Because of the ways in which economic sanctions can have an impact on commodity trade transactions, the number of jurisdictions involved, and the ever-changing nature and scope of such sanctions, it is often the case that a commodity trader, compliance officer or legal counsel needs to have a keen eye on the transactions in order to identify suspect transactions so as to avoid falling foul of the complicated web of U.N., E.U., U.S. and other sanctions.

Despite the extensive efforts of the U.S. and the E.U. to curb Iran’s ability to trade with the rest of the world, Iran appears to be still capable of avoiding the sanctions to some degree.


According to press reports, Iran is estimated to have bought more than USD6 billion of gold from Turkey last year, largely after Iran was ejected from the SWIFT banking system in March 2012. This is more than ten times the level in 2011. Similarly, Turkey exported USD4.6 billion of gold to the U.A.E., an increase from USD280 million in 2011, and it is believed that much of this is on-shipped to Iran or converted to hard currency. According to data from the Turkish Ministry of Economy, there are more than 3,200 Iranian companies listed in Turkey. In January, a 1.5 tonne parcel of gold valued at more than GBP50 million was seized in Istanbul, whilst en route to Dubai from Libya.

It is understood that front companies are used to purchase gold from Africa, South America and Switzerland, and that some of the gold is shipped to Iran via transit points such as Istanbul and Dubai, with the majority being stored in havens worldwide to keep the gold liquid and facilitate redistribution, as required. With letters of credit being opened on the value of gold (held by brokers outside of Iran), and used to make payments to third parties, this results in no currency changing hands or being received from Iran. Accordingly, this presents a challenge in terms of tracking payments from Iran and complying with the sanctions.

On 6 February, U.S. sanctions tightened controls over foreign financial institutions and stopped the Turkish state-owned lender Halkbank from processing other nations’ energy payments to Iran.

Similarly, press reports indicate that trade in Turkish gold to the U.A.E. is drying up as dealers and bankers declined to purchase the gold to avoid the risk of sanctions associated with such trades.

However, Turkey faces pressure from Iran, from whom it obtains oil and gas supplies. Turkey is Iran’s biggest natural gas customer. The Turkish Minister of Development has recently called for the expansion of economic ties with Iran despite foreign pressures. According to press reports, Turkey pays Iran for the gas imports in Turkish lira because the sanctions prevent it from paying in U.S. Dollars or Euros. The lira, held in Halkbank accounts, is then apparently used to purchase gold in Turkey and moved to Iran or the havens elsewhere.

On its part, Iran has rebuffed the offer by the West made in February to relax the gold sanctions in exchange for Iran halting the development of its Fordow uranium enrichment plant. Iran has also attempted to move away from oil exports and increased exports of both agricultural and mining products, aided in part by the devaluation of the Iranian rial which has made such products more attractive.

Since then, Turkish gold exports to Iran appear to have resumed, albeit at a lower level of around USD120 million in February 2013. Turkish gold exports to the UAE, based on trade data reported in March 2103, on the other hand, rose from USD371 million in January to USD402 million in February. Halkbank has also issued a statement on 21 April denying that it was in breach of any Iran sanctions.

The U.S. has given Turkey a six-month waiver exempting it from sanctions on trade with Iran, which is due to expire in July. It remains to be seen what position Turkey and the U.S. will take on this gas-for-gold trade in the coming months.

Barter Trade

In early March 2013, it was reported that one of the world’s largest commodities traders, Glencore, had supplied thousands of tonnes of unprocessed alumina to Iranian Aluminum Company (Iralco) under a barter trade deal for aluminum. Aluminum can be used to make aluminum tubes and end-caps for uranium enrichment gas centrifuges.

Iralco, in turn, has a aluminum supply contract with Iran Centrifuge Technology Co (TESA), a subsidiary of the Atomic Energy Organization of Iran (AEOI). Both TESA and AEOI are subject to various sanctions since 2006. Iralco, on the other hand, only came under E.U. sanctions in December 2012, and is not covered by U.S. or U.N. sanctions.

Switzerland-based Glencore has confirmed that it entered into the barter deal in August 2011 and its last trade was in October 2012, though it also says that it ceased transactions with Iralco immediately and upon learning of the TESA-Iralco relationship in December 2012 and denies any wrong-doing of breach of any applicable law or regulations including those relating to sanctions.

The Swiss authorities are also reported as saying that they saw no evidence of U.N. or Swiss violations by Glencore.

According to press reports, Iralco apparently covered costs within Iran, while Glencore covered all activity involving foreign currency such as shipping costs and insurance.

In addition, it has also come to light, via the annual report of one of Glencore’s U.S. affiliates, Century Aluminum, that in 2012 Glencore entered into sale and purchase contracts worth USD659 million with Iranian entities either fully or majority by the Iran government for metal oxides, metals, wheat and coal. Glencore declined to state how much of this USD659 million relates to the alumina-for-aluminum barter trade.

Switzerland has been bound by U.N. sanctions since joining the U.N. in 2002. However, Switzerland is not a member of the E.U., and has asserted its traditional neutrality over Iran and declined to adopt some of the more stringent measures imposed by the U.S. and the E.U.

Not surprisingly, Switzerland has taken steps to protect its central role in the global commodities market, and in late March 2013 it published a report that stops short of calling for strict mandatory regulation or disclosure of payments to foreign governments by traders based in Switzerland, and instead proposes a wide ranging consultation about matters such as transparency and human rights.

What does this all mean?

Some of these risks can be effectively managed by having clear compliance policies and procedures in place, for example where a transaction involves gold or barter trade. Where third party countries, whose link to the trade in question is not obvious, more attention is probably warranted. For example, in The Greek Fighter (2006), the vessel was allegedly carrying Iraqi oil in breach of sanctions and sold as a result. The English court held that the charterer had breached the absolute warranties in the charterparty that the vessel would only be carrying lawful merchandise and that the vessel would not be required to undertake voyages that expose it to capture or seizure.

The above incidents also suggest that compliance is now an even more challenging task, given the creativity and lengths to which Iran has taken action to side-step the sanctions.

Cotton - Changes to ICA Rules

The world’s leading cotton trade association and arbitral authority International Cotton Association (ICA) recently approved changes to the ICA Bylaws & Rules, which came into force on 1 April 2013.

Among the key changes, there is now a pool of ten Chairmen (called "qualified Chairmen") approved by the ICA Board of Directors on an annual basis. The ten Chairmen will be appointed to chair tribunals and technical appeals on a ‘taxi rank’ system.

The new rules also expressly provide that the Chairman is responsible for drafting the award but can delegate this responsibility to a qualified member of the tribunal.

There is also now a mentoring and training scheme for new arbitrators (called "Observers") under the mentorship of assigned Chairmen, who will be allowed to participate in ICA arbitration proceedings albeit not as members of the tribunal.

The rules have also been changed to expressly provide that nomination of sole arbitrators for Small Claims Technical Arbitrations will be carried out within seven days of a Request, and for small claims technical appeals to be cased on documentary evidence only.

Certain other changes were also made to streamline the fees and expenses claimable by the arbitrators.

The perception remains in some quarters that losing parties are buying time and avoiding being on the default list, by filing unmeritorious appeals and taking full advantage of the timelines under the ICA Rules. It remains to be seen if this will be addressed in future editions of the ICA Rules, for example by way of payment of security of some form as a condition of an appeal or shortening of timelines for appeal.

Coal - Changes to SCoTA Terms

globalCOAL has developed a new version of its Standard Coal Trading Agreement (SCoTA) Version 8 General Terms and Conditions (SCoTA v8) which will now sit alongside the version 8 Master Agreement ("v8 Master Agreement") which went live on 18 March 2012. SCoTA v8 went live 24 February 2013. SCoTA is widely recognized as the contract of choice for the trade of seaborne thermal coal, having been introduced in 2001.

SCoTA v8 is intended to be identical to the v8 Master Agreement save for structural changes to convert the terms from a master agreement structure to a general terms and conditions structure. Part of its object is to encourage market take-up, as a number of globalCOAL market members continue to transact business on SCoTA v7e for various reasons. According to globalCOAL, various other options were considered in lieu of introducing SCoTa v8 but were ultimately dismissed as either confusing or overly complicated.

In Other News

Regulatory approval in China of deals involving commodities traders remains an area of concern in various deals, on the back of the more active role being taken by the Chinese Ministry of Commerce (Mofcom).

Last year, Glencore’s deal to purchase Canadian grain-handler Viterra for CAD 6.1 billion was delayed by Mofcom, whose approval came in December, some nine months after the deal was announced, and five months after Canadian authorities approved the deal. There was some speculation that the delay was linked to Canada’s approval of China’s CNOOC’s takeover of Canadian oil and gas company Nexen Inc, which was also approved by Canadian authorities in December.

In March this year, Glencore was required to extend, once again, the deadline for its planned USD76 billion merger with Xstrata, as the deal had yet to gain the approval of Mofcom. Conditional approval was only granted on 16 April 2013, after Glencore agreed to sell its stake in Xstrata’s USD5.7 billion copper mining project in Las Bambas, Peru to a buyer approved by the Chinese authorities by September 2014 and complete that deal by June 2015. In addition, Glencore agreed to supply a minimum volume of copper concentrates to China for a period of eight years from January 2013. For 2013, the minimum is 900,000 tonnes, which is equivalent to Glencore and Xstrata’s average copper sales to China in the past two years. This suggests that a key concern of Mofcom is China’s access to key commodity copper.

In a separate deal involving Marubeni’s USD5 billion take-over of U.S. based grain trader Gavilon announced last May, Mofcom has likewise granted conditional approval in late April 2013. The conditions are significant, and include a condition that Marubeni and Gavilon continue selling soy beans to China as two entirely separate companies, with different teams and firewalls between them blocking the exchange of market information. China is the world’s largest soy bean importer, and accounts for more than 60% of the global trade. Marubeni was the largest soybean supplier to China in 2012, which suggests once again that a key concern of Mofcom is China’s access to key commodity, in this case soybeans.

In January the Singapore Mercantile Exchange (SMX), the first pan-Asian multi-product commodity and currency derivatives exchange, announced an increase in cumulative trading volumes since launch from USD63 billion in the previous year to USD134 billion by the end of 2012. In March, SMX signed a memorandum of understanding with the Agricultural Futures Exchange of Thailand (AFET). SMX and AFET will collaborate on matters including terms and conditions for futures contracts and regulation, with a view to enhancing both sides’ capabilities in the international markets. SMX also announced its new precious metals futures contract, SMX E-Silver, designed to enable market participants to hedge their exposure based on one of the most liquid precious metals futures markets globally.

On 27 April, the Singapore International Arbitration Centre (SIAC) officially launched its first overseas office in Mumbai, India. Singapore is India’s largest ASEAN trade and investment partner with trade between to two countries valued at USD17.44 million in 2010-2011. It is widely regarded that the growth in trade and transactions in India’s emergent economy will lead to an increase in disputes requiring arbitration.