The Blocking Statute and Client Protection

A European client may face a rejected payment, blocked funds, a suspended account, or even the termination of a banking relationship because of an improper application of OFAC sanctions. What can the client do in these situations?

A bank may justify its decision in general terms by referring to “U.S. sanctions,” “OFAC,” “Iran,” “Cuba,” or the group’s “international policy.” However, these explanations alone are not enough to determine whether the bank’s action is lawful. The specific legal source of the restriction must be identified.

It is necessary to distinguish between:

• the application of a restrictive measure imposed by the European Union;
• the enforcement of a United Nations measure incorporated into EU law;
• a freezing obligation or an anti-money laundering requirement;
• a request from a correspondent bank;
• an independent risk-management decision;
• direct or indirect compliance with an extraterritorial U.S. law listed in the Annex to Council Regulation (EC) No 2271/96.

This distinction is essential because the European Union’s Blocking Statute is intended to counteract the extraterritorial effects of certain U.S. laws listed in its Annex. However, it does not prevent a bank from complying with a legally binding EU or international measure. See CJEU, Case C-124/20.

To determine the source of the block, the client should first establish whether the situation genuinely falls within the scope of the Blocking Statute. This distinction prevents the Regulation from being extended to situations that it does not actually govern.

The principle is relatively straightforward. A European bank subject to the Blocking Statute may not reject, block, or interrupt a transaction or banking relationship solely to comply with an extraterritorial U.S. rule concerning Cuba or Iran when that rule is listed in the Annex to Council Regulation (EC) No 2271/96.

The Blocking Statute may apply even when OFAC has issued no individual order, and its protection may be invoked before national courts. However, this conclusion requires three qualifications:

1. The second paragraph of Article 5 allows an application to the European Commission for authorization where non-compliance could cause serious damage.
2. A bank may comply with binding EU, United Nations, or national measures and must continue to meet its independent anti-money laundering obligations.
3. A breach of the Blocking Statute must be linked to a specific U.S. rule and to the bank’s actual motivation, not merely to the use of the acronym “OFAC.”

What Is the Blocking Statute?

The Blocking Statute, Council Regulation (EC) No 2271/96, was adopted by the European Union to counteract the extraterritorial effects of certain laws of third countries. Those laws seek to regulate, even outside their own territory, the activities of persons and companies subject to the jurisdiction of EU Member States.

In the context of the Blocking Statute, the Court of Justice has stated that the Regulation protects the EU legal order, its interests, and persons exercising rights derived from the Treaties. It does so by counteracting the effects of the foreign laws expressly listed in its Annex. See CJEU, Case C-124/20.

The Blocking Statute is based primarily on four mechanisms:

1. a prohibition on complying with the extraterritorial laws covered by the Regulation;
2. a prohibition on recognizing or enforcing certain foreign decisions within the European Union;
3. the right to seek recovery of damages suffered;
4. the obligation of Member States to establish effective, proportionate, and dissuasive penalties.

These mechanisms do not turn the Blocking Statute into an absolute right to carry out any banking transaction. They do, however, prevent a European financial institution from automatically treating an OFAC sanction as a rule that applies to a European client.

Article 5 of the Blocking Statute: the prohibition on compliance

The first paragraph of Article 5 of the Blocking Statute provides: “No person referred to in Article 11 shall comply, whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the laws specified in the Annex or from actions based thereon or resulting therefrom.”

In other words, persons covered by Article 11 may not comply, directly or indirectly, through a subsidiary or other intermediary, by affirmative action or deliberate omission, with any requirement or prohibition — including requests from foreign courts — that is based on, or arises directly or indirectly from, the laws listed in the Annex or actions founded on those laws.

In practical terms, Article 5 prevents a person or company subject to the Blocking Statute from applying, directly or indirectly, the extraterritorial U.S. laws listed in the Annex to the Regulation. The prohibition may also cover conduct carried out through subsidiaries or intermediaries, as well as apparently internal decisions that are, in reality, intended to comply with those foreign rules. In Case C-124/20, the CJEU confirmed that the prohibition may apply even when no individual order has been issued by a U.S. authority.

The Court of Justice has clarified that the prohibition:

• may apply even without an individual order issued by a U.S. authority;
• also covers indirect forms of compliance;
• may be carried out through a deliberate omission;
• may extend to commercial decisions by which an operator terminates a relationship;
• is expressed in clear, precise, and unconditional terms;
• may be invoked by the client before national courts.

These criteria must be considered together. The Bank Melli Iran judgment concerned a commercial relationship terminated in the context of U.S. sanctions against Iran. For purposes of interpreting the Blocking Statute, the judgment confirms that the absence of an individual order does not, by itself, exclude the application of Article 5. See CJEU, Case C-124/20.

Iran and Cuba: the U.S. laws listed in the Annex to the Blocking Statute

For purposes of the Blocking Statute, it is not enough to state broadly that “OFAC is prohibited in Europe.” The legal issue is different: the Regulation prohibits compliance with certain extraterritorial U.S. laws specifically listed in its Annex.

In the case of Iran, applying the Blocking Statute requires identifying the specific U.S. rule that is relevant. The Court of Justice has expressly examined the relationship between the EU Regulation and certain U.S. secondary sanctions connected with the Specially Designated Nationals and Blocked Persons List, commonly known as the SDN List.

Read and interpret the judgment

Among the provisions listed in the Annex, the judgment refers to the Iran Freedom and Counter-Proliferation Act of 2012, as well as the subsequent update to the Annex made by Commission Delegated Regulation (EU) 2018/1100. See CJEU, Case C-124/20.

As regards Cuba, the Blocking Statute requires an analysis of the specific U.S. measure and the version of the Annex in force when the relevant events occurred. It is not enough for the bank to refer generally to “Cuba” or “OFAC.”

The institution must identify the U.S. rule on which it bases its decision and determine whether that rule actually falls within the scope of the Blocking Statute. For that reason, it would be inaccurate to state that “European banks can never reject transactions involving Cuba or Iran.”

A more accurate formulation is this: banks and other operators subject to the Blocking Statute may not reject, block, or interrupt a transaction or relationship solely to comply with an extraterritorial U.S. rule concerning Cuba or Iran when that rule is listed in the Annex to Council Regulation (EC) No 2271/96, unless the European Commission has granted authorization or another EU or national legal basis independently justifies the measure.

This interpretation preserves the protection afforded to the client without giving Article 5 a broader scope than its text allows.

The Blocking Statute may apply even when the bank relies on an internal policy

A bank may argue that it never received a direct OFAC order and merely applied its own internal risk-management policy. Under the Blocking Statute, that argument is not automatically decisive.

The Court of Justice has held that Article 5 may apply even when no administrative or judicial order has been issued by the United States. Extraterritorial rules may also produce effects through the threat of economic consequences under U.S. law. See CJEU, Case C-124/20.

How to identify and document possible misconduct by the bank

From the perspective of the Blocking Statute, a potential issue may arise where the bank:

• closes the account because the client appears on an OFAC list;
• rejects a payment because the beneficiary is connected with Iran or Cuba;
• blocks specific amounts to avoid consequences in the U.S. market;
• terminates the relationship because a U.S. group company or correspondent bank could penalize it;
• expressly states that it intends to “comply” with an extraterritorial U.S. measure.

In these situations, the client may invoke the Blocking Statute and argue that the institution’s conduct amounts to direct or indirect compliance with foreign legislation covered by Article 5. A bank cannot automatically avoid the Regulation simply by replacing the expression “OFAC sanction” with “internal policy.”

The assessment must be substantive. If an internal policy was adopted specifically to produce the effects required by an extraterritorial U.S. rule, the Blocking Statute requires an examination of that circumstance and of the bank’s true reason for acting.

Can the bank terminate the relationship despite the Blocking Statute?

Yes. The Blocking Statute does not prevent a bank from making an independent commercial decision to terminate a contractual relationship when national law permits it. However, that decision must be clearly distinguished from conduct whose true purpose is to comply with a U.S. sanction.

The Court of Justice has indicated that, in principle, Article 5 does not prevent an operator from terminating a contract without necessarily stating its reasons where national law permits such termination. However, when the available evidence supports a presumption that the termination was intended to comply with the U.S. rules listed in the Annex, the operator must show that its conduct was not intended to comply with those rules. See CJEU, Case C-124/20.

This distinction means that:

• the bank is not necessarily required to disclose the existence of a suspicious transaction report;
• the bank may have independent contractual reasons for terminating a relationship;
• the bank may not formally rely on an independent reason when the facts show that the decision was taken to apply an OFAC sanction covered by the Blocking Statute;
• the client must provide initial evidence making a breach of the Blocking Statute plausible;
• once such evidence exists, the bank must explain and demonstrate that its decision was not intended to comply with the U.S. rule.

The Blocking Statute requires a precise assessment

In practice, the Blocking Statute requires an examination of the true reason for the bank’s decision. It is not enough to consider only the formal explanation given in a letter or communication, especially where other evidence may reveal a different motivation.

The prohibition in Article 5 is not absolute. The second paragraph of that Article allows the European Commission to authorize full or partial compliance with a foreign rule where non-compliance would seriously damage the interests of the operator or of the European Union itself. See CJEU, Case C-124/20.

For this reason, the bank may not:

• decide unilaterally that U.S. economic pressure is sufficient;
• apply an OFAC sanction directly without considering the Blocking Statute;
• automatically give priority to the risk of losing access to the U.S. market;
• treat Commission authorization as an irrelevant formality.

The Blocking Statute requires the bank to determine whether authorization is necessary. If it seeks to rely on this exception, it must demonstrate the existence of circumstances capable of justifying such authorization.

The General Court of the European Union has examined authorizations granted by the Commission in connection with U.S. measures against Iran. In that context, it emphasized the importance of the reasons given, links with the United States, the risk of significant economic losses, and the possible impact on business continuity. See General Court of the European Union, Case T-8/21, IFIC Holding.

A bank cannot replace Commission authorization with a unilateral assessment that “continuing the relationship is too risky.” On this point, the Blocking Statute does not allow shortcuts.

The Blocking Statute does not eliminate anti-money laundering obligations

Financial institutions remain subject to customer due diligence, customer and beneficial-owner identification, ongoing monitoring, and anti-money laundering and counter-terrorist financing obligations under EU law and the national legislation applicable in each Member State.

Where the risk is high, the bank may apply enhanced measures, request additional information, and examine the purpose and nature of the relationship more closely. Relevant factors may include geographic risk, complex ownership structures, third-party payments, source of funds, and the specific characteristics of the transaction.

If the institution cannot satisfactorily complete the checks required by applicable law, it may be required to refrain from initiating, executing, or continuing a particular transaction or relationship. However, these obligations must remain separate from the application of OFAC sanctions. An account may not be closed solely to apply a U.S. sanction covered by the Blocking Statute and then justified, without other concrete grounds, by a general reference to AML obligations.

Likewise, anti-money laundering policies should not be used to exclude entire categories of clients automatically without a specific risk assessment. The individual circumstances of the client and the transaction must be distinguished from a general policy applied solely on the basis of nationality, residence, or geographic connection. In Italy, these obligations are governed, among other provisions, by Legislative Decree No 231/2007.

Accordingly, even when applying the Blocking Statute, the bank must distinguish between:

• the specific risk of the relationship;
• the specific risk of the transaction;
• the source of funds;
• the identity of the counterparties;
• geographic risk;
• the possible involvement of designated persons;
• the client’s nationality or residence;
• the generalized application of an internal group policy.

Nationality alone should not be used to justify a block

Iranian or Cuban nationality, considered in isolation, does not necessarily indicate an AML irregularity and does not automatically trigger an OFAC sanction. The Blocking Statute does not remove anti-money laundering controls, but it prevents a covered foreign sanction from being used automatically to avoid an individualized assessment.

The institution must therefore distinguish between a genuine risk connected with a specific person or transaction and an exclusion based solely on nationality, residence, or legitimate economic ties with a particular country.

A bank may be legally prohibited from informing the client about the existence of a suspicious transaction report, an AML investigation, or certain actions by competent authorities. Applicable anti-money laundering rules may prohibit the institution from disclosing information where doing so could compromise an investigation or the work of the competent financial intelligence unit.

However, that prohibition does not allow the bank to respond to every complaint with a formula that provides no meaningful information. In a dispute involving the Blocking Statute, the client may request operational information about the account and the nature of the restriction, subject to the limits imposed by applicable law.

Even so, this prohibition does not permit the institution to answer every complaint with a meaningless formula. In a dispute involving the Blocking Statute, the client may ask:

• whether a single transaction or the entire account is blocked;
• whether the restriction affects specific amounts;
• which documents are still required;
• which secure channel should be used to provide them;
• whether the relationship is suspended or has already been terminated;
• the effective date of any termination;
• whether amounts unrelated to the disputed transaction remain available;
• whether the rejection results from an EU measure, an AML obligation, or a U.S. sanction.

The institution may not be permitted to confirm the existence of a suspicious transaction report. That does not mean, however, that it may refuse to provide any operational information about the banking relationship.

How the client should respond under the Blocking Statute

The first step should be to submit a written, structured, and documented complaint. The client should ask the bank to specify:

1. which service has been suspended;
2. which transactions have been rejected;
3. which amounts are actually blocked;
4. the date from which the restriction has applied;
5. whether the restriction affects the entire account or only a specific transaction;
6. whether the institution has applied an EU measure or an applicable national measure;
7. whether it has applied an OFAC-related policy or acted on a request from a correspondent bank;
8. whether authorization from the European Commission has been requested or obtained;
9. which documents are required to complete due diligence;
10. whether there is a procedure for accessing amounts that are not affected by the dispute.

The request may be worded as follows:

“Please indicate whether the block or rejection of the transaction results from a restrictive measure of the European Union or the United Nations, an independent due diligence obligation, a request from a correspondent bank, or the direct or indirect application of a U.S. rule or policy related to OFAC.”

“Please also indicate, within the limits permitted by applicable law, the affected transaction, the nature of the restriction, any documentation still required, and the available procedure for releasing amounts that are not subject to a specific restriction.”

The client should attach, in an organized manner:

• identity document;
• proof of residence;
• documentation concerning the client’s economic activity;
• contracts;
• invoices;
• tax documentation;
• bank statements;
• inheritance or estate documents;
• purchase and sale documents;
• source-of-funds documentation;
• information about counterparties;
• an economic explanation of the transactions;
• evidence of deadlines or obligations that the block makes difficult or impossible to meet.

The client must show that the block is linked to OFAC sanctions

A mere match with an OFAC list is not always sufficient to obtain a favorable outcome. The client must assemble a body of evidence capable of linking the block to compliance with U.S. rules.

Particularly relevant evidence includes:

• a communication that expressly mentions OFAC;
• a communication referring to the SDN List;
• a statement that the payment was rejected because it is connected with Iran or Cuba;
• a reference to secondary sanctions;
• communications from the correspondent bank;
• internal documents inadvertently disclosed to the client;
• termination occurring at the same time that the client or counterparty is added to a U.S. list;
• evidence that the bank treated several clients in the same category in the same way;
• the absence of specific requests for AML documentation;
• the absence of an applicable EU or United Nations measure.

The Bank Melli Iran judgment is favorable to the client on this point. Where the available evidence supports an initial presumption that the operator complied with the rules listed in the Annex, the operator must demonstrate that its conduct was not intended to comply with those rules. See CJEU, Case C-124/20.

This does not mean that a bank must always prove in advance that every account closure is lawful. The shift in the burden of proof presupposes that the client has provided sufficient evidence to make a breach of Article 5 plausible.

Remedies available to the client under the Blocking Statute

Complaint to the bank

• The client should submit a formal complaint requesting:
• reversal of the block;
• release of amounts unrelated to the disputed transaction;
• execution of legitimate transactions;
• return of the balance if the relationship is terminated;
• an explanation of the legal and contractual basis for the measure;
• reimbursement of documented expenses;
• preservation of communications and data related to the decision.

Out-of-court complaint procedure

Where the dispute may be submitted to an out-of-court dispute-resolution mechanism, the client should identify the competent body in the relevant Member State. Subject to the applicable rules, the client may challenge the handling of the block, breach of contract, lack of information, and properly documented financial losses.

The procedures, jurisdiction, and effects of these decisions vary from country to country. The appropriate complaint mechanism must therefore be determined by reference to the financial institution involved, the contract, the client’s domicile, and the applicable national law.

In Italy, for example, certain banking disputes may be brought before the Arbitro Bancario Finanziario (ABF). Article 128-bis of the Italian Consolidated Banking Act (Testo Unico Bancario, or TUB) provides the legal basis for this out-of-court dispute-resolution system.

The ABF is not automatically a mechanism for obtaining the reopening of an account or compelling the continuation of any banking relationship. When this procedure is used, the claim must be tailored to the body’s powers and to the form of relief sought.

Court proceedings to enforce the prohibition in Article 5

The Court of Justice has recognized that the prohibition in Article 5 may be invoked in national civil proceedings. National courts must ensure its effectiveness. See CJEU, Case C-124/20.

Accordingly, depending on the contract and the measure taken, the client may consider seeking:

• a declaration that Article 5 has been infringed;
• a challenge to the validity or lawfulness of the termination;
• performance or reinstatement, where compatible with national law;
• interim measures where urgency exists;
• damages;
• restitution of the amounts concerned;
• reimbursement of expenses and proven financial losses.

The Regulation does not automatically determine the specific remedy available. That remedy must be identified under the procedural and contractual law of the competent Member State.

The right to compensation

Article 6 of the Regulation grants persons protected by the Blocking Statute the right to recover damages, including legal costs, caused by the application of the laws listed in the Annex or by actions based on those laws. The Court of Justice expressly referred to this remedy in the Bank Melli Iran judgment. See CJEU, Case C-124/20.

The client should document:

• rejected payments;
• contractual penalties;
• costs incurred to obtain alternative liquidity;
• costs of replacement transfers;
• additional interest or fees;
• losses arising from non-payment;
• loss of contracts;
• losses caused by delays in an inheritance matter or a purchase and sale transaction;
• professional fees;
• effects on business continuity.

Personal inconvenience or temporary difficulty accessing a banking application may not, by itself, be enough to establish compensable loss. The client must connect the loss to the bank’s conduct and show that it is a concrete consequence of the block or rejection.

Caporaso & Partners can assist clients throughout the complaint process and with claims for compensation.

Arguments the bank cannot properly rely on

A bank cannot automatically justify a block by stating:

• “the client is Iranian, so the account must be closed”;
• “the counterparty is Cuban, so every payment is prohibited”;
• “the transaction uses U.S. dollars, so OFAC automatically takes precedence”;
• “the group follows a U.S. policy, so the Blocking Statute does not apply”;
• “we have not received an OFAC order, so the prohibition in Article 5 is irrelevant”;
• “the client presents a high risk, so no further individualized checks are necessary”;
• “the correspondent bank will not accept the transaction, so all funds in the account are frozen.”

Each of these statements requires a specific assessment of the source of the prohibition, the transaction affected, the role of intermediaries, and the applicable legal framework.

Legal assistance, even from the outset, is essential to gather the documentation properly, identify the right questions to put to the bank, and determine how to proceed with the complaint.