Navigating Sovereignty’s Edge: Corporate Nationality and the Extraterritorial Grasp of U.S. Secondary Sanctions

Abstract

This article delves into the intricate legal fiction of “corporate nationality” and its profound disruption by the extraterritorial application of United States secondary sanctions. Traditionally, a corporation’s nationality is determined by its place of incorporation or central administration, a principle fundamental to international law that ensures legal certainty and delineates sovereign authority. However, this article contends that U.S. sanctions regimes, particularly those targeting countries like Iran, increasingly disregard this doctrine. Instead, they predicate jurisdiction on concepts of “ownership or control,” effectively treating foreign-incorporated subsidiaries of U.S. parent companies as extensions of U.S. jurisdiction. By analyzing the classic case of a French subsidiary caught between U.S. sanctions and E.U. blocking statutes, this analysis explores the resultant clash of sovereignties. It concludes that this aggressive extraterritoriality creates an untenable legal paradox for multinational enterprises, erodes the foundational principle of separate legal personality, and ultimately undermines the stability of the international legal order, necessitating a multilateral approach to resolve such jurisdictional conflicts.

Keywords: Corporate Nationality, Secondary Sanctions, Extraterritoriality, State Sovereignty, E.U. Blocking Statutes, Jurisdictional Conflict.

Introduction

 In the contemporary globalized economy, multinational enterprises (MNEs) operate as intricate webs of parent companies, subsidiaries, and affiliates spanning dozens of jurisdictions. This structure, while economically efficient, exists within a fragile framework of international law built upon the Westphalian concept of state sovereignty. A cornerstone of this framework is the legal fiction of corporate nationality, which provides a predictable anchor for determining which state’s laws govern a company’s existence and conduct.[1] Yet, this principle is facing its most significant challenge in the form of unilateral economic sanctions, which have become a primary tool of foreign policy, most notably for the United States.

The imposition of U.S. secondary sanctions, designed to deter non-U.S. entities from engaging with targeted regimes, represents a deliberate projection of domestic law beyond national borders. This analysis confronts the critical legal dilemma that arises when this projection collides with the distinct legal personality of a foreign subsidiary. Consider a subsidiary duly incorporated in France, subject to French and European Union law. When its American parent company is bound by U.S. sanctions against Iran, what is the legal status of the French entity? Is it French, as its place of incorporation dictates, or is it effectively American due to its parentage?

This article argues that the U.S. sanctions regime’s approach, which often prioritizes parental control over the established legal test of incorporation, constitutes a significant erosion of international legal norms. It forces foreign subsidiaries into an impossible “catch-22”, caught between the conflicting legal commands of the U.S. and their own sovereign government, exemplified by E.U. blocking statutes. This exploration will first dissect the traditional doctrine of corporate nationality as affirmed by international jurisprudence. It will then examine the mechanics of U.S. secondary sanctions before analyzing the irreconcilable conflict they create. Ultimately, this article asserts that such unilateral extraterritoriality not only disrupts international commerce but also corrodes the very principles of comity and sovereignty that underpin a stable global order.

Main Body

The Legal Fiction of Corporate Nationality

Corporate law is built upon a series of foundational legal fictions, none more critical for international purposes than the concept of a distinct legal personality and an assigned nationality. For a corporation to operate, sue and be sued, and be subject to a coherent legal system, it must belong somewhere. International law has long grappled with establishing a uniform test, leading to two primary approaches. The common law tradition, followed by the U.S. and the U.K., generally favors the place of incorporation as the determining factor.[2] A company incorporated in Delaware is American, regardless of the nationality of its shareholders or the location of its operations. Conversely, the civil law tradition, prevalent in continental Europe, often prefers the siège social or real seat theory, which looks to the location of the company’s central administration or principal place of business.[3]

Despite these differing domestic approaches, a landmark ruling by the International Court of Justice (ICJ) provided much-needed clarity for the purposes of international law. In the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain) case, the ICJ was asked to determine whether Belgium had standing for diplomatic protection of a company incorporated in Canada but with predominantly Belgian shareholders. The Court decisively upheld the primacy of the place of incorporation, stating that it forms “a connecting factor of the greatest importance” which “has been endowed with a reality and strength which commands general recognition.”[4] This judgment affirmed that, on the international plane, a corporation’s nationality is a matter of its formal legal domicile, not its ownership structure. This principle is vital; it provides legal certainty and prevents a chaotic situation where a company could be subject to the competing claims of multiple states based on the diverse nationalities of its shareholders.

The Mechanics of U.S. Extraterritorial Sanctions

U.S. sanctions are a complex and powerful tool administered primarily by the Department of the Treasury’s Office of Foreign Assets Control (OFAC). It is crucial to distinguish between two types of sanctions. Primary sanctions prohibit “U.S. Persons”—defined as U.S. citizens, permanent residents, and entities organized under U.S. law (including their foreign branches)—from engaging in transactions with a sanctioned target.[5]

The more controversial instrument is secondary sanctions. These measures do not claim direct jurisdiction over non-U.S. persons. Instead, they function through a coercive threat: if a non-U.S. person (e.g., a French bank or a German manufacturer) engages in specified significant transactions with a sanctioned country like Iran, the U.S. can cut that person off from the U.S. financial system, block their assets, and deny them access to the U.S. market.[6] This represents a powerful form of economic leverage, compelling foreign companies to align with U.S. foreign policy out of commercial self-preservation.

The legal friction intensifies where these two concepts blur. Under certain sanctions programs, particularly those concerning Iran, U.S. law has asserted that a foreign-incorporated entity is “owned or controlled” by a U.S. person and is therefore subject to the same prohibitions as its U.S. parent.[7] OFAC’s “50 Percent Rule,” for instance, aggregates ownership stakes, and if a U.S. person or persons own 50 percent or more of an entity, that entity is itself considered a blocked person. While this is primarily for asset blocking purposes, the underlying logic of control is often extended in practice, creating an expectation that a U.S. parent will ensure its foreign subsidiaries comply with U.S. policy, irrespective of their own nationality.

The French Subsidiary’s Dilemma: A Clash of Sovereignties

This brings us to the central predicament. Our hypothetical French subsidiary is a legal person under French law. Its siège social is in Paris. It is subject to French taxation, French labor law, and the jurisdiction of French courts. Critically, it is also subject to European Union law. In response to the extraterritorial reach of U.S. sanctions, the E.U. enacted Council Regulation (EC) No 2271/96, commonly known as the E.U. Blocking Statute.[8]

This statute has two primary effects. First, it nullifies the effect of foreign court rulings that enforce the specified U.S. sanctions within the E.U. Second, and more importantly, it explicitly prohibits E.U. persons—including our French subsidiary—from complying with those U.S. sanctions, unless exceptionally authorized by the European Commission.[9]

The French subsidiary is thus caught in an irreconcilable legal bind:

• If it complies with U.S. sanctions by terminating its business with a lawful Iranian partner, it directly violates Article 5 of the E.U. Blocking Statute. This exposes the subsidiary and its directors to penalties under French law.
• If it defies U.S. sanctions and continues its business with Iran in compliance with E.U. law, its U.S. parent company faces massive civil and criminal penalties from OFAC. Furthermore, the subsidiary itself could be targeted by U.S. secondary sanctions, effectively making it a pariah in the global financial system.

This is not a theoretical problem. The multi-billion dollar fine levied against French bank BNP Paribas in 2014 for processing transactions for sanctioned parties, though involving its U.S. branch, sent a shockwave through the European corporate world, demonstrating the immense punitive power of U.S. authorities.[10] The dilemma forces a U.S. parent company to choose between violating the laws of a host country where its subsidiary operates or facing devastating penalties at home.

Critical Analysis: Eroding the Corporate Veil and International Comity

The U.S. position, in effect, treats the French subsidiary not as a distinct French national but as a mere extension of its American parent. This fundamentally undermines the principle of separate legal personality, which dictates that a subsidiary is not liable for the debts or obligations of its parent, and vice versa. By predicating jurisdiction on control, U.S. sanctions “pierce the corporate veil” on an international scale, ignoring the legal form established in Barcelona Traction in favor of a substance-over-form approach driven by policy goals.

This approach shows little regard for international comity, the doctrine by which sovereign states show mutual respect for one another’s laws and judicial decisions. By commanding a French company to break French and E.U. law, the U.S. is placing its domestic policy objectives above the sovereign right of the E.U. to regulate economic activity within its own territory. The E.U. Blocking Statute is a direct response to this perceived legal overreach, creating a head-on collision of jurisdictional claims. The result is legal chaos, forcing MNEs to make business decisions based not on commercial logic but on a complex and perilous geopolitical calculus.

Suggestions/Way Forward

Resolving this impasse requires action on multiple levels, as no single actor can unilaterally solve a problem rooted in conflicting sovereign wills.

1. For Multinational Corporations: MNEs must adopt hyper-vigilant compliance and governance structures. This includes “ring-fencing” the decision-making autonomy of foreign subsidiaries to the greatest extent possible, ensuring that compliance with host-country laws (like the Blocking Statute) is documented as a decision of the subsidiary’s local board, not as a directive from the U.S. parent. While not a perfect shield, it can create a degree of legal separation.
2. For States and Blocs (like the E.U.): Governments must move beyond mere protest and actively enforce their blocking statutes to create a credible deterrent. Furthermore, there is a strong case for coordinated diplomatic action, potentially through bodies like the World Trade Organization, to challenge the trade-distorting effects of secondary sanctions.
3. For the International Legal Order: The long-term solution lies in developing a multilateral framework for the application of sanctions. Such a framework could establish clear and predictable rules for jurisdiction, create mechanisms for resolving conflicts of law, and ensure that sanctions, when used, are a tool of the international community rather than an instrument of a single state’s foreign policy.

Conclusion

The legal fiction of corporate nationality was conceived to bring order and predictability to international commerce. The unilateral and extraterritorial application of U.S. secondary sanctions has turned this fiction into a source of profound legal and political conflict. By prioritizing ownership and control over the internationally recognized standard of incorporation, the U.S. has effectively attempted to nationalize the foreign subsidiaries of its domestic corporations, extending the reach of its laws deep into the sovereign territory of its allies.

The impossible situation of a French subsidiary forced to choose between violating U.S. or E.U. law is the starkest illustration of this problem. It reveals a global legal system under strain, where the economic might of one nation can override foundational principles of corporate law and state sovereignty. Until a multilateral consensus is reached that respects the legal personality of all corporations and the sovereign right of all nations to regulate them, multinational enterprises will remain trapped as pawns in a larger geopolitical contest, navigating a treacherous landscape where the rule of law is supplanted by the law of the strongest.

Bibliography

Table of Cases

1. Case Concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v Spain) (Second Phase) [1970] ICJ Rep 3
2. Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)

Table of Legislation and Regulations

1. Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom [1996] OJ L309/1
2. Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560
3. U.S. Code of Federal Regulations, 31 C.F.R. § 515.329

Books

1. Lowe V, International Law (OUP 2007)
2. Nephew R, The Art of Sanctions: A View from the Field (Columbia University Press 2017)

Journal Articles

1. Helmer EV, ‘The Long Arm of the Law: U.S. Secondary Sanctions and Their Consequences’ (2018) 45 Yale J Int’l L 221
2. Shamwell II FE, ‘The Nationality of Corporations for the Purpose of Diplomatic Protection’ (2009) 22 Duke J of Comp & Int’l L 129

Other Sources

1. U.S. Department of Justice, ‘BNP Paribas Agrees to Plead Guilty and to Pay $8.9 Billion for Illegally Processing Financial Transactions for Countries Subject to U.S. Economic Sanctions’ (Press Release, 1 July 2014)

[1] As established in cases like Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).

[2] Frederic E. Shamwell II, ‘The Nationality of Corporations for the Purpose of Diplomatic Protection’ (2009) 22 Duke J of Comp & Int’l L 129, 134.

[3] Ibid 137.

[4] Case Concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v Spain) (Second Phase) [1970] ICJ Rep 3, para 70.

[5] See e.g. 31 C.F.R. § 515.329 (Code of Federal Regulations, definition of “person subject to the jurisdiction of the United States”).

[6] Elena V. Helmer, ‘The Long Arm of the Law: U.S. Secondary Sanctions and Their Consequences’ (2018) 45 Yale J Int’l L 221, 225.

[7] See e.g. Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560, which extends prohibitions to entities “owned or controlled” by a U.S. person.

[8] Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom [1996] OJ L309/1.

[9] Ibid, art 5.

[10] U.S. Department of Justice, ‘BNP Paribas Agrees to Plead Guilty and to Pay $8.9 Billion for Illegally Processing Financial Transactions for Countries Subject to U.S. Economic Sanctions’ (Press Release, 1 July 2014).