Financial sanctions are a foreign policy tool used to coerce a state or a regime to change its behaviour. They can be imposed on individuals or companies and can take the form of an asset freeze and/or a travel ban or more targeted restrictions such as denying access to key resources. Failure to adhere to sanctions can result in reputational damage, loss of insurance cover, foreclosure of mortgage as well as huge fines and/or imprisonment. Over the last few years, sanctions imposed by the UN, EU and US have greatly impacted the shipping industry directly and also through financial institutions and insurers, including P&l clubs. This can be challenging for members who may find themselves subject to complex and conflicting sanctions regimes. Shipping is also increasingly being viewed as an effective means of enforcing sanctions.
Main sanctions regimes
UN sanctions derive from UN Security Council Resolutions which require member states to implement them in their domestic legislation. In the EU they are implemented through Regulations which have direct effect in EU member states.
EU Sanctions are imposed as part of the EU Common Foreign and Security Policy. They apply:
- within the territory of the EU (including its airspace);
- on board any aircraft or any vessel under the jurisdiction of an EU Member State;
- to any person inside or outside the territory of the EU who is a national of an EU Member State;
- to any legal person, entity or body, inside or outside the territory of the EU, which is incorporated or constituted under the law of an EU Member State; and
- to any legal person, entity or body in respect of any business done in whole or in part within the EU.
EU sanctions may affect non-EU members if they are directed at insurers, even where the ship, the parties and the particular trade has no connection to the EU. For example, International Group (IG) clubs and reinsurers that are constituted under the law of an EU member state will not be able to insure a ship for a voyage in breach of such sanctions. Even where clubs are based outside the EU, they may be affected by the IG pooling/reinsurance arrangements and their own individual reinsurance arrangements (i.e. where such reinsurers are subject to EU sanctions).
Under most EU sanctions, there is a defence if you did not know or had no reasonable cause to suspect that your actions have caused a breach of sanctions. This means that if appropriate due diligence has been undertaken, and no suspicion reasonably aroused, then no offence has been committed even if it turns out that there has been an infringement. But what constitutes appropriate due diligence will depend on the particular facts of the case.
EU sanctions provide for implementation of ‘effective, proportionate and dissuasive’ penalties, which are imposed at national level. For example, the Office of Financial Sanctions Implementation (OFSI) which is part of the HM Treasury is responsible for enforcing financial sanctions in the UK:
https://www.gov.uk/government/publications/financial-sanctions-faqs. The maximum value of a financial penalty imposed by OFSI range from 50% of the estimated value of the funds subject to the breach of sanctions or £1m (whichever is higher). Penalties imposed by the criminal courts include up to 7 years in prison.
US sanctions are implemented under Presidential powers (Executive Orders) and domestic legislation. These (“primary sanctions”) apply to:
- US citizens and permanent residents wherever located;
- US entities organised under US law and their foreign branches;
- persons physically in the US (regardless of citizenship); and
- foreign entities owned or controlled by a US person.
With respect to sanctions against Iran and Cuba, non-US entities owned or controlled by US persons are also considered to be US persons.
There are also US sanctions with extra-territorial effect which apply to non-US persons (“secondary sanctions”) which are designed to prevent non-US persons from transacting business with targets of US primary sanctions. Secondary sanctions have mainly been imposed in connection with Iran, North Korea and Venezuela.
In the US financial sanctions are enforced by the US Office of Foreign Assets Control (OFAC) which is part of the US Treasury Department. Compliance is on a strict liability basis. Criminal penalties include fines up to $1m and/or 20 years in prison or both. Civil penalties include fines up to $250,000 or twice the amount of the underlying transaction. Other penalties include seizure/forfeiture of the goods involved.
A key part of most sanctions measures is an assets freeze against named individuals, companies and other entities. This means that their funds and economic resources are frozen and it is prohibited to make funds or economic resources available to them. Under US sanctions 'entities directly or indirectly owned 50% or more in the aggregate by one or more blocked persons' ie sanctioned individuals or entities which are known as specially designated nationals (SDNs) are themselves considered to be SDNs. The US Treasury 'urges caution when considering a transaction with an entity ... in which one or more blocked persons have a significant ownership interest that is less than 50% or which one or more blocked persons may control by means other than a majority ownership interest' (according to Guidance issued on 13 August 2014). Similarly, under EU sanctions entities owned 50% or more by a sanctioned individual or entity which are known as Designated Entities (DEs) are themselves considered to be DEs. However under EU sanctions this includes entities 'controlled' by a sanctioned individual or entity. The EU Council has issued guidelines on the criteria to be taken into account when assessing ownership or control by a sanctioned entity; and when considering whether a party is affected by asset freezes, read more here.
The current consolidated list of asset freeze targets designated by the UN, EU and UK under legislation relating to financial sanctions regimes, can be found on the HM Treasury website.
The current list of sanctioned individuals and entities (also known as Specially Designated Nationals or SDNs) in respect of US sanctions can be found on the US Treasury website.
These lists are amended on an ongoing basis with little or no prior notice so members should ensure that they are closely monitored.
The club cannot confirm whether a particular trade or shipment will breach sanctions. Members must exercise their own due diligence and make enquiries so that they can satisfy themselves as to whether their trading activities will expose them to the risk of breaching sanctions. This will include:
- identifying which sanctions regimes apply to a transaction (which includes considering the country of loading, transit, transhipment and discharge);
- investigating whether the particular trade, voyage or operation is subject to any prohibitions or restrictions;
- reviewing whether any of the parties involved e.g. Owners, Charterers, Sub-Charterers, cargo interests (e.g. shippers, receivers, consignees, buyers and sellers), port operators, bunker suppliers or local agents etc are named on the relevant sanctions list(s) or are owned and/or controlled by entities named on the sanctions list(s);
Sanction regimes change regularly and this can occur with little or no prior notice e.g. a cargo that was not previously prohibited may become subject to sanctions during a voyage. We therefore recommend that members should consider inserting sanctions clauses in their charterparties e.g. BIMCO sanctions clauses for time and voyage charterparties.
Members will need to carry out enhanced due diligence in high risk jurisdictions (e.g. Iran, Syria, North Korea etc) as there has been evidence of deceptive shipping practices in these areas e.g. physically altering a vessel’s identification, falsifying shipping documents, manipulating AIS (the automatic identification system) on vessels and carrying out illicit ship-to-ship cargo operations (to conceal the origin or destination of the cargo) etc.
On 14 May 2020 the US authorities issued a Global Advisory to the Maritime Industry which provided detailed guidance to ship owners, charterers, flag registries and insurers etc. regarding emerging trends related to illicit shipping practices. A copy of the advisory is available here. It sets out recommendations in terms of risk management and due diligence. Although its recommendations are not mandatory, it demonstrates US OFAC’s focus on shipping as a means to implement and enforce sanctions policy. A web alert issued by the club which provides some guidance is available here and the International Group’s response to the Advisory is available here.
On 2 May 2019, the US OFAC published a Framework for OFAC Compliance Commitments (the Compliance Framework), which is available here. It sets out OFAC’s expectations of the essential elements of an effective sanctions compliance programme. It strongly encourages companies subject to US jurisdiction and foreign entities that conduct business in or with the US or involving US-origin goods or services, to develop a risk-based approach to sanctions. It recommends that a sanctions compliance programme should include the following five components:
- Senior management commitment which should include arranging direct reporting lines to senior management and promoting a “culture of compliance” within the company.
- Risk assessment that properly takes account of the sanctions’ risks relevant to the business. This includes developing an onboarding process for new customers through a Know-Your-Customer process. It also expects companies to develop a methodology to identify, analyse, and address any risks it identifies, which will be monitored and updated to respond to any systemic risks identified by the company during its business operations.
- Risk-based internal controls including written policies and procedures tailored to the business and sanctions risk in order to identify, prevent, escalate, report and record activities that are prohibited by sanctions’ programmes. These controls should be flexible enough to respond to new legislation and/or sanctions risks.
- Testing and auditing sanctions procedures to ensure that they are effective and adapt to any changes in the sanctions’ environment.
- Providing training to all relevant employees on a regular basis (at least once a year) and assess employees understanding of the training.
The Compliance Framework does not impose any legal requirements on US persons, persons doing business with the US or persons subject to secondary sanctions. It does however set out the standards that OFAC will apply in evaluating the adequacy of a sanctions’ compliance programme under its Enforcement Guidelines. It has also made it clear that a failure to adopt the Compliance Framework increases the likelihood and severity of penalties being imposed on a company that is found to have breached US sanctions.
Members should be aware of the club’s sanctions rules (i.e. P&I rule 4.8, 6.22 and 17.2(5) or their equivalent) which are set out in full in the club’s rule books here.
Rule 4.8: “No claim is recoverable if it arises out of [the ship] …being employed in an unlawful, prohibited or sanctionable carriage, trade, voyage or operation, or if the provision of insurance … is unlawful, prohibited or sanctionable…”
Rule 6.22: “The member shall in no circumstances be entitled to recover from the club that part of any liabilities which is not recovered by the club from [pooling agreement partners or reinsurers] … by reason of any sanction, prohibition or adverse action against them by a state or international organisation…”
Rule 17.2(5): “A member shall cease to be insured by the club in respect of any ship entered by him if … the ship is employed by the member in a carriage, trade, voyage or operation which will thereby in any way howsoever expose the club to the risk of being or becoming subject to any sanction, prohibition or adverse action in any form whatsoever by any state or international organisation, unless the managers shall otherwise determine.”
Members should be aware that even if they are not breaching sanctions, cover for a ship will automatically cease when the club is at risk of being exposed to sanctions (rule 17.2(5)). Similar rules to the above also apply under the Standard Offshore Rules.
Members need to be aware that certain sanctions regimes may prohibit the provision of insurance which may affect the club’s ability to provide assistance in the event of a claim e.g. providing security or paying the claim or third party service providers. Many banks also have blanket policies whereby they are unable to process any payments linked to high risk jurisdictions.
We strongly urge members to ensure that their sanctions compliance procedures are robust, proactive and up to date. If members have any sanctions queries they should contact their usual club contact. We have a P&I sanctions team who are experienced in dealing with sanctions queries which includes representatives from our offices in London, Piraeus, New York and Singapore. They can provide general guidance, advice on cover issues and recommend specialist sanctions lawyers in England, the US and other key jurisdictions should members need legal advice.
Circular: 4 May 2020, Standard Club circular - DPRK – UN Panel of Experts of North Korea sanctions report
EU implements new UN sanctions against the Democratic People's Republic of Korea (''DPRK'') - March 2017
New US Sanctions legislation against Iran, Russia and North Korea - August 2017
US amends and reissues sanctions against North Korea
OFAC announces new North Korean sanctions
US expands sanctions against North Korea
New US sanctions legislation against Iran, Russia and North Korea
US takes steps to revoke sanctions against Sudan - January 2017
US revokes sanctions against Sudan - October 2017
United States imposes further sanctions against Venezuela
US sanctions and Venezuelan crypto-currency
Freehill Hogan & Mahar Client Alert: US sanctions against Venezuelan Digital Currency Impact Shipping dated 10 April 2018
Freehill Hogan & Mahar Client Alert: US sanctions against Venezuela stepped up dated 5 Sept 2017
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