Two Masters: US Secondary Sanctions and the EU Blocking Statute
Nordwind GmbH, a Düsseldorf pump manufacturer, is wholly owned by a Delaware parent. An Iranian petrochemical operator wants EUR 4.2 million of standard industrial pumps for a plant expansion. The Iranian buyer is not designated, but payment would come from an Iranian bank that is on the SDN list, routed through a UAE intermediary, in euros. The pumps contain no US-origin content and there is no dollar touchpoint. The German managing director believes the deal is lawful in the EU and wants to proceed. The US parent's Chief Compliance Officer emails the subsidiary: 'Group policy is no Iran business anywhere in the group - decline it, and confirm in writing.'
1. Separate the legal questions. Is this transaction prohibited, permitted, or permitted-but-risky?
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It is permitted under EU law, prohibited for the US parent, and high-risk for Nordwind. Three separate analyses must be kept apart.
1. EU law. Most nuclear-related EU measures against Iran were lifted in 2016. There is no blanket EU prohibition on standard industrial pumps. Check three things: whether the pumps are dual-use under the EU export control regime (unlikely for standard industrial pumps, but verify the technical specification), whether the specific buyer appears on any EU list, and the destination end use.
2. US law. Nordwind is not a US person, so the primary prohibitions do not reach it directly. But the Iranian bank is an SDN, which creates two exposures: US secondary sanctions for knowingly conducting significant transactions with an SDN Iranian financial institution, and designation risk for materially assisting a designated party. Also confirm the de minimis calculation for the goods - Iran is a 10% de minimis destination, so even modest US-origin content can pull the export into the EAR.
3. Conclusion. This is a board-level risk decision, not a compliance officer's 'no'. The correct output is a documented risk assessment with the legal basis, the secondary-sanctions exposure and the mitigation (no US persons involved, no USD, no US-origin content, verified end use), not a reflex decline.
2. The parent's CCO instructs the subsidiary to decline and confirm in writing. What is the problem with that instruction, and what lawful options does the group have?
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The instruction itself creates a problem, even though the parent is free to stay out.
The EU Blocking Statute prohibits EU operators from complying with specified extraterritorial US legislation, and from responding to requests that implement it. A US parent directing an EU subsidiary to refuse a lawful EU transaction solely because of US secondary sanctions is exactly the conduct the Regulation targets: the subsidiary may be exposed to damages claims from the Iranian counterparty and to penalties applied by the Member State, and group-wide policies that are merely instruments of US law are the classic enforcement target.
What the group can lawfully do:
- The parent, as a US person, may not approve, facilitate, finance, guarantee or be involved in the transaction, and may prohibit any US-origin content or US-person participation. It is entitled to protect itself.
- If Nordwind concludes non-compliance would cause serious harm, it can apply to the competent national authority for authorization to comply - that is the mechanism the Regulation provides, and the application should be documented.
- The practical solution is a policy adopted by the German board for reasons that stand on their own under EU law (EU and German measures, export control, AML, counterparty risk, reputational exposure), with local decision-making authority and a documented, independent rationale.
- The written confirmation the CCO wants should record Nordwind's own analysis, not state that it is complying with US secondary sanctions.
3. The UAE intermediary proposes settling in US dollars through a New York correspondent, saying 'the currency does not change the goods.' How does that change the analysis?
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It converts a tolerable risk into a US-jurisdictional event.
Once the payment clears through New York, a US financial institution is dealing in funds in which a designated bank has an interest. The correspondent is obliged to reject or block, and it will. Nordwind and its bank have then caused a US person to process a prohibited transaction, which is a materially worse posture than the original euro structure and can support a finding of facilitation.
There is also an intent question. Switching the settlement currency after the compliance function has flagged the Iranian nexus invites the inference that the change was made to move the payment, and any omission of the Iranian bank from payment messages in order to get the wire through is straightforward concealment. The difference between a legitimate commercial currency choice and evasion is timing and disclosure: if the USD route had been the plan from the outset and the parties were transparent, it is a risk decision; if it appears after a decline, it is a red flag.
The correct response is to refuse the USD route, record why, and consider whether the proposal itself is reportable. The intermediary's role and ownership also need checking - a UAE intermediary introduced mid-deal is a standard evasion channel.