For the past several months, the sanctions spotlight has seemingly been turned directly on the international shipping industry. In particular, the seizure of the Adrian Darya 1 (previously the Grace 1) off the coast of Gibraltar by UK Royal Marines in July set off a chain of events that saw the UK-flagged Stena Impero seized in the Strait of Hormuz and, following the decision by the courts of Gibraltar to release the Adrian Darya 1, the U.S. Department of Justice issue a warrant for its seizure as well as designating both the vessel itself and its captain as specially designated nationals (SDN).
Whilst these stories may have caught the attention of headline writers, they reflect an increased focus on the shipping industry on the part of enforcement agencies on both sides of the Atlantic. Given the industry’s central role in international trade, these agencies are increasingly proactive in targeting entities involved in international shipping.
In this article, we highlight some of the major developments in enforcement actions against the shipping industry, as well as considering some of the key risks to shipowners, insurers and related parties.
Whilst the U.S. has imposed sanctions against Venezuela since 2015, the scope of sanctions were significantly extended at the start of this year with the designation of Petróleos de Venezuela, S.A. (PDVSA) as an SDN pursuant to Executive Order 13850 (EO 13850). The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has stated that Venezuela’s oil sector (in which PDVSA is the central participant) provides ‘a lifeline to the illegitimate regime of former President Maduro’.1
OFAC’s designation of PDVSA is significant and gives rise to a variety of risks for participants in the shipping industry who are engaged in trade with Venezuela including, significantly, non-U.S. entities. Whilst U.S. entities are prohibited from engaging in most transactions with PDVSA, EO 13850 provides for the designation of any entities which are deemed to be operating in ‘the oil sector of the Venezuelan economy’ and/or to have materially assisted an entity (such as PDVSA) which is designated under EO 13850.
OFAC has actively targeted companies which it deems to be operating in Venezuela’s oil sector. These include, in April of this year, the designation of PB Tankers S.P.A., an Italian ship-owning company, and several of its vessels which were allegedly carrying Venezuelan oil to Cuba. Although PB Tankers was removed from the SDN List in July 2019, the effect of being designated by OFAC had led to it filing for bankruptcy protection. This example serves as an illustration of the risk involved in continued participation in trade in oil with Venezuela and the consequences of any violations.
In March, OFAC issued an “Advisory to the Maritime Petroleum Shipping Community”, in which it warned of the ‘significant U.S. sanctions risks for parties involved in petroleum shipments to the Government of Syria…including shipping companies, vessel owners, managers, operators, insurers, and financial institutions.’
The advisory refers to the designation in November 2018 of Iranian and Russian private and public sector entities involved in procuring Iranian oil for Syria, and warns that the U.S. is committed to rigorous enforcement of sanctions against entities who engage in sanctionable activities.
The Advisory contains a non-exhaustive list of vessels that have delivered oil to Syria between 2016 and 2018, as well as a non-exhaustive list of vessels that have engaged in ship-to-ship transfers of oil destined for Syria between 2016 and 2019. While the Advisory states that the listed vessels ‘have engaged in sanctionable conduct in support of the Government of Syria or entities owned by the Government of Syria’, not all the vessels listed have been designated by OFAC. The list nevertheless gives an indication that OFAC is committed to an increased level of oversight of the shipping industry in order to police its sanctions policy.
On September 4, 2019, OFAC issued a further advisory to the maritime petroleum shipping community in relation to the sanctions risks involved in shipping petroleum and petroleum products from Iran. In a similar vein to the March Advisory, OFAC warns of the significant sanctions risks in participating in such shipments and affirms its commitment to aggressively enforce its sanctions against the Iranian regime. The advisory lists 12 vessels (including the Adrian Darya 1) that have been added to the SDN List for engaging in such shipments. OFAC concurrently issued a press release stating that these vessels are part of a large shipping network that is directed by and financially supports the Islamic Revolutionary Guard Corps-Qods Force and its terrorist proxy Hizbullah.
Additionally, on September 5, 2019, OFAC updated existing FAQs and published new FAQs regarding bunkering of non-Iranian and Iranian vessels carrying goods to or from Iran. Pertinently, in certain circumstances, bunker providers risk being targeted by sanctions if they provide bunkering services to non-Iranian vessels transporting sanctionable goods to or from Iran. This underlines the requirement for all operators in the industry to have a rigorous compliance program to identify risks which may not, at first instance, be apparent.
On September 25, 2019, the US designated several entities and individuals, including COSCO subsidiaries Cosco Shipping Tanker (Dalian) Co., Ltd. and Cosco Shipping Tanker (Dalian) Seaman And Ship Management Co., Ltd., for ‘knowingly engaging in a significant transaction for the transport of oil from Iran’. The sanctions were imposed pursuant to the authority in Executive Order 13846 (EO 13846). This has had a significant impact on COSCO’s business and the tanker market more generally – the two designated COSCO entities control or manage 49 vessels.
US entities cannot now engage in transactions with the designated COSCO entities and certain of their subsidiaries. The position regarding non-US entities is less clear. Whilst is has been reported that non-US entities are prohibited by ‘secondary sanctions’ from engaging in certain material transactions with the designated COSCO entities, this is not actually reflected in the wording of section 3 and 5 of EO 13846. pursuant to which the entities are designated. Notwithstanding, many non-US traders, charterers, insurers and financial institutions are reconsidering their exposure to the two entities and their designated subsidiaries.
In August 2019, OFAC designated two Taiwanese individuals, two Taiwanese entities, one Hong-Kong entity and one vessel which had participated in illicit ship-to-ship transfers with North Korea-flagged vessels in order to circumvent UN sanctions restricting the import of petroleum products into North Korea. As part of these announcements, OFAC warned that ‘shipping companies trading with North Korea are exposing themselves to significant sanctions risk, despite the deceptive practices they try to employ.’
Takeaways for the international shipping industry
Shipping a key focus
As can be seen from the above developments, the shipping industry (and particularly the tanker industry) is a key area of focus for enforcement agencies such as OFAC. This should come as no surprise, given that crude oil is a major economic asset of countries, like Venezuela and Iran, which are the focus of U.S. sanctions policy and, in particular, its application of “maximum pressure”.
Some of the key areas of focus were identified by OFAC in its March advisory. These are: (1) the falsification of cargo and vessel documents; (2) the practice of ship-to-ship transfers (which can be used to conceal the origin or destination of cargo); (3) disabling Automatic Identification System (AIS); (4) vessel name changes.
All participants in the shipping industry should be aware of the risks involved in trade with certain countries (including those set out above, and any regional trade hubs known to engage with such countries), ensure they have robust policies, procedures and contractual protections, and take active steps to monitor developments and ensure compliance with applicable sanctions laws, in order to avoid the risk of participating in sanctionable trade.
The importance of a rigorous compliance program
In May, OFAC published “A Framework for OFAC Compliance Commitments” in which it encouraged entities subject to U.S. jurisdiction, as well as non-U.S. entities that conduct business in or with the U.S., U.S. persons, or using U.S.-origin goods or services to ‘employ a risk-based approach to sanctions compliance by developing, implementing, and routinely updating a sanctions compliance program’.
The document sets out five essential components of compliance: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training.
It is essential that participants in the shipping industry (including shipping companies, vessel owners, managers, operators, insurers, and financial institutions) have in place a robust compliance program to identify risk.
Currently, some argue that the burden of monitoring compliance falls unfairly on insurers who are required to monitor the activities of their insured vessels. However, until this regrettable position is altered, the consequences of violating sanctions means that every entity involved in the shipping industry, including insurers, must take measures to ensure compliance.
While the presence of an effective compliance program may result in a reduced monetary penalty, it should be borne in mind that it will not negate liability for a breach of sanctions.
To this end, it is vital that participants ensure they also have adequate contractual protection. This includes ensuring they have the right to refuse to perform, finance, or insure a voyage where to do so would expose them to risks under the sanctions regimes that they must comply with at law. Sanctions clauses are no longer “pro-forma” and must be carefully considered and drafted to be effective and “fit for purpose” for the specific transaction. These provisions must also effectively interact with compliance programs.
The proliferation of advisories, FAQs and enforcement action coming out of the U.S. suggests that the shipping industry will continue to be a key area of focus for OFAC. Participants in the industry are therefore on notice, and should ensure that they have taken all appropriate steps to ensure compliance.