A short sail across the Persian Gulf, the UAE has historically been a haven for Iranian traders. Dubai in particular has attracted hundreds of thousands of economic migrants and is currently home to an estimated 8,000 Iranian businesses. The once healthy mercantile relationship between the Emirate and nationals of the Islamic Republic has suffered in recent times as Dubai becomes one of the territorial focal points for the application of more exacting international sanctions against Iran. As Iranian businesses look for new opportunities elsewhere, those operating in the Gulf must be mindful of their obligations under international law before committing to any potentially prohibited activities.
2010 saw a marked increase in the scope of sanctions against Iran. On 9 June, the United Nations (“UN”) Security Council passed Resolution 1929 (2010) (“Resolution 1929”), which built on existing trade and financial restrictions. This was shortly followed in July by the United States Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (“CISADA”), unilateral legislation intended to impose far stricter, US -led prohibitions. Though subject to international criticism, CISADA has (among other things) the potential to exclude from the US financial system those guilty of breaching its terms. The EU Council Decision 2010/413/CFSP (the “Council Decision”) of July and Regulation (EU) No. 961/2010 of 25 October (the “Iran Regulation”) followed, imposing similarly demanding obligations as those set out in CISADA, albeit limited to a European context.
The introduction of these sanctions builds on what is an already complex body of law and provides further uncertainty to individuals, businesses and government entities in the Gulf over who is affected and what is prohibited. The line between applicable and unenforceable legislation is far from clear. Those in danger of breaching any applicable rules are encouraged to seek clarification and advice before making a costly (if innocent) mistake.
The UN Sanctions
Resolution 1929 expands on existing UN resolutions against Iran, namely 1696 (2006), 1737 (2006), 1747 (2007), 1803 (2008), 1835 (2008) and 1887 (2009) (together with Resolution 1929, the “UN Sanctions”). The UN Sanctions seek to exert political and economic pressure on Iran in order to, among other things, force the country into providing greater transparency in respect of its nuclear development programme. The UN Sanctions are the most directly pertinent rules to GCC members.
Resolution 1929 places a number of obligations on Iran as a UN member state. These are focussed on the country’s cooperation with the International Atomic Energy Agency and suspension of its uranium enrichment efforts. The resolution also extends the existing restrictions on trade with, and investment in, Iran or Iranian entities by other UN member states.
The new measures include prohibitions on the supply (direct or indirect) of arms to Iran and the provision of bunkering services to Iranian owned or contracted vessels (provided there are reasonable grounds to believe the vessels are carrying prohibited items). Member states are also required to inspect cargo travelling to or from Iran provided there are reasonable grounds to believe the cargo contains prohibited items. Resolution 1929 also prohibits the provision of financial services (including insurance) that could contribute to Iran’s nuclear proliferation or weapons delivery systems.
As UN member states, each GCC member is obliged to comply with the UN Sanctions. For example, the UAE has reportedly stepped-up its scrutiny of vessel cargoes travelling to/from Iran through its ports and airports, particularly in Dubai. Trade has suffered as a result: Iranian imports from the UAE were estimated at US$13 billion in 2008 by the IMF and it is estimated by some commentators that this figure could fall as low as US$6 billion for 2010.
Obtaining finance to fund trade with Iran has also become increasingly difficult (and where available, expensive) as US influence has dissuaded banks from lending. Rather than spend time and money on due diligence to comply with the UN Sanctions (and CISADA), banks are dropping some Iranian clients and/or calling in existing loans. For example, a number of creditors of the Islamic Republic of Iran Shipping Lines (“IRISL”) called in debts owed by IRISL after it was made the subject of certain sanctions under Resolution 1929. These developments may have a significant impact on the enforcement of security: for example, three of IRISL’s vessels were seized by a syndicate of banks in Singapore last year; the vessels were only released in January 2011 by Singapore’s Supreme Court following the repayment by IRISL of at least EUR155m to Société Générale as agent for the banks.
As the UAE becomes increasingly unattractive as an operational hub, Iranian businesses are reportedly looking for opportunities elsewhere in the region. Though the climate for dealing with Iranian counterparties may currently be easier in other jurisdictions, nationals and residents (whether natural or corporate persons) of all GCC member states must remain mindful of their obligations under the UN Sanctions. Comprehensive due diligence is to be encouraged to ensure that the directly enforceable provisions of the UN Sanctions are not breached.
CISADA goes further than the UN Sanctions. It targets globally all companies involved in the Iranian energy and financial services sectors. This legislation is intended to restrict Iran’s access to oil refinement technology and equipment and its import of diesel and petroleum products, both of which are vital to the country’s economic development.
CISADA is a controversial and divisive example of unilateral law making. It is intended to extend US influence and policy in dealings with Iran, but is unpopular in a region with longstanding ties to the Islamic Republic. Officials in the UAE have, for example indicated a willingness to follow the rules provided in the UN Sanctions but are reluctant to enforce the tougher CISADA provisions and have questioned their legality, despite the recent diplomatic efforts of US Treasury officials visiting the region.
The CISADA sanctions are broad and the penalties severe; both are intended to reach far beyond US borders. For example, under the act the US President is able to prohibit any transfers of credit or payments by, through or to any financial institution where those transfers or payments are subject to US jurisdiction and involve a sanctioned person. Practically, the US President could therefore freeze any dealings in US Dollars which involve an individual or company that had breached the terms of CISADA. Although questions remain over the enforceability of the act globally, the potential repercussions of non-compliance for a region reliant on US currency are clear.
Members of the transport, energy, finance and insurance industries in the Gulf wanting to make use of the US financial system and markets are strongly encouraged to exercise considerable caution when dealing with Iran or Iranian entities. Careful scrutiny of customers, cargoes, financing and end users is essential and in case of doubt, business may need to be refused or further assurances provided; indemnities will not provide sufficient protection in the face of potential criminal liabilities for breach of the CISADA provisions.
The Council Decision and Iran Regulation
Like CISADA, the Council Decision contains significantly broader sanctions than those imposed by the UN under Resolution 1929. The Iran Regulation develops the Council Decision in setting out new and detailed rules on the operation of European Union (“EU”) sanctions against Iran and is legally binding on EU member states, EU citizens and EU entities. Importantly, the Iran Regulation applies on board any aircraft or vessel under the jurisdiction of an EU member State, to any EU national (natural or corporate) and to any legal entity doing business in whole or in part with the EU.
The Iran Regulation follows to a large extent, but not entirely, the CISADA provisions. The EU has prohibited its member states from applying unilateral US sanctions against Iran as a matter of policy and therefore introduced the Iran Regulation to complement CISADA from a European perspective. Unlike CISADA, the Iran Regulation does not purport to be extra-jurisdictional, but its provisions are relevant to EU nationals and to those companies operating with the EU or within European territory.
The Iran Regulation contains restrictions on imports from and exports to Iran and technical or financial assistance in the nuclear field. The regulation prohibits the supply of certain equipment and technology to, and investment in, the Iranian oil and gas industries. It also imposes additional inspection requirements on EU member states on goods imported from or exported to Iran, regulates relationships between EU and Iranian financial institutions and prohibits the provision of insurance or reinsurance to Iran or persons acting on behalf of Iran.
Companies and individuals in the transport, energy, finance and insurance sectors with European interests or operations are recommended to tread carefully when dealing with Iran or Iranian entities. Locally, the Iran Regulation may not share the relevance of the UN Sanctions or the threatening nature of CISADA, but those affected should seek advice before engaging in any potentially prohibited activity.
This is an extremely complex area of the law. It is not entirely clear how the various sanctions inter-operate or who is bound by what. In the Gulf region, the one constant we can apply is that compliance with the UN Sanctions is mandatory for all. Beyond that, those operating within the transport, energy, financial and insurance industries in the region must be mindful of the stricter CISADA and Iran Regulation provisions in order to determine whether they are of relevance in any given situation. Persons wishing to avail themselves of the US financial system, currency and markets must take particular care to avoid breaching CISADA.
Although local governments have voiced their opposition to CISADA and the Iran Regulation, US and EU nationals based in the Gulf should be extremely careful before ignoring these laws. Non-compliance could result in significant civil and criminal penalties, especially given the extra-jurisdictional nature of the US legislation. Individuals should also seek to ensure that any conflicts between their personal interests (in relation to the sanctions) and the best interests of the entity to which they owe a fiduciary duty (where relevant) are minimised.
Persons potentially impacted by any of the laws summarised above are encouraged to undertake comprehensive due diligence and seek legal counsel where necessary to ensure that the risks of breach and associated penalties are reduced.
If you would like to read more on this topic, please follow the links below:
Effect of international and US sanctions against Iran on the global shipping industry
EU publishes Regulation implementing Iranian sanctions
James Collins is an associate specialising in asset finance and leasing based in Abu Dhabi.