By Jonathan M. Epstein | Holland & Knight
The U.S. Office of Foreign Assets Control (OFAC) on Sept. 25, 2019, designated COSCO Shipping Tanker (Dalian) Co. Ltd. (COSCO Dalian), Kunlun Shipping Company Ltd., and certain other entities and individuals as Specially Designated Nationals (SDNs) under Executive Order 13846 for transporting Iranian oil and petroleum products contrary to U.S. sanctions. Notwithstanding the long lead-up to this action, the designations took many in the maritime industry by surprise. In late 2018, as part of its withdrawal from the Iran nuclear accord, the Joint Comprehensive Plan of Action (JCPOA), the United States reimposed “secondary sanctions” on petroleum exports from Iran. However, the U.S. granted several countries, including China, waivers to continue to import Iranian crude-oil. These waivers expired on May 2, 2019.
In summer 2019, the maritime trade press reported on suspicious activity involving certain vessels that appeared to carrying Iranian petroleum products to the Far East. Suspicious activity included ship-to-ship transfers during blackout periods, where vessels had switched off their Automatic Identification System (AIS) transponders. In fact, in early September 2019, OFAC issued an “Advisory to the Marine Petroleum Shipping Community” warning industry of this suspicious activity, identifying vessels, cautioning non-U.S. entities of the sanctions risk they face and highlighting the expectations of the U.S. government regarding due diligence.
Who Are the Targets of the Sanctions?
Although OFAC has in the past designated maritime entities under secondary sanctions authority, OFAC typically designates specific vessels by name. In this case, OFAC has not identified vessels and issued only one guidance note indicating that the sanctions apply only to the listed entities, and entities that they own individually or in aggregate a 50 percent or more interest. OFAC advised that sanctions do not apply to COSCO Shipping Corporation Ltd. (COSCO), or its other subsidiaries or affiliates (e.g., COSCO Shipping Holdings) that are not 50 percent or more owned by the designated entities. However, determining which COSCO entities and vessels are subject to sanctions is difficult.
Based on news reports, there may be as many as 50 tanker vessels indirectly owned by COSCO Dalian. In addition, COSCO Dalian has a joint venture with Teekay LNG that may be affected. In the absence of clear information as to which COSCO entities and vessels are subject to sanctions, banks, charters and other parties may take conservative positions with respect to continued dealings with certain COSCO entities.
What Are the Implications of the Sanctions?
Because these sanctions were issued under Executive Order 13846 (relating to Iran), they have both “primary” and certain “secondary” sanctions implications.
- Primary Sanctions. U.S. persons (i.e., U.S. companies and U.S. citizens), and foreign entities owned or controlled by U.S. persons, must “block” the property of these sanctioned entities, and must refrain from directly or indirectly engaging in transactions with the sanctioned entities. This effectively means that U.S. banks processing wire transfers related to sanctioned entities must block such transactions and report them to OFAC. The entities designated SDNs were also subject to other more limited sanctions restrictions enumerated in the designations.
- Secondary Sanctions Related to Iran Trade. To the extent that future transactions involved trading in Iran petroleum and petroleum products or dealings with Iranian SDNs, a non-U.S. entity could be sanctioned for providing material support, goods or services to such designated entities; foreign financial institutions could be sanctioned for knowingly facilitating significant financial transactions; and foreign insurers could be sanctioned for providing coverage to such entities. Hence, even if there is no U.S. nexus to a transaction, non-U.S. entities could be subject to sanctions.
- Secondary Sanctions with Designated Entities Unrelated to Iran Petroleum Trade. Although there is no definitive guidance yet from OFAC, the sanctions do not appear to have broad secondary sanctions implications for non-U.S. entities engaging in transactions with COSCO Dalian and other entities sanctioned on Sept. 25,2019. Generally any non-U.S. person that provides material support for or engages in significant transactions with SDNs designated under most Iran sanctions laws and executive orders, is potentially subject to U.S. secondary sanctions. This includes transactions with persons designated as SDNs under Sections 1 and 2 of Executive Order 13846. However, the designations on Sept. 25, 2019, appear to have been made pursuant to Section 3 of Executive Order 13846, which at least facially does not provide for designation of non-U.S. entities for providing material support or engaging in significant transactions with such non-Iranian SDNs (provided the transactions are not otherwise sanctionable). OFAC reportedly has issued informal advice to certain parties confirming this interpretation. Given the major disruptions caused by the designation of COSCO Dalian, it is hoped that OFAC will issue a clarification on this point in the near future.
Regardless of the legal scope of sanctions, the practical implications of these sanctions cannot be understated. In the current sanctions environment, many banks, insurers and major maritime companies will not take the risk of U.S. sanctions, and will cease or wind-down business transactions with designated entities.
Will Sanctions Be Lifted on COSCO Dalian in the Near Future?
Historically, the U.S. government has used the imposition of secondary sanctions designations as a means to change behavior, then has removed sanctions once the sanctioned party has taken adequate measures to change the behavior. However, because COSCO Dalian is ultimately state-owned, its actions and the removal of sanctions will likely be tied to U.S.-China negotiations at the highest levels of government. Hence, the timing of any removal of sanctions is unclear. In the interim, it is likely that OFAC will issue further guidance regarding the scope of sanctions and/or general licenses to allow transactions with certain entities.
What Can Companies Do to Mitigate Sanctions and Commercial Risk?
- A critical step is to identify the relevant business relationships that may be affected, and develop a plan to address the sanctions and commercial risk created by the designations. This may include: in-depth research to determine who owns particular counterparties, taking steps to wind-down or terminate contracts, or other actions. For many companies, the commercial risks of counterparties refusing to provide services, risk of contractual breaches and the inability to engage in financial transactions are likely the most pressing issue.
- OFAC has not provided any “wind-down” general license to allow U.S. companies to disengage from designated entities. However, upon application, OFAC may issue specific licenses to facilitate winding-down transactions and/or divestment of U.S. persons from designated entities.
- In other circumstances, OFAC has created regulatory safe harbors from secondary sanctions for limited wind-down transactions by foreign persons with SDNs (where there is no U.S. nexus). Non-U.S. companies may seek informal guidance from the U.S. government or from U.S. trade lawyers regarding whether, under a particular set of facts, a transaction would be deemed “significant” or “material” enough to expose the company to sanctions.
- Where particular vessels have been effectively stranded because of sanctions, OFAC upon application may issue safety and security type licenses that provide a basis for insurers to continue to insure vessels, as well as for other parties to continue to provide services while the vessel is at anchor (i.e., not trading).
The designation of COSCO Dalian and other entities creates numerous challenges, and it is hoped that the U.S. government will move swiftly to issue general licenses, clarifications and/or additional guidance as companies reach out to OFAC with questions and concerns.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.
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