its core, because it goes against bedrock principles of sovereignty and territory.[5]

The U.S. government enacts sanctions in two general categories – primary sanctions and secondary sanctions. Primary sanctions restrict the economic activity of U.S. “entities,” movement of U.S. goods, and any transaction taking place in the U.S. with a person identified in a sanctions program.[6]  Because the conduct regulates U.S. entities, these sanctions apply regardless of the physical location of the individual.[7] For example, under the U.S. sanctions program targeting Iran, a foreign company owned or controlled by U.S. citizens cannot conduct business transactions with any entity listed on the Iranian sanctions list or the Iranian government.[8]  Even though the foreign company is located abroad, the company’s U.S. assets are subject to fines, penalties, and seizure.[9] Secondary sanctions allow sanctions to apply to non-U.S. citizens because they target individuals (U.S. citizen or otherwise) engaging with someone sanctioned by the U.S..[10]  For example, under secondary sanctions the U.S. can place sanctions on a foreign-owned company, owned and controlled by a foreign entity, shipping airplane parts to Mahan Air, (a sanctioned Iranian company).[11]   In response to contentions regarding the legality of extraterritorial effects, both the European Union (“EU”) and China have enacted “blocking statutes,” or statutes that attempt to prevent a legal domestic company from being subject to U.S. sanctions.[12]

In 1996, the EU passed a blocking statute intending to protect EU citizens from the effects of the U.S. sanctions regime after the U.S. enacted sanctions on Cuba and Iran.[13]  The statute arose out of the EU’s position that extraterritorial effects of third countries’ laws are illegal under international law.[14]  The blocking statute largely became obsolete until the U.S. backed out of the Iranian Nuclear Deal and reinstated sanctions on Iran, prompting an amendment to the Blocking Statute to reinforce the law’s applicability.[15]  In 2021, a German company was a party to a dispute at the Court of Justice of the European Union (“CJEU”) under the EU Blocking Statute for the first time after terminating contracts with U.S. sanctioned Milli Bank over compliance with U.S. sanctions on Iran.[16]  The CJEU upheld the statute, reaffirming that the statute 1) nullifies “the effect in the EU of any foreign court ruling based on the foreign laws listed in its Annex” and 2) allows “EU operators to recover in court damages caused by the extraterritorial application of the specified foreign laws.”[17]  Furthermore, the statute provides a positive obligation prohibiting compliance with foreign laws that companies can only circumvent with approval from the European Commission.[18]

The Chinese Anti-Foreign Sanctions law goes further than the EU’s, not only by preventing compliance but also by mandating companies’ aid with retaliatory measures.[19]  The Chinese Anti-Sanctionsrgely arose out of growing tensions between the U.S. and China after sanctions for Chinese human rights abuses.[20]  Similar to the EU program, the Chinese program also creates positive obligations that require an exemption if seeking to comply with U.S. sanctions and encourages the termination of contracts to avoid compliance with U.S. sanctions. [21]  However, the Chinese law goes even further by creating a Counter-Control List that targets individuals and companies complying with U.S. sanctions and can restrict their entry into China or deport them.[22]  China has yet to enforce its Counter-Control List.[23]

The U.S. will likely not accept compliance with blocking statutes to circumvent U.S. sanctions violations.[24]  However, “blocking statutes” create a conflict of laws in which companies must choose which legal regime to comply with.[25]  These barriers and conflicting legal standards pose a major risk to U.S. and multinational businesses.  Companies risk non-performance of contracts in both China and the EU for compliance with U.S. sanctions.[26]  Businesses must not only worry about non-performance, but also enforcement penalties.[27]  An EU company can recover damages caused by U.S. sanction-based termination of a contract.[28]  In China, deportation or denial of entry poses a serious threat.[29]

The solution may be international arbitration – allowing disputes to be settled outside of legal regimes with conflicting legal rules.  Mandatory arbitration clauses would allow the parties to circumvent taking the matter to courts that can rely on anti-sanctions laws to avoid performance.[30]  However, even with arbitration as an option, companies must choose whose law to follow, bearing in mind the strength of U.S. sanctions enforcement.  Companies that attempt to circumvent U.S. sanctions are subject to fines, penalties, and even possibly criminal liability.[31] Additionally, the U.S. enforcement program is actively seeking violators of U.S. sanction law.[32]  Perhaps, ultimately, the U.S. sanctions regime possesses a bigger threat than blocking statutes elsewhere. Thus, companies should comply with U.S. sanctions and turn to other dispute resolution methods abroad.

[1] See Michael Brzoska, International sanctions: A useful but increasingly misused policy instrument, Vision of Humanity (last visited Feb. 12, 2022), https://www.visionofhumanity.org/international-sanctions-a-useful-but-increasingly-misused-policy-instrument/ (explaining the growing popularity of sanctions over the last 30 years and their usefulness to target human rights violators and support peace efforts).

[2] Brent Radcliffe, How Economic Sanctions Work, https://www.investopedia.com/articles/economics/10/economic-sanctions.asp (last visited Feb. 17, 2022).

[3] See New European Union (“EU”) approach to unilateral sanctions with extra-territorial effect, Dentons (Feb. 1, 2021) https://www.dentons.com/en/insights/alerts/2021/february/1/new-eu-approach-to-unilateral-sanctions-with-extra-territorial-effect (last visited Feb. 15, 2022).

[4] See Clara Portela, Creativity Wanted Countering the Extraterritorial Effects of US Sanctions, EUSS (Oct. 20, 2021), https://www.iss.europa.eu/content/creativity-wanted-countering-extraterritorial-effects-us-sanctions#_secondary_sanctions__extraterritorial_effects_and_over_complicance.

[5] New European Union (“EU”) approach to unilateral sanctions with extra-territorial effect, supra note 3.

[6] See Oliver Malherbe, U.S. Economic Sanctions Against Nord Stream 2 Under International Jurisdiction Principles, 53 N.Y.U. J. Int’l L. & Pol. 1017, 1022 (2021) (“Primary sanctions only regulate economic relations between U.S. government, citizens, and companies and the states or entities that the sanctions target, for example, the interdiction to engage in business with the government of Sudan due to its implication in genocide”).

[7] Id.

[8] Iran-Related Secondary Sanctions, Price Benowitz LLP, https://ofaclawyer.net/economic-sanctions-programs/iran/secondary-sanctions/ (last visited Feb. 16, 2022).

[9] Id.

[10] Malherbe, supra note 6 (“Secondary sanctions are “any form of economic restriction imposed by a sanctioning … state … that is intended to deter a third-party country or its citizen and companies … from transaction with a sanction target (e.g., a rogue regime, its high government officials, or a non-state terrorist entity”).

[11] See Iran-Related Secondary Sanctions, supra note 8. E.g., Bart M. McMillan, et al., US Government Designates IRISL, E-Sail, and Mahan Air under Executive Order 13382, Baker McKenzie (Dec. 18, 2019), https://sanctionsnews.bakermckenzie.com/us-government-designates-irisl-e-sail-and-mahan-air-under-executive-order-13382/

[12] See Burt Braverman & Edlira Kuka, China’s Newest Anti-Foreign Sanctions Blocking Law: What We Know, What We Don’t Know, and What U.S. Companies Can Do, Davis Wright Tremaine LLP (Aug. 30, 2021), https://www.dwt.com/blogs/broadband-advisor/2021/08/anti-foreign-sanctions-law-china.

[13] See Blocking Statute, European Commission https://ec.europa.eu/info/business-economy-euro/banking-and-finance/international-relations/blocking-statute_en (last visited Feb. 12, 2022); https://www.lw.com/thoughtLeadership/Top-EU-Court-Clarifies-Anti-US-Sanctions-Blocking-Statute

[14] See id. (“The European Union does not recognise the extra-territorial application of laws adopted by third countries and considers such effects to be contrary to international law”).

[15] See Top EU Court Clarifies Anti-US Sanctions “Blocking Statute,” Latham & Watkins, https://www.lw.com/thoughtLeadership/Top-EU-Court-Clarifies-Anti-US-Sanctions-Blocking-Statute (last visited Feb. 16, 2022).

[16] See Case C‑124/20, Bank Melli Iran v. Telekom Deuschland GmbH, ECLI:EU:C:2021:1035, ¶¶ 1-2 (Dec. 21) (holding that Telekom’s termination of contracts with U.S. sanctioned Milli bank was permissible because the bank was the target of the U.S. sanctions program with Iran); See also Genevra Forwood, et al., CJEU ruling on EU Blocking Regulation provides some clarifications but leaves difficult questions to national courts, White & Case (Dec. 29, 2021) https://www.whitecase.com/publications/alert/cjeu-ruling-eu-blocking-regulation-provides-some-clarifications-leaves-difficult (explaining that the regulation formally known as the 1996 EU Blocking Regulation has been in effect since 1996; however, the matter had yet to be brought to the CJEU).

[17] See Blocking Statute, supra, note 6; Council Regulation No 2271/96, 1996 O.J. (L 309) 1, art. 1, 4, (EC).

[18] See Blocking Statute, supra, note 6; See also Council Regulation No 2271/96, 1996 O.J. (L 309) 1, art. 5, (EC).

[19] See Jeffie Lam, China’s anti-sanctions law: what is it, how will it take effect in Hong Kong and should the business community worry?, S. China Morning Post (Aug. 18, 2021, 7:00 AM), https://www.scmp.com/news/hong-kong/politics/article/3145394/chinas-anti-sanctions-law-what-it-how-will-it-take-effect.

[20] See id. (determining that the Chinese Anti-Sanctions law originated from persistent U.S. sanctions for ongoing human rights abuses in Xinjiang).

[21] See Braverman & Kuka, supra, note 12.

[22] See id.

[23] See id.

[24] See id.

[25] See Irene Polieri & Raza Nazar, Extraterritorial U.S. Sanctions and EU Blocking Rules: Damned If You Do, Damned If You Don’t, Akin Group (Dec. 22, 2021), https://www.jdsupra.com/legalnews/extraterritorial-u-s-sanctions-and-eu-7536261/;S

[26] See id.

[27] Id.; Lam, supra note 19.

[28] Polieri, supra note 27.

[29] Lam, supra note 19.

[30] See id.

[31] Roberto J. Gonzalez & Rachel M. Fiorill, Sanctions 2020, 154 (1st ed. 2020), https://www.paulweiss.com/media/3979073/iclg_sanctions2020.pdf (“The maximum criminal fine for violations of most U.S. sanctions programmes is $1 million or 20 years in prison for each violation. Under the Kingpin Act, certain narcotics-related sanctions violations can trigger criminal fines of up to $5 million or 30 years in prison per violation. Funds related to sanctions violations can also be subject to criminal forfeiture. There is no statutory ceiling on the size of the total penalty or forfeiture that could be imposed, and there have been several recent criminal sanctions enforcement actions that resulted in penalties and/or forfeitures of hundreds of millions and even billions of dollars.”).

[32] Id. at 151 (“OFAC has the power to investigate and impose civil monetary penalties against persons (including non-U.S. persons) that violate U.S. sanctions laws and regulations. DOJ criminally investigates and prosecutes “willful” violations of U.S. sanctions.”).