Please find following information as PDF:
In this Member Alert, the Club considers the sanctions currently in place against Iran, and the effects that these sanctions may have on both the shipping industry in general, and on Members in particular.
CONTENTS
OPERATIONAL AND PRACTICAL ISSUES
THE SANCTIONS LEGISLATION
The United Nations
The Resolutions
Resolution 1970 (2011) was adopted on 26 February 2011 by the United Nations Security Council. Resolution 1973 (2011) was adopted on 17 March 2011.
To whom do the Resolutions apply?
The UN Resolutions applies to all UN Member States. However, they are not directly effective, and so must be implemented by national legislation in the individual states.
What measures are put in place?
By way of these Resolutions, the UN imposes an arms embargo, and an international travel ban on 17 named individuals, certain designated Libyan government officials and certain members of their respective families. It also imposes sanctions on six members of the Qadhafi family, including Muammar Qadhafi himself. The details of these individuals are set out in Annex II to Resolution 1970.
UN Member States are required to freeze all funds, other financial assets, and economic resources within their territories which are owned or controlled, directly or indirectly, by:
a) the persons listed in Annex II;
b) individuals or entities acting on their behalf or at their direction; or
c) entities owned or controlled by them.
Member States should also ensure that no funds, financial assets or economic resources are made available by their nationals, or by any individuals or entities within their territories, to or for the benefit of the persons listed in Annex II.
Enforcement and Penalties
Each Member State must make provisions for the penalties which are to apply to citizens and companies incorporated within its jurisdiction.
In the UK, for example, Resolution 1970 was brought into English law by way of the Libya (Financial Sanctions) Order 2011 which came into force on 27 February 2011. This makes any breach of the UN sanctions legislation by any UK national, or by any company incorporated in the UK, punishable by imprisonment, a fine, or both.
The United States
The sanctions legislation
Executive Order 13566 (the “Executive Order”) was issued on 25 February 2011. This set out a unilateral package of trade sanctions against Libya, which took effect immediately.
On 26 April 2011, the US Treasury Office of Foreign Assets Control (“OFAC”) broadened and clarified its policies for licensing petroleum transactions involving the Transitional National Council of Libya (“TNC”).
To whom does the legislation apply?
The sanctions legislation applies to all “US persons”, wherever located. This includes US citizens and resident aliens, entities organised under the laws of the US or any jurisdiction within the US (e.g. companies, non-profit groups, government agencies and foreign branches of such entities, wherever located) and any person within the US.
What measures are put in place?
The Executive Order blocks all assets, property and interests in property, and bars all dealings with:
a) the Government of Libya, its agencies, instrumentalities and controlled entities;
b) the Central Bank of Libya; and
c) certain persons determined to be responsible for human rights abuses in Libya.
The Qadhafi family is placed on the OFAC Specially Designated Nationals and Blocked Persons (“SDN”) List. In doing so, it blocks all of the family’s far-ranging assets.
The Executive Order also directs the US Treasury Department to add additional individual Libyan officials or others contributing to the ongoing repression in Libya to the SDN list, including:
a) senior officials of the Government of Libya;
b) anyone who is determined to be responsible for or complicit in human rights abuses in respect of political repression in Libya;
c) any person who provides material support for human rights abuses in respect of political repression in Libya;
d) any entity owned or controlled, or acting on behalf of, a person blocked by the Executive Order; or
e) the spouse or dependent of a person blocked by the Executive Order.
Libya has a broad array of state-owned entities and sovereign wealth investment funds. As a result, the reach of the Executive Order is likely to go beyond entities which are easily identifiable as government agencies. Libyan authorities control a wide range of state-owned companies including the National Oil Company and several other infrastructure, energy and utility companies. Accordingly, due diligence must be undertaken by any “US person” (see the definition above) in transactions with any companies which may have ownership or control ties to Libya, even if they are located outside that country.
There are two exceptions to the Executive Order in relation to Libyan-owned banks established outside the country.
The OFAC General License No.1 (issued on 25 February 2011) states that “all transactions involving banks that are owned or controlled by the Government of Libya and organised under the laws of a country other than Libya are authorised, provided the transactions do not otherwise involve the Government of Libya or any person whose property and interests in property are blocked.”
OFAC General License No.2 (issued on 1 March 2011) authorises, under certain conditions, the provision of goods and services to the diplomatic missions of Libya to the United States and United Nations, and their employees.
The policies introduced in April 2011 provide a basis for US persons to engage in TNC-linked oil and gas transactions that otherwise could be barred by the Executive Order. In particular:
(a) a General License was issued authorising US persons to engage in transactions involving Qatar Petroleum or the Vitol group (subject to neither the government of Libya nor any other blocked person receiving any benefit from the transaction in question);
(b) a Statement of Licensing Policy, issued by OFAC, established a regime by which US persons can request authorization, on a case by case basis, to engage in certain dealings. These include the purchase, exportation and importation of oil, gas and petroleum products under the control of the TNC, and all transactions (including investment) involving the production and transport of oil, gas and petroleum products under the control of the TNC.
Enforcement and Penalties
Breach of sanctions legislation carries both civil and criminal penalties. As regards the former, a party who violates a provision may be fined the greater of US$250,000 or an amount which is twice the amount of the transaction that forms the basis of the violation.
As regards criminal penalties, a person who “wilfully commits, wilfully attempts to commit, or aids or abets in the commission of” a violation may be convicted of a criminal offence and, on conviction, be fined not more than US$1,000,000. In addition, if the violation is committed by a natural person, that person may be subject to both a fine and/or imprisonment of up to 20 years.
Further, if property or assets belonging to blocked persons come into US jurisdiction, they may be frozen. Such measures could cause the effective forfeiture of cargo, freight or even vessels.
The European Union
The sanctions legislation
Council Regulation (EU) No. 204/2011 was adopted on 2 March 2011. It implements UN Resolution 1970 (2011) into the European Union. Council Regulation (EU) No. 296/2011 was adopted on 25 March 2011.
To whom does the legislation apply?
The Regulation is directly effective in EU Member States, in that it does not need to be implemented by way of national legislation. It applies to any legal person, entity or body in respect of any business done in whole or in part within the EU, as well as to EU nationals and EU companies.
What measures are put in place?
The Regulation prohibits the sale, supply, transfer, export, purchase, import or transport of listed equipment, including arms and ammunition, which might be used for internal repression.
It also adds a further 20 names to the individuals listed by the UN Resolutions who are subject to the asset freeze. The prohibitions on making funds, financial assets and economic resources available are extended to these persons. There is limited scope to obtain a licence to deal with a designated person’s assets, or to make funds, financial assets and economic resources available to them.
By the Regulation, the EU has enacted the UN’s visa ban on 16 persons, including Muammar Qadhafi, and added a further 10 people to this list.
It should be noted that there is no overall ban on trading with Libya or with Libyan people or entities, over and above those specifically named.
The Council Decision sets out the Council of the European Union’s intention to designate six port authorities in Libya for an asset freeze. The designated port authorities, which have been identified as being controlled by the Qadhafi regime, are:
- Port authority of Tripoli
- Port authority of Al Khoms
- Port authority of Brega
- Port authority of Ras Lanuf
- Port authority of Zawia
- Port authority of Zuwara
The asset freeze will take effect on the publication of an implementing Regulation, which is expected shortly.
Once the Regulation is adopted no funds or economic resources may be made available, either directly or indirectly, to or for the benefit of the designated port authorities. In practice, this will mean that it will not be possible to pay port or other fees to these port authorities for any reason, including to dock at the ports listed.
Enforcement and Penalties
Although the EU Regulations are directly effective, each Member State must lay down rules on penalties which apply to infringement of the Regulations.
In the UK, for example, the relevant statutory instruments provide for criminal penalties, including up to two years’ imprisonment and/or unlimited fines. The UK implementing legislation also specifically states that where a corporate entity commits an offence, culpable individuals (for example, directors) can be punished.
OPERATIONAL, PRACTICAL AND CHARTERPARTY ISSUES
The effect on services central to the shipping industry
The sanctions imposed against Libya are less restrictive than those imposed against Iran. However, they are still capable of having an adverse effect on various parts of the shipping industry.
The US Executive Order prohibits the provision of “funds, goods or services by, to, or for the benefit of” any person whose property and interests in property are blocked by the Order. The EU Regulations prohibit any party to provide, either directly or indirectly, “technical assistance or brokering services” related to equipment specified in the Regulations. Further, it is stated that no funds or economic resources shall be made available, whether directly or indirectly, to or for the benefit of the persons and entities listed in the Regulations.
These provisions could affect, amongst other things, the provision of brokering services, security and financial assistance.
The key issue is whether the transaction in question concerns goods, persons or entities (or a combination of these) which are specifically named or listed in the sanctions legislation. If so, then providing any sort of service which will enable the sale and/or purchase of the goods, or which will benefit one of the persons or entities (whether directly or indirectly) is likely to run the risk of incurring penalties under sanctions legislation.
All parties involved in commercial shipping transactions, not just Owners and Charterers, should fully investigate the transaction and the parties that they will be dealing with.
Owners’ position where Charterers’ orders amount to a breach of sanctions
Where Charterers wish to order a vessel to any country against which sanctions are in force, to discharge goods specified in any sanctions legislation, whether Owners will be entitled to refuse such orders is not a straightforward question. As sanctions are likely to impact on Charterers as well as Owners, it may be that highlighting the risk that Charterers would face by ordering the vessel on such a voyage would be sufficient to lead to an agreement between Owners and Charterers to revise the voyage orders.
If, however, Charterers restate their original orders, and there is no express exclusion in the charterparty preventing them from doing so, Owners would be left with a number of arguments.
It may be possible to argue that such an order should be considered illegal as the vessel is only permitted to carry lawful merchandise in lawful trades. Under English law a voyage order would be illegal not only if it is contrary to English law but also, it is thought, if it is illegal under the law of the vessel’s flag state or the law of the “place of performance” of the charterparty. Looking at US sanctions for example, which may require the freezing of assets and funds, it could be argued that if hire payments are routed through the US then the payment of hire is effectively prohibited by US legislation. Further, such funds could be frozen on receipt by a US bank even where the parties themselves are not US persons.
The Club recommends that Members seek legal advice if they are at all concerned that particular voyage orders may result in sanctionable conduct.
Frustration of the Charterparty
The doctrine of frustration allows a party to treat a contract as discharged if there has been a sufficient change in circumstances, through no fault of that party, which would render performance under the contract “radically different” to that which was originally contemplated.
It could be arguable that requiring an Owner to comply with an order that could result in the imposition of sanctions is a sufficiently “radical” change of circumstances to frustrate the contract. However, it is the Club’s view that such a finding would be rare, as it is the nature of the contract itself which results in the imposition of sanctions, and Members should not seek to rely on such an argument without seeking legal advice.
An argument which may have more chance of success is that of supervening illegality, which is a recognised cause of frustration. Where freight or hire is to be routed through the US, for example, there might be grounds for arguing that the charterparty has been frustrated in light of the risk that such payments would be frozen.
However, this is a difficult area of law and the English courts at any rate are generally reluctant to find that contracts have been frustrated. The Club recommends that Members seek legal advice if they are in any way concerned that Charterers’ orders may result in sanctionable conduct.
Issues affecting hire and freight payments
The issue of getting paid will be complicated by legislation limiting parties’ abilities to deal with Libyan banks. For example, the US Executive Order prohibits dealings with the Central Bank of Libya.
There may be ways to deal with these issues. For example, under the EU Regulations, the competent authority of a Member State (as specified in Annex IV to the Regulation) may authorise the release of frozen funds or economic resources, or allow certain funds or economic resources to be made available, in very specific circumstances. These circumstances are specified in the Regulations.
As a result of these issues, it may be necessary to look for other ways of making and receiving payment, for example via a source which is not a designated person or entity. However, caution must be exercised where corporate restructuring is put in place in an attempt to avoid the sanctions, as this could still amount to a breach.
The Club recommends that Members seek legal advice if they are at all concerned about their ability to make or receive payments in respect of a particular transaction.
Negotiating future charterparties
There are measures which Owners can take in negotiating new charterparties which will go some way to protecting them from the effects of sanctions legislation.
Should Owners wish to avoid calling at Libyan ports, the Club suggests that Libya be excluded from the trading limits in the charterparty.
In cases where Libyan ports are not specifically excluded from trading limits, Owners can also protect themselves by incorporating specific wording into the charter (and, where appropriate, the sub-charter) to provide a mechanism to deal with a situation when orders are given by Charterers that would breach sanctions. BIMCO and Intertanko have both published a standard form of wording.
The Intertanko clause has a broad scope and is generally drafted in favour of Owners, as all that is required for a trade to be deemed unlawful is that it “could” expose the “vessel, its Owners, Managers, crew or insurers” to a “risk” of sanctions. There is, however, the possibility that parties could disagree as to whether the “trade” in question could lead to such a risk. Owners may wish to expressly amend the clause to provide that it is for Owners to decide, in their reasonable judgment, whether such risks exist. Charterers, on the other hand, may wish to restrict the scope of the clause to trade which “does”, in fact, expose Owners to risk.
BIMCO state that the objective of their clause is to “provide owners with a means to assess and act on any voyage order issued by a time charterer which might expose the vessel to the risk of sanctions. The test is one of ‘reasonable judgment’ by the owners in determining whether the risk of the imposition of sanctions is tangible”.
The Club strongly recommends that such a clause be included in charterparties, although legal advice should be obtained to ensure that the clause is in keeping with the other terms of the charterparty in question.
Cargo issues
There has been an on-going debate about so-called “dual use” cargoes. These cargoes consist of items that could be said to have both civil and military uses. Such cargoes could include raw materials, computer and mechanical components, manufacturing items and electronic systems. A particular cargo could therefore be prohibited by certain sanctions legislation, even though the use to which those particular goods will be put is not itself sanctionable.
Generally, carriers are not the end user of the goods carried, and in the past they have not needed to know the ultimate use to which any particular cargo will be put. However, in the context of trade with countries which are the target of sanctions legislation, carriers must now make diligent and reasonable enquiries as to the parties they deal with, and the possible end use of their cargos.
FREQUENTLY ASKED QUESTIONS
What steps can Members take to avoid falling foul of sanctions legislation?
It is essential that Members carry out thorough investigations where there is even a possibility that interests related to a country against which sanctions are in force may be involved in a transaction. The Club suggests that the following points, in particular, are considered:
a) Identify all parties involved in the transaction. This may include Charterers, customers, suppliers, receivers, ultimate end users and financial institutions. Members should also make themselves aware of any third parties or middlemen, as well as the ultimate beneficial owner of the vessel/s in question. All of these parties must be investigated thoroughly.
b) Identify the precise nature of the cargo to be transported. Members should also investigate the ultimate use to which the cargo will be put. Pleading ignorance of this is unlikely to provide a defence to a breach of sanctions legislation.
c) Regularly check the published lists of parties with whom trade is prohibited or restricted. The relevant websites are listed later on in this memo.
d) Ensure that all contracts, for example charterparties, are drafted to permit the refusal by Owners of orders that require trading with entities who are targeted by sanctions legislation, and permit a refusal of cargo which will put any party at a risk of a breach of sanctions legislation.
If in any doubt as to whether a particular contractual arrangement will result in a breach of any sanctions legislation, the Club recommends that Members seek legal advice.
What resources are available to enable Members to stay up to date on sanctions legislation?
Resource centre for UN sanctions
US Department of the Treasury Resource Centre for Libya Sanctions
The UK Treasury maintains a list of all designated persons and entities, which is regularly updated
What options are available to Owners if following Charterers’ orders will put them in breach of sanctions legislation?
Charterers may order a vessel to discharge in Libya, to discharge goods which are prohibited by sanctions legislation, or which are to be supplied to a party listed in sanctions legislation. Taking any such action may put Owners in breach of one or more provisions of the sanctions legislation currently in force. However, the question of whether Owners will be entitled to refuse Charterers’ orders is not a straightforward one.
The imposition of sanctions is likely to impact on Charterers as well as Owners. It may, therefore, be worth highlighting the risk that Charterers would fact by ordering the vessel on such a voyage. This could be sufficient to lead to an agreement between Owners and Charterers to revise the voyage orders.
Charterers may, nevertheless, restate their original orders. If there is no express exclusion in the charterparty preventing them from doing so, Owners are left with a number of arguments.
It may be possible to argue that Charterers’ order should be considered illegal: the majority of charterparties only permit vessels to carry lawful merchandise in lawful trades. Under English law, for example, a voyage order would be illegal not only if it is contrary to English law, but also if it illegal under the law of the vessel’s flag state or the law of the “place of performance” of the charterparty. US sanctions, for example, require the freezing of assets and funds. As a result, it could be argued that if hire payments are routed through the US then the payment of hire is effectively prohibited by US legislation.
The Club recommends that Members seek legal advice if they are at all concerned that particular voyage orders may result in sanctionable conduct.
What steps should Members take when negotiating charterparties to avoid falling foul of sanctions legislation?
Although it is impossible to guarantee protection at all times from all sanctions legislation, there are some measures which Owners can take when negotiating new charterparties which will go some way to protecting them.
Firstly, should Owners wish to avoid calling at Libyan ports, the Club suggests that Libya be excluded from the trading limits in the charterparty.
In cases where Libyan ports are not specifically excluded from trading limits, Owners can also protect themselves by incorporating specific wording into the charter (and, where appropriate, the sub-charter) to provide a mechanism to deal with a situation when orders are given by Charterers that would breach sanctions legislation. BIMCO and Intertanko have both published a standard form of wording for time charters, which can be found on their respective websites.
The Intertanko clause has a broad scope and is generally drafted in favour of Owners, as all that is required for a trade to be deemed unlawful is that it “could” expose the “vessel, its Owners, Managers, crew or insurers” to a “risk” of sanctions. There is, however, the possibility that parties could disagree as to whether the “trade” in question could lead to such a risk. Owners may wish to expressly amend the clause to provide that it is for Owners to decide, in their reasonable judgment, whether such risks exist. Charterers, on the other hand, may wish to restrict the scope of the clause to trade which “does”, in fact, expose Owners to risk.
BIMCO states that the objective of its clause is to “provide owners with a means to assess and act on any voyage order issued by a time charterer which might expose the vessel to the risk of sanctions. The test is one of ‘reasonable judgment’ by the owners in determining whether the risk of the imposition of sanctions is tangible”.
The Club strongly recommends that such a clause be included in new charterparties, although legal advice should be obtained to ensure that the clause is in keeping with the other terms of the charterparty in question.
How will sanctions legislation affect the making and receipt of payments
The issue of getting paid will be complicated by legislation limiting parties’ abilities to deal with Libyan banks. For example, the US Executive Order prohibits dealings with the Central Bank of Libya.
Provisions in the sanctions legislation may well complicate the issues of paying and getting paid under charterparties and related contracts. They could, for example, result in funds passing through the US banking system being frozen, or penalties being imposed as a result of unauthorised payments being made.
In considering such issues, it is necessary to distinguish between cases where a Libyan party is refusing or is unable to pay, and cases where the funds are available but payments are prevented by sanctions provisions. In the former case, this is a private contractual matter, and should be resolved between the parties. In the latter case, the party who is expecting the payment should first investigate whether the transaction in question is covered by an existing licence, issued by the relevant authority, which will enable them to receive payment.
If the transaction in question is not covered by an existing licence, then the party may be able to apply for such a licence. In the UK, for example, an application should be made to HM Treasury. Under the EU Regulations, the competent authority of a Member State (as specified in Annex IV to the Regulation) may authorise the release of frozen funds or economic resources, or allow certain funds or economic resources to be made available, in very specific circumstances. These circumstances are specified at length in the Regulations.
If it is not possible to circumvent the problems, it may be necessary to look for other ways of making and receiving payment. This could be done, for example, via a source which is not a designated person or entity. Alternatively, funds could be routed through the banking system of a country which does not require funds to be frozen. While one option could be corporate restructuring, caution should be exercised as if this is put in place specifically in an attempt to avoid the imposition of sanctions, it could itself amount to a breach.
The Club recommends that Members seek legal advice if they are at all concerned about their ability to make or receive payments in respect of a particular transaction.
Ae there any exemptions in relation to the asset freeze imposed on the designated port authorities?
Member State authorities will be able to authorise exemptions from the asset freeze for the execution of prior contracts until 15 July 2011. This means that payments to port authorities that are necessary in order to fulfil an existing contract will be permitted.
A ‘prior contract’ is construed as one which was concluded prior to the date that the implementing Regulation comes into force. The contract does not have to be with the port itself, but the port must be the location of delivery under the contract.
It should be noted that this ‘prior contract’ exemption does not apply to contracts relating to oil, gas and refined products.
This exemption only exempts a party from complying with the asset freeze in so far as it applies to the port authorities. It will not be possible to use this exemption to send goods to any other designated persons or entities.
Until 15 July 2011, therefore, it will be possible to make a payment to a designated port authority in relation to, for example, a non-oil/gas/refined products shipment going to a non-designated recipient in Libya, provided that the payment is made under a contract concluded before the date of the implementing Regulation.
Members who currently have contracts in place which require discharge at one of the listed ports will need to check carefully whether all fund transfers involving the port authorities will have been completed by 15 July 2011. If not, then it may be necessary to consider agreeing a variation to the charterparty in question so as to avoid the need to discharge at a Libyan port.
A formal application will need to be made in order to take advantage of the exemption. In the UK, for example, a licence from HM Treasury must be applied for.
A further exemption applies for the sending of humanitarian shipments to Libya.
What are the penalties for a breach of sanctions legislation?
The penalties for breaching any of the sanctions legislation in place can be severe, although the precise penalties differ depending on exactly which provisions are breached. It is also important to remember the detrimental effect which a breach of one or more sanctions could have on a Member’s reputation within the industry.
United Nations (General Observations)
Each Member State must make provisions for the penalties which are to apply to citizens and companies incorporated within its jurisdiction.
The enforcement measures and penalties put in place by the UK are considered as an example below.
United States
Breach of sanctions legislation carries both civil and criminal penalties. As regards the former, a party who violates a provision may be fined the greater of US$250,000 or an amount which is twice the amount of the transaction that forms the basis of the violation.
As regards criminal penalties, a person who “wilfully commits, wilfully attempts to commit, or aids or abets in the commission of” a violation may be convicted of a criminal offence and, on conviction, be fined not more than US$1,000,000. In addition, if the violation is committed by a natural person, that person may be subject to both a fine and/or imprisonment of up to 20 years.
Further, if property or assets belonging to blocked persons come into US jurisdiction, they may be frozen. Such measures could cause the effective forfeiture of cargo, freight or even vessels.
European Union
Although the EU Regulations are directly effective, each Member State must lay down rules on penalties which apply to infringement of the Regulations.
United Kingdom
Here we consider the various enforcement measures and penalties put in place by the UK, as an example of how the UN and EU sanctions regimes have been implemented.
UN Resolution 1970 was brought into English law by way of the Libya (Financial Sanctions) Order 2011 which came into force on 27 February 2011. This makes any breach of the UN sanctions legislation by any UK national, or by any company incorporated in the UK, punishable by imprisonment, a fine, or both.
As regards the EU sanctions regime, the relevant UK statutory instruments provide for criminal penalties, including up to two years’ imprisonment and/or unlimited fines. The UK implementing legislation also specifically states that where a corporate entity commits an offence, culpable individuals (for example, directors) can be punished.
Member Alert is published by The Swedish Club as a service to members. While the information is believed correct, the Club cannot assume responsibility for completeness or accuracy.