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Tightening the sanctions noose on Iran

As the US and EU continue to impose additional restrictions on commerce with the Islamic Republic of Iran, companies need to increase their vigilance

Whatever the arguments about the impact of international trade sanctions on Iran and its nuclear ambitions, there can be no doubt that the web of overlapping restrictions on trade with Iran are having a significant effect not only on companies based in the EU and US, but also on companies in the rest of the world, where they have any EU or US connection, or are reliant on EU or US insurers, banks or trading partners.

Companies need to ensure not only that they comply in full with the numerous restrictions, but also that they have processes in place to ensure that there is no inadvertent breach. Any breach of US or EU sanctions is likely to have very serious consequences, which can include unlimited fines, lengthy prison sentences, exclusion from the US banking system, loss of customer and supplier confidence, and enormous reputational damage.

As a result of the breadth of the legal restrictions, coupled with enormous political pressure being applied in both the US and the EU to dissuade companies from trading with Iran, a number of companies, including most recently Mærsk Line, have publicly declared that they will no longer trade with Iran.

However, there are, of course, countries which have historically relied on Iranian crude oil, petroleum products or petrochemical products and as a result, there are still companies, predominantly based outside the EU and US, which still want to trade with Iran. The latest EU and US sanctions make it increasingly difficult for those trades to continue, and any companies which are determined to trade with Iran need to tread cautiously, obtain specialist advice and talk carefully with their counterparties, banks and insurers before proceeding.

As one of the newest tools in the diplomatic community’s armament, credited with achieving major diplomatic successes in Ivory Coast and Libya, it is likely that international trade sanctions are here to stay, not least because they put the financial burden of compliance on international commerce, rather than governments. 

It is likely that the restrictions on trade with Iran will only get more onerous, unless there is a significant political change. By way of example, in the past six months, we have seen sanctions against Iran increased by four pieces of US legislation and two pieces of EU legislation alone. As a result, companies need to ensure that the advice which they are receiving is up to date, and that they fully understand the risks which their business faces.

One of the biggest challenges which businesses face is that there is not a single, certain set of legal dos and don’ts. Instead there is a patchwork of different restrictions, with distinct measures imposed by the EU, US and other countries, such as Australia and Switzerland.

This means that businesses operating in difficult markets and jurisdictions must interpret a number of sometimes uncertain, often overlapping restrictions, while taking responsibility not only for their own actions but also for those of their counterparties, agents, suppliers and distributors. And that assessment must be made against a background of political pressure to isolate Iran, meaning that regulators may take an expansive view of the legislation, and a dim view of any infraction.

US companies and individuals are effectively prohibited from trading with Iran, and that is likely to be the end of the matter for those companies and individuals. The position is rather more complex for EU companies.

At the heart of the EU sanctions are financial restrictions, primarily an asset freeze. The effect of this is that the funds and economic resources of prohibited persons are frozen and it is also forbidden to make funds or economic resources – in essence any valuable asset – available directly or indirectly to or for the benefit of those prohibited persons. On 16 October 2012, a further individual and 34 entities, mainly in the oil and gas sector, were made subject to the asset freeze, increasing the total number of prohibited persons to 104 individuals and 471 entities.

The list includes Iranian government ministers, members of the Iranian Revolutionary Guard Corps and scientists, as well as Iranian businesses which are said to be involved in, or supporting, Iran’s nuclear and/or ballistic missile programmes. The latest additions include National Iranian Oil Company (NIOC),National Iranian Drilling Company (NIDC), Iranian Oil Terminals Company (IOTC) and National Iranian Tanker Company (NITC). 

Because of the wide scope of the asset freeze, it is important that detailed checks are carried out on all counterparties, to ensure that a company is not indirectly making funds or economic resources available to a prohibited person, through a seemingly innocuous front company.

Even if your counterparty is not a prohibited person, you need to ensure that any substantial payment to or from an Iranian person, entity or body (which includes any person in Iran) is notified or authorised in advance, as required by the EU regulation.

As well as the counterparty-related sanctions, there are also cargo-related sanctions. These also target Iran’s oil and gas sector. Since 1 May 2012, it has been prohibited for EU persons to import, purchase or transport Iranian petrochemical products. Likewise, since 1 July 2012, it has been prohibited for EU persons to import, purchase or transport Iranian crude oil or petroleum products.

Those prohibitions not only have a direct effect on EU-based shippers and traders, but also an indirect effect on shippers and traders based elsewhere. This is because the regulation prohibits EU-based insurers and reinsurers from providing insurance which relates to the import, purchase or transport of Iranian crude oil, petroleum products or petrochemical products. Traders and shippers who are based outside the EU often rely upon EU-based insurers and reinsurers not only for their own insurance, but also to pay compensation to third-parties in the event of a spill, so these restrictions on EU-based insurers and reinsurers are very significant indeed for traders worldwide.

The US looks beyond its shores

The EU is also due to impose a similar prohibition on the import, purchase or transport of Iranian natural gas. This will apply in the same way to EU-based insurers and reinsurers. It is unclear how natural gas will be defined, and whether there will be a grace period, but these measures will undoubtedly have an impact on worldwide trade of Iranian natural gas.

There is also a long-standing prohibition on the supply to Iran of key equipment for the Iranian oil, gas and petrochemical industries as well as financial restrictions which essentially prohibit investing in Iran’s oil, gas and petrochemical industries and entering into joint ventures with Iranian companies in those industries.

As well as seeking to prohibit all US companies and individuals from trading with Iran, US regulators have also recently increased the restrictions which they seek to impose on companies which are based outside the US.

Previous extra-territorial measures have focussed on certain cargoes being sent to Iran, including refined petroleum products, and goods and services which may assist Iran’s domestic production of refined petroleum products or enhance Iran’s ability to develop petroleum resources.

Recent measures go further than this and will affect not only any non-US company which is owned or controlled by a US company but also any company worldwide which trades with the United States.

In the former case, the US parent is at risk of US penalties if the non-US company trades with Iran. US companies should therefore assert greater supervision and control over the activities of the companies which they own or control, if they think that there is any risk of Iran trading.

In the latter case, non-US companies (irrespective of their ownership or control) can be cut off from the US marketplace where they cause a violation of US sanctions (eg by causing a US bank to breach US sanctions by asking it to clear a US Dollar payment which relates to Iran) or facilitate deceptive transactions (eg by concealing the transaction’s Iranian connection).

The US is also putting pressure on other nations significantly to reduce their volume of crude oil purchases from Iran. A number of countries, including India, Malaysia, Japan, Turkey, Italy, Greece, Germany and the UK have done so, and have been rewarded by the US with temporary exemptions from US sanctions.

Companies in countries without an exemption are at risk of US sanctions if they own, operate, control or insure a ship that is used to transport crude oil from Iran, or if they engage in a significant transaction for the purchase or acquisition of petroleum, petroleum products or petrochemical products from Iran (or they own or control a company which does).

All in all, the scope for any trade with Iran is very limited, and any trade with Iran’s oil and gas sector carries particular risks. Any company which does continue trading with Iran needs to carry out careful checks (on the cargo, their counterparty, and everyone else involved in the transaction), to be sure that the transaction is permitted. They will need to work closely with their insurer and their bank, and be sure that they go into the transaction with their eyes wide open.

*Daniel Martin is an associate with Holman Fenwick Willan, an international law firm advising businesses engaged in international commerce.

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