Is it better to breach EU law than run the risk of incurring US ire?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The branch of the Iranian bank Bank Melli Iran in Hamburg, northern Germany, 27 March 2019. Iranian banks were among some 20 institutions and individuals that have been the subject of fresh sanctions by the US Treasury for illegally transferring billions of dollars and euros in cash to Iran's Revolutionary Guard. [EPA-EFE/OLAF MALZAHN]

The Bank Melli Iran v Telekom Deutschland case is significant because it highlights the intrusive impact of U.S. extraterritorial sanctions and spotlights the weaknesses in the E.U. response, writes Dick Roche.

Dick Roche is a former Irish Minister for European Affairs and former Minister for the Environment. He also served as Chairman of the Irish Commission of Justice and Peace.

In 2018 President Trump walked away from the Joint Comprehensive Plan of Action (JCPOA), reintroduced sanctions on Iran and reinstated secondary sanctions on companies doing business with that country.

A legal case, Bank Melli Iran v Telekom Deutschland GmbH, which has its origins in President Trump’s actions, was recently adjudicated by the European Court of Justice. The case highlights how U.S. extraterritorial legal outreach can negatively impact European companies’ legitimate business activities.

It spotlights difficulties posed by the U.S. presumption that laws made in Washington have global application. It raises fundamental questions about whether Council Regulation (E.C.) No 2271/96, the E.U. “Blocking Statute”,  is fit for purpose. The case also raises whether Europe has been looking to the wrong place for a solution to U.S. outreach.

The Joint Comprehensive Plan of Action (JCPOA), a unique international agreement between Iran, the five permanent members of the United Nations Security Council plus Germany and the E.U., was signed on 14 July 2015. Six days later, it was unanimously endorsed by the U.N. Security Council.

Under the JCPOA, Iran agreed to dismantle its nuclear programme and open its facilities for international inspections in exchange for sanctions relief.

President Obama said the JCPOA “makes our country, and the world, safer and more secure.”

In January 2016, the International Atomic Energy Agency certified that Iran had honoured its JCPOA nuclear commitments. The IAEA verification resulted in the U.S. and the E.U. lifting their sanctions.

With sanctions lifted, E.U. companies could legitimately do business with Iranian entities.

In May 2018, President Trump announced that the U.S. was unilaterally withdrawing from the JCPOA. The President’s decision was made not because Iran had broken its side of ‘the bargain’: President Trump was playing to his base.

On 7 August 2018, President Trump signed Executive Order 13846, reinstating all U.S. sanctions waived under the JCPOA.

Executive Order 13846 sounded alarm bells for Telekom Deutschland, which had a contract with Bank Melli Iran (BMI), Iran’s largest commercial bank, to provide telephone and internet services to the bank’s operations in Germany. The modest contract yielding just over € 2,000 per month was a completely legitimate business.

To avoid crossing swords with U.S. authorities, Telekom Deutschland served notice on BMI, immediately terminating all contracts with it. With BMI back on the U.S. sanctions list doing business with it could result in Telekom Deutschland finding itself on the SDN list.

As the German company derived almost half of its turnover from business in the United States, that would spell commercial disaster. Cutting the connection with BMI made sense.

The bank appealed the decision to the German courts, arguing that the termination infringed Article 5 of the E.U. Blocking Statute. The basis of the action by BMI was more than a little ironic; the E.U. Blocking Statute is regularly portrayed by the E.U. Commission as  “protecting” E.U. companies against the extraterritorial laws of third countries.

The case was referred to the ECJ by the German regional court in March 2020. In May 2021, the Advocate General issued an opinion in which he referred to the “impossible—and quite unfair—dilemmas” faced by E.U. entities arising from the E.U. Blocking Statute but took the view that courts must apply the terms of the Blocking Statute as enacted.

The CJEU issued its findings in the case in December. While noting that Telekom Deutschland could have applied for an exemption from the E.U. Blocking Regulation but had not done so,  the CJEU suggested, somewhat at odds with the Advocate General’s opinion,  that courts should apply the proportionality principle and weigh up whether forcing the maintenance of a contract could entail disproportionate economic consequences in the circumstances of each case. It left it to the German courts to determine how proportionality should apply in the BMI case.

Whatever the German courts’ final determination, the BMI case is significant. It again highlights the intrusive impact of U.S. extraterritorial sanctions and spotlights the weaknesses in the E.U. response.

Telekom Deutschland was operating lawfully in its dealings with BMI, yet it felt that the dangers it faced were so great that it had to terminate a lawful contract.  Telekom Deutschland was not alone. Following President Trump’s U-turn on the JCPOA, many legal European business connections with Iran were severed. Significantly, the Belgium based Society for Worldwide Interbank Financial Telecommunications (SWIFT) immediately cut Iranian banks from the SWIFT system. All took the view that discretion is the better part of valour – better to breach E.U. law than run the risk of incurring U.S. ire.

As recognised in the Advocate General’s opinion, the Statute, rather than providing European entities with a protective shield against U.S. outreach, put them in a Catch 22 situation.

Moreover, the Blocking Statute lacks teeth. The E.U. lacks the enforcement capacity to challenge the U.S.

Overall, the Statute has had little impact on U.S. thinking. It has not shifted the deeply entrenched beliefs within the U.S. executive and legislative branches that U.S. law trumps all other laws.

However, Europe could employ one lever to affect a change – the U.S. court system.

Contrary to the other branches of government, U.S. federal courts have long taken the view that U.S. law applies only within the United States.

In 1991 the Fifth Circuit of the U.S. Court of Appeals rejected an appeal in which the plaintiff claimed that while he was working outside the U.S., his U.S. registered employer breached his rights under Title VII of the Civil Rights Act 1964. The court rejected the appeal because the Civil Rights Act applied only within U.S. territorial jurisdiction.

In 2013 Chief Justice John Roberts invoked the “presumption against extraterritorial application” in a landmark human rights case. In an opinion where four other Justices joined him, the Chief Justice wrote, “United States laws govern domestically, but do not rule the world.” The case was decided 9-0.

In 2019 the German SWP think tank examined the options available open to Europe to protect the JCPOA from falling apart and protect EU-based companies from Trump’s renewed sanctions regime.

Having concluded that the E.U.’s best efforts had fallen short of providing the cover E.U. companies needed against U.S. extraterritoriality, SWP suggested that an answer to Europe’s dilemma might be found in the U.S. Courts and, more particularly, in the U.S. Supreme Court.

Citing a strengthening of the “presumption against extraterritoriality” in U.S. courts, a 19th Century court cannon known as the “Charming Betsy” presumption and the current conservative-leaning makeup of the U.S. Supreme Court, SWP concluded that challenging U.S. extraterritorial outreach in the U.S. courts could be the remedy “to protect European sovereignty.”

The E.U. Commission would be well advised to invest some effort in putting together a strategy to use the U.S. Courts to provide the protection that European entities need against the claims by U.S. agencies and legislators. The idea may sound like a long shot, but sometimes long shots pay off.

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