Re-imposition of US secondary sanctions targeting Iran

Wednesday, 8th August 2018

UPDATE Wednesday, 8 August 2018

European Union Regulation 2271/96 (Blocking Regulation)

Background?

The Circular dated 29 May 2018 issued by all Clubs in the International Group outlined the potential repercussions for shipowners and insurers that will arise from the U.S. Administration’s decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) agreement signed by China, France, Germany, Russia, the United Kingdom, the United States, the European Union (EU) and Iran.

As previously advised, the U.S. withdrawal from the JCPOA, and its decision to reactivate the nuclear-related laws that were waived in order to implement the JCPOA, will have significant ramifications for maritime trade with Iran and the insurance of such trade.

Action taken by the European Union to preserve the JCPOA

In an attempt to maintain the principles established under the JCPOA framework, to facilitate the continuation of trade activities between European businesses and Iran, and to counteract the extraterritorial effect of U.S. secondary sanctions, the European Union has replaced the annex to Council Regulation (EC) No 2271/96, otherwise known as the Blocking Regulation. Commission Delegated Regulation (2018/1100) of 6 June 2018 gives effect to the replacement of the Annex from 7 August 2018. The new annex sets out amongst others the United States laws, regulations and other legislative instruments relating to trade with Iran from the Iran Sanctions Act 1996 onwards that have been subject to waivers under the JCPOA since 16 January 2016. However, those waivers will cease to have effect on a phased-in basis from 6 August 2018 with a final date of 4 November for certain trade activities, including the transport of oil cargoes, by which date the performance of contracts must be either executed or terminated.

Click here for a copy of Regulation 2018/1100 attaching the new Annex and a Guidance Note issued by the European Commission.

The International Group has engaged extensively with the Office of Foreign Assets Control (OFAC) in the U.S., the European Union External Action Service, European Commission, the UK Treasury and Foreign Office and EU Member States in order to explain some of the practical effects arising from the reactivation of U.S. secondary sanctions on shipowners and insurers, and the potentially complex legal scenario that could arise as a result of EU natural and legal persons complying on the one hand with the reinstatement of U.S. measures, while on the other hand facing a potential exposure to a law suit by virtue of an civil action taken under the Blocking Regulation. Under the Blocking Regulation, a national of an EU Member State or a legal person incorporated within the European Union who suffers a detriment as a result of another legal person in the European Union complying with the U.S. measures, may seek recovery of damages arising from that legal person. EU Member States are also obliged to uphold the EU measures. Attention is however drawn to section 1.5 of the Guidance Note which reflects the right of an EU operator, consistent with the provisions of the Blocking Regulation, to make its own assessment of the economic situation and its decision on whether to commence, continue or cease business operations in Iran.

The situation is complicated and the way in which the Blocking Regulation is implemented and enforced in the Member States will vary from country to country.

The Blocking Regulation – Authorisation Process

Exemption from the Regulation is permissible under Art. 5, providing a natural or legal person to whom the Regulation applies (Art. 11) can demonstrate that compliance with the Regulation – and non-compliance with the reactivation of U.S. measures - would seriously damage their interests. Section 3, paragraphs 16 – 20 of the Guidance Note address the process for authorisation to comply with the extraterritorial legislation listed under the new Annex in circumstances where non-compliance would seriously damage their interests. The envisaged authorisation process permits for applications for individual EU operators, or by several operators jointly, where their interests are sufficiently homogenous. Following release of this Guidance, the Group is following up with the European Commission and European External Action Service on the necessity for authorisation, and the possibilities for a collective application on behalf of the Group Clubs. Shipowners incorporated within the European Union who believe that they might face a claim for damages from another entity incorporated within the European Union for failure to perform under a contract involving activity subject to U.S. sanctions may also wish to give consideration to seeking an authorisation under the Blocking Regulation in order to protect their business interests from the risk of enforcement action by OFAC for breach of U.S. sanctions.

The International Group will continue to monitor and assess the situation.

30 May 2018:

The decision by President Trump announced on 8th May, 2018 to cease the US participation in the JCPOA and to begin re-imposing US nuclear-related sanctions which were lifted to implement the JCPOA, is likely to have significant ramifications for maritime trade with Iran and the insurance of such trade.

The US Department of the Treasury FAQs issued on 8 May relating to the effect of the re-imposition of US secondary sanctions measures, can be accessed via this web link.

The Group is already engaged with OFAC directly seeking clarification on a number of aspects of the application of the Presidential Memorandum of 8 May including in relation to the continuation of pre-8 May contractual obligations during the “wind-down” period, permitted trade with Iran after the 6 August and 4 November deadlines and in relation to the wind down of the General Licence H arrangements applying to non-US domiciled affiliates and subsidiaries of US domiciled insurers and reinsurers. As the remaining JCPOA partners have reaffirmed their support for the JCPOA, the Group is also engaging with the UK Treasury and with the EU External Action Service in relation to the impact of the US decision, and possible EU measures, on the Clubs and their reinsurers. The position may become more complex in the short-term by virtue of the continued support for the JCPOA by its other signatories and by the recent threat of further sanctions being imposed by the U.S. The U.S. position has reverted to that prior to the relaxation of U.S. nuclear related sanctions on Implementation Day on 16 January 2016 when the JCPOA took effect. Shipowners and charterers who are considering trading to Iran should understand that P&I cover for such trade is unlikely to remain in place where there is a risk that providing insurance risks the imposition of sanctions by the U.S.

Calls at Iranian ports

One potential ramification of the US withdrawal from the JCPOA could be that, in the event of ship detention, Clubs could encounter difficulties putting up security in the context of any claim with an Iran nexus.

This is particularly relevant if security is required for a major claim relating to Iranian port, since the U.S. will re-impose sanctions against Iran’s port operators, which sanctions provide for penalties against any person who provides “significant financial, material, technological, or other support to, or goods or services in support of any activity or transaction on behalf of or for the benefit of…a person determined to operate a port in Iran.” The ramifications of the re-imposition of secondary sanctions against Iranian ports are uncertain and we are seeking clarification from OFAC on this point.

The position in relation to calls at Iranian ports under pre-8 May contracts during the wind down period up to 6 August and 4 November 2018 is unclear in a number of respects on which the IG is awaiting clarification and/or guidance from OFAC. Due to the uncertainty surrounding the application of the re-imposed secondary sanctions against Iranian ports, caution should be exercised in respect of all calls at Iranian ports, especially if they are made under post-8 May contracts and under all transactions after November 4, 2018. Due diligence should be exercised to ensure that neither the cargoes carried nor the parties involved in the transactions offend U.S. sanctions. However, we emphasise that there is at this point no clear guidance from the U.S. authorities on the issue of routine transactions with Iranian port operators.

Party related sanctions

On JCPOA implementation day in January 2016, hundreds of individuals and entities were removed from the U.S. sanctions lists. These parties will now be relisted no later than 5 November 2018. After their relisting, most of these parties will be subject to secondary sanctions.

Maritime activities related to the 90 days’ wind-down period

From 6 August 2018, the sale, supply or transfer, directly or indirectly, to or from Iran of the following materials: graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes is sanctionable where the material is:

  • to be used in connection with the energy, shipping or shipbuilding sectors of Iran or any sector of the economy of Iran controlled directly or indirectly by Iran's Revolutionary Guard Corps
  • sold, supplied or transferred to or from an Iranian person on the SDN List (other than Iranian financial institutions that have not been designated for the imposition of sanctions)
  • to be used in connection with the nuclear, military or ballistic missile programs of Iran

In addition, from 6 August 2018, the following activities will be subject to the re-imposition of sanctions

  • Iran’s trade in gold or precious metals;
  • Significant transactions related to the purchase or sale of Iranian currency, or the maintenance of significant funds or accounts outside the territory of Iran that occurs in Iranian currency; 
  • The purchase, subscription to, or facilitation of the issuance of Iran sovereign debt; 
  • Iran’s automotive sector

Maritime and non-maritime activities related to the 180 days’ wind-down

From 4 November 4 2018, U.S. sanctions will be re-imposed on:

  • Iran’s energy sector
  • Iran’s port operators
  • Iran’s shipping and shipbuilding sectors, including the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line, or their affiliates; Petroleum related transactions, with, among others, the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”), and National Iranian Tanker Company (“NITC”) including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
  • The provision of underwriting services, insurance, or reinsurance
  • Transactions by foreign financial institutions with the Central Bank of Iran and other foreign financial institutions that have been designated under NDAA Section 1245; and
  • The provision of specialized financial messaging services to the Central Bank of Iran and other Iranian financial institutions; 

The US Treasury FAQs has stated that any persons engaged in these activities should take steps necessary to reduce those activities by the end of the wind down periods to avoid exposure to sanctions or enforcement actions.
The wind-down periods permit the winding down of Iranian transactions which had been commenced before 8 May 2018. OFAC FAQ 2.2 addresses the issue of whether, after 8 May 2018, parties can engage in new Iran-related transactions if they will be concluded within the applicable wind-down periods. FAQ 2.2 is less than clear but in informal discussions OFAC has indicated that penalties could be imposed on sanctionable activities entered into after 8 May 8 even if they are concluded within the applicable wind-down period.

In addition, the U.S. plans to revoke specific and general licenses issued in connection with sanctions relief provided under the JCPOA, again subject to wind down periods, including General License H, which authorised U.S.-owned or controlled foreign entities to engage in certain activities involving Iran.

The Group will continue to engage with the relevant US and EU regulatory bodies on these issues with a view to obtaining further clarity especially with regard to implementation of the reinstatement of sanctions in the US and the impact this will have in relation to shipowners’ liability and club cover. In the meantime, members should contact their clubs directly for advice/guidance in relation to the provision of their insurance cover arrangements and / or take legal advice from specialist lawyers.

Further information on the issues raised in this circular can be obtained by clicking the links to US based law firms Freehill, Hogan & Mahar and Gibson Dunn.