Top EU court upholds law that balances compliance with sanctions and economic ruin

LUXEMBOURG (CN) — For a German telecom that makes half of its profits from U.S. business, the “risk of substantial economic loss” can be enough to trigger a loophole under an EU law that would otherwise let it carry on business with an entity like Bank Melli that has been sanctioned by the United States, the bloc's highest court ruled Tuesday.

This follows because the law in question, known as the Blocking Statute, contains a provision allowing affected businesses to recover damages, but ultimately "would not be capable of counteracting the effects of" the sanctions. To wit, "neither a recovery claim ... nor the possibility of the issue of an authorization to comply with the sanctions provided for ... is sufficient compensation for the risk of economic loss," the decision states.

The EU updated its Blocking Statute the same year that this case erupted in 2018 when then-U.S. President Donald Trump unilaterally backed out of the Iran nuclear deal. Bank Melli is Iran's largest private bank and serves as the main bank for transactions between Germany and Iran but had been effectively unable to function that year after Telekom Deutschland cut off the phone lines.

A regional court in Hamburg ultimately took up Bank Melli's complaint but referred the case to the European Court of Justice to decide the EU Blocking Statute's role here.

The Grand Chamber of the Luxembourg-based court issued its decision Tuesday following a nonbinding recommendation earlier this year from one of the court's advisers, who concluded that Deutsche Telekom was most likely trying to preserve its U.S. interests and the move breached EU regulations. Advocate general Gerard Hogan wrote the expansive American sanctions regime is viewed by many legal experts as a “form of exorbitant jurisdiction which some think is not easily reconciled with general principles of public international law.” 

Although German law doesn’t require a company to disclose why they are canceling a contract, the telecoms giant generates about half of its global revenue in the United States and employs some 50,000 people there. 

The EU’s blocking statute was originally enacted in 1996 to counteract sanctions imposed by the U.S. against Cuba. The United States implemented an embargo against Cuba in 1958, and it had been expanded by 1962 to include blocking the import and export of nearly all goods from the island. Following the automatic reinstatement of sanctions against Iran, once the U.S. withdrew from the Iran nuclear deal, the EU updated the regulation to “protect EU companies doing legitimate business with Iran from the impact of US extra-territorial sanctions.” 

Tuesday's decision from the 13-judge panel says that EU businesses cannot be asked to shoulder a “substantial economic loss” by refusing to adhere to U.S. sanctions. Washington could block financial transactions, seize assets or even shut down companies operating in the country for refusing to comply. 

"In so far as Telekom’s economic activity outside the European Union is exposed to the sanctions provided for by the United States against persons who fail to comply with the secondary sanctions taken by that third country against Iran, the referring court is required to assess whether those first-mentioned sanctions are liable to entail disproportionate effects for that undertaking," the court wrote.

As the case returns to Hamburg, the EU body said the referring court owes consideration to "the probability that Telekom would be exposed to economic losses and the extent of those losses if that undertaking were unable to terminate its commercial relationship with" an entity sanctioned by the United States.

It’s unclear when the German court will rule. 

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