Recent Iran Sanctions and Their Effect On Ship Owners
Companies involved in shipping and energy now have an additional factor to consider when conducting international business: the Comprehensive Iran Sanctions, Accountability and Divestment Act (“CISADA”) signed into law by President Obama on July 1, 2010. Unlike sanctions that prohibit U.S. persons from doing business with Iran, CISADA applies extraterritorially to everyone, everywhere, thereby injecting additional risk into international commerce.
CISADA endeavors to curtail Iran’s alleged nuclear weapons program and support for international terrorism by targeting foreign companies that conduct business with Iran’s energy and financial sectors. As a result, persons who sell or transport refined petroleum products (diesel, gasoline and jet fuel) to Iran, or who assist with the development of Iranian petroleum resources, may now find themselves subject to U.S. sanctions even though they have no contact with the United States.
CISADA obliges the U.S. President to impose no less than three sanctions (out of the nine listed in the Act) on persons who violate the law. The most onerous target non-U.S. persons’ ability to access the U.S. financial system by prohibiting foreign exchange transactions; prohibiting the transfer of payments or credit between financial institutions; and, prohibiting the use of property subject to U.S. jurisdiction (thereby raising the specter of seized vessels). The sanctions are clearly designed to target a sanctioned company’s ability to transfer money internationally.
Businesses engaged in energy and shipping should consider the below factors to gauge their exposure under CISADA. Though by no means an exhaustive list, these factors constitute a general framework for understanding how CISADA impacts businesses engaged in the development and transport of energy, specifically petroleum products.
Investments violate the sanctions
Any investment of $20,000,000, or any combination of investments of $5,000,000 each that exceeds $20,000,000 aggregate, violates CISADA if the investment “directly and significantly contributes to the enhancement of Iran’s ability to develop petroleum resources.” The words “directly and significantly,” though regularly mentioned in the statute, are undefined.
Assisting Iran’s domestic production of refined petroleum products violates the sanctions
A person violates the sanctions if they provide Iran goods, services, technology, information or support with a fair market value of $1,000,000, or an aggregate fair market value of $5,000,000 within a 12 month period, which “…could directly and significantly facilitate the maintenance or expansion of Iran’s domestic production of refined petroleum products, including any direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries.” Shipments of dual-use goods, services, etc. must therefore be scrutinized to ensure they are not being used by Iran’s petroleum refining industries.
Providing Refined Petroleum Products to Iran is a Sanctionable Offense
A person is subject to sanctions if they knowingly sell or provide Iran with refined petroleum products with a fair market value of $1 million or more, or with an aggregate fair market value of $5 million, during a 12-month period. A person is also subject to sanctions if they knowingly provide Iran with “goods, services, technology, information, or support that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products.” Providing shipping services, and financing and brokering the sale, lease or provision of goods or services that “directly and significantly” contribute to Iran’s ability to import refined petroleum products, also constitute sanctionable offenses.
Has a person “knowingly” committed a sanctionable offense
Culpability under CISADA is expansive. Under CISADA, a person commits a sanctionable offense if they know, or “should have known”, that their conduct, circumstances or results would constitute a sanctionable offense.
In the first CISADA enforcement action against entities not affiliated with the Iranian government, the U.S. government announced in May 2011 that CISADA sanctions were being imposed against seven international companies, including Ofer Brothers Group in Israel, Tanker Pacific in Singapore, and Associated Shipbroking in Monaco. These three entities were sanctioned for their alleged roles in the sale of a product tanker to a front company for the Islamic Republic of Iran Shipping Lines (IRISL), which has been blacklisted due to its presumed role in weapons and nuclear materials proliferation. Ofer and Tanker Pacific were charged with failing to exercise due diligence to discover they were dealing with an IRISL front company. The shipbroker was sanctioned for knowingly acting on behalf of an IRISL front company. As a result of these violations, the two shipping companies are now prohibited from securing financing from the U.S. Export-Import Bank, obtaining more than $10 million in loans from U.S. financial institutions, and receiving U.S. export licenses. Associated Shipbroking was severely penalized for its role in the transaction, and is now banned from U.S. foreign exchange transactions, U.S. banking transactions, and U.S. property transactions.
“Know your customer”
In this era of increased risk and heightened sanctions enforcement, the best practice is to “know your customer.” Businesses involved in the energy and shipping sectors must, therefore, perform due diligence to know with whom they are contracting. Remember, culpability does not depend on actual knowledge, but whether a person “should have known” not only that its conduct violated the sanctions, but that its conduct gave rise to circumstances or resulted in a sanctions violation. Knowing one’s customer is therefore key to ensuring that a performed contract does not result in an inadvertent violation of the sanctions.
Patrick J. Bonner is a partner at Freehill, Hogan & Mahar LLP. Mr. Bonner has throughout his career represented shipowners and their underwriters in defending personal injury claims, including longshoremen, passengers and seamen cases. He also has significant expertise in oil pollution incidents, collision cases and proceedings before the United States Coast Guard. Mr. Bonner has dealt with many crew wage claims and at the request of the Government of Cyprus, he spoke at Maritime Cyprus 1991 and 1993 on the subjects of wage claims and oil pollution. He has published numerous articles on a variety of maritime law topics. Mr. Bonner served as a Lieutenant in the U.S. Navy from 1971 to 1975. Mr. Bonner currently serves as the President of the United States Maritime Law Association. Mr. Bonner can be contacted on +1 212-381-3007 or by email at firstname.lastname@example.org
Edward J. Carlson is an associate at Freehill, Hogan & Mahar LLP. Mr. Carlson spent one summer working as a summer associate for a law firm in Bangladesh and then studied one semester at Tsinghua University School of Law in Beijing. While in Beijing, he worked for a Chinese firm that specialized in energy and commodities shipping disputes. Having discovered shipping law, Mr. Carlson then pursued a master’s degree in maritime law at Tulane Law School, completing his LLM degree in 2008. Mr Carlson can be contacted on +1 212-381-3022 or by email at Carlson@freehill.com