When US President Trump announced a unilateral withdrawal from the 2015 Joint Comprehensive Plan of Action (“JCPoA”, commonly referred to as the “Iran Nuclear Deal”) made between Iran, the P5+1 and the European Union, the world changed again in particular for European companies doing business with both the US and Iran. From 5 November 2018 onwards, secondary sanctions preventing foreign companies from engaging with Iran, which had been lifted or waived under the JCPoA, became effective again. These November sanctions target the banking, oil, shipping and shipbuilding sectors in particular. The Iranian currency has already lost more than two-thirds of its value. The European Commission has reacted by updating the EU Blocking Regulation (Council Regulation (EC) No 2271/96), generally forbidding EU corporations from complying with such “extraterritorial” sanctions relating to Iran. Consequently, now more than ever, internationally active companies must carefully evaluate with whom they want to do business besides the US, and what consequences they need to be aware of in case of conflicts between applicable legal regimes.
Timo Spitzer, Head of Legal Corporate & Investment Banking Germany, Austria & Switzerland at Banco Santander in Frankfurt, comments on this delicate situation and provides a view to the future.
Mr. Spitzer, in September you gave a lecture at Harvard Law School at the conference "New Finance, Restructuring and Corporate Law Challenges: A Transatlantic Perspective", talking about certain incompatibilities between international sanction provisions. What brought you to Harvard University?
Spitzer: In 2018 I participated in Banco Santander’s competition “The WiseLegalSpeakers’ Awards”, held amongst our approximately 1,500 in-house lawyers of the group. Colleagues from about ten countries took part and each participant had to submit an essay on a current legal topic of choice. The prize for winning this global competition was to present the essay in a lecture at Harvard Law School.
… and it seems that your work was successful.
Spitzer: It was a great honor for me to come to the famous Harvard campus and have the chance to interact with so many inspiring people from the academic world and experienced legal practitioners in order to exchange views on current transnational topics. Especially the fact that one of the professors who teaches both at Harvard Law School and Harvard Business School had quite similar views, e.g. on corporate governance issues, was very inspiring to me.
That must have been quite something. Did you have a chance to further explore Boston and the US?
Spitzer: The trip to Harvard certainly left a lasting impression on me. To round up the experience, I had the pleasure of joining the other congress attendees on excursions through Cambridge and Boston, visiting e.g.
the Massachusetts Institute of Technology, and was invited to a dinner at the Harvard Faculty Club. Afterwards I spent some days in New York City, visiting my Santander US colleagues there as I did in Boston.
What about the reaction of your bank to this?
Spitzer: In October I was given the opportunity to repeat my lecture on sanctions at Santander’s global headquarters in Spain for all the group’s heads of legal and the legal colleagues based at our Corporate Center in Boadilla del Monte close to Madrid.
Your lecture was called “(In-)Compatibility of US, EU and German sanction provisions” – why did you choose this topic?
Spitzer: When I thought about a suitable subject of general interest for the competition, I had in mind geopolitical changes as well as my daily work as General Counsel at Banco Santander for the D-A-CH region. In my professional practice I am responsible for drafting, negotiating and reviewing agreements in many cross-border transactions. For EU corporations, in particular, the secondary US sanctions on the one side and the updated and directly applicable EU Blocking Regulation on the other side could create significant tension. These corporates could find themselves, metaphorically speaking, between the hammer and the anvil. That is because complying with one set of rules will violate the other set of rules, likely resulting either way not only in financial penalties, but also in severe reputational damage. The opposition of these sanction regimes illustrates the magnitude of this international legal conflict.
To what extent?
Spitzer: Non-US companies doing business with designated countries or persons that are listed as sanction targets by the US may be blocked from access to the US financial system. Such blocking would lead to an indirect extraterritorial punishment due to its drastic economic consequences. On an EU level, Article 5 of the EU Blocking Regulation prohibits EU persons and companies from any compliance, even in an indirect fashion, with requirements or prohibitions under relevant applicable sanction regimes of other countries. Also German law contains in Section 7 of the Foreign Trade Ordinance (Außenwirtschaftsverordnung, AWVO) a prohibition to issue a declaration in foreign trade and payments transactions whereby a resident participates in a boycott against another country. This German law provision does not apply to sanctions that are already covered by United Nations, EU or German legislation, but it does apply to certain US-only sanctions (i.e. those which are not at the same time also UN or EU sanctions). Therefore, this requires being specifically addressed and carved-out in the documentation. For example, when a German resident agrees to comply with sanctions, the documentation should provide that such party undertakes to comply with applicable sanction regimes as is required by the transaction (for example US, EU and UN sanction regulations) only to the extent that its compliance does not constitute a violation of Section 7 AWVO and the EU Blocking Regulation.
And what are the consequences?
Spitzer: Apart from the aforementioned monetary and reputational repercussions of sanction violations, for example, if a contract complies with US sanctions only but not with EU or German blocking laws, the counterparty could challenge the validity or individual clauses of the contract due to the other party breaching a statutory prohibition. Therefore, an “economic approach” to complying with US sanctions only and to ignoring EU and German laws is not recommended. This remains true regardless of what penalties may be established on national levels by EU member states to punish a violation of the EU Blocking Regulation.
Could full compliance with US sanction regulations lead to an infringement of EU and German laws?
Spitzer: Indeed. For instance with respect to US sanctions on Cuba, the district court (Landgericht) of Dortmund held in its decision dated 15 January 2016 that the enforcement of US embargo laws in Germany or Europe would be illegal, as it would violate pertinent principles of commerce and jeopardize the existence of local businesses, leading to consumer discrimination (decision reference no 3 O 610/15).
Talking about syndicated loans, what does that mean for the international lending practice?
Spitzer: Especially companies in international finance need to consider how to comply with relevant sanctions. The underlying transaction documentation should clearly define which sanctions could be applicable. Compliance with such applicable sanctions should be backed-up by the borrower via representations and covenants. If there is no room for changing the syndicated loan agreement by introducing additional language into the documentation, the borrower and the lender asking for sanction comfort could alternatively agree on a side letter in which the borrower confirms compliance to the lender.
But isn’t the borrower merely bound bilaterally in this case? How can the contract be terminated due to a sanction infringement?
Spitzer: Legally speaking, this can be resolved if the agent executes the side letter together with the borrower and the lender in order to designate such side letter as a “Finance Document” under the credit documentation. Since the violation of any “Finance Document” would trigger an event of default, and, provided that the standard loan market association language is used, a “Finance Document” is defined, inter alia, as any document designated as such by the agent and the company, a breach of the terms of the sider letter by the borrower would give the lender a termination right.
And what happens if the borrower wants to avoid that the agent knows about potentially applicable sanctions?
Spitzer: In this case a special due diligence review together with the borrower is the remaining possibility for the lender to obtain sufficient comfort as to why neither the borrower nor any other element of the transaction could be subject to a sanctions program. These findings could also be used as evidence in the context of potential investigations by the authorities at a later stage.
However, this does not have any contractual effects.
Spitzer: Correct. A due diligence review is not linked to the loan documentation and, as such, does not enable the lender to accelerate the loan. Therefore, this solution is weaker than the aforementioned possibilities which offer a lender not only a potential defense for investigations by authorities but also the possibility to exit the transaction by way of accelerating the loan and recovering the disbursed funds. In addition, a due diligence review only reflects a particular moment in time and the facts may change.
This sounds like an intractable mine field for European companies with US and Iran relationships.
Spitzer: Yes. It is very interesting to observe how this conflict between US and EU sanction laws will play out. Potential solutions are being discussed at a geopolitical level in particular. On 2 November 2018 the US administration announced six month waivers for eight undisclosed countries, said to include the largest Iranian oil importers, allowing them to reapply for further extensions. The waivers, however, which prescribe payments for the oil to be made through barter systems, are not likely to be issued for the EU, whereby the secondary sanctions became fully effective again on 5 November 2018.
And what is the EU doing apart from having updated its EU Blocking Regulation with respect to Iran?
Spitzer: To mitigate the conflict for European companies intending to do legitimate business with Iran, the EU is, for example, exploring the creation of a special purpose vehicle (SPV) as intermediary for trading with Iran outside the international banking system, e.g. with matching payments to be made in goods and/or services rather than in cash. However, US sanctions also target the movement of goods, not only financial transactions. An alternative structure of using non-dollar movements between national central banks outside of the US financial system could make participating central banks subject to US secondary sanctions. In addition, no EU country has offered to physically accommodate and host such an SPV yet, making this SPV proposal potentially difficult to implement in practice as well.
What is your view on how the situation potentially develops?
Spitzer: In my personal view, decision makers in global corporations will make commercial judgment calls to avoid or at least minimize any repercussions and not to become victims in this political struggle. Suggested workarounds seem to appear more attractive for smaller and medium sized entities with no or limited US connections. Large corporates with significant US exposure have already ceased transacting business with Iran in order not to jeopardize their US market access. Foreign countries would need to form a strong coalition in order to weaken the legal and economic effect of US sanctions and the “maximum pressure” policy that is being pursued by the current US administration.
About Timo Spitzer
With a career rich in experience at some of the world’s most prominent legal and financial institutions, Timo Matthias Spitzer is the current head of legal corporate & investment banking in Germany, Austria and Switzerland for Banco Santander from his base in the German financial hub of Frankfurt. Spitzer’s role has a broad scope, and on a day-to-day basis involves management of the legal aspects of a number of important cross border transactions, all of these relating to the Spanish bank’s corporate and investment banking portfolio in the aforementioned countries. A bright and adaptable lawyer, Spitzer came to Banco Santander after previous secondee roles at Citibank and UniCredit in London and Munich respectively. He acquired the foundation of his legal knowledge at a variety of international law firms and is a graduate of the BPP Law School in London to compliment his other outstanding credentials.