The political row with Iran over uranium enrichment continues to escalate. It is therefore an appropriate time to re-visit the topic of economic sanctions to ensure that traders and banks understand their exposure and have, where possible, limited that exposure.
Sanctions imposed by one country against another seek to persuade a country to a particular behaviour by means of pressure – in the case of Iran, the aim would be to persuade Iran to abandon its nuclear programme. Sanctions can include diplomatic sanctions (expulsion of diplomats and the like), suspension of co-operation with the third country, boycotting sporting or cultural events, flight bans, immigration controls, arms embargoes and financial/trade sanctions. It is the financial and trade sanctions that are the subject of this note.
Sanctions can be imposed by:
- The United Nations, pursuant to UN Charter, Article 41. These then require implementation in each different member state and differences in the method, wording and extent of implementation can arise. In our experience, this leads to inconsistencies, loopholes and opportunities to circumvent. In addition, the well-publicised failings of the UN regulatory machinery (e.g. “Oil for Food Programme”) have led to fraud and profiteering.
- Individual countries may impose sanctions, the most prolific of which is the United States. It is US sanctions which have the most impact on traders and banks because the US Dollar is the currency of most trade transactions. US Dollar transactions are usually cleared through US Banks. Those banks follow the US sanctions regime even if the bank is a US subsidiary situated outside the US. The US currently has sanctions against more than 12 countries, as a visit to the US Treasury Office of Foreign Asset Control (OFAC) website will show [www.treas.gov.ofac]. The US has imposed sanctions against Iran since 1987 and the current sanctions regime against Iran dates from 1995 (based on disapproval of Iranian “sponsorship of international terrorism” and Iran’s “active pursuit of weapons of mass destruction”). The current OFAC Iran sanctions prohibit most imports from Iran to the US and exports of goods, technology or services to Iran from the US or by a US person wherever located.
- European Union sanctions can also be imposed based on the Common Foreign and Security Policy (CFSP) under Articles 60 and 301 of the Treaty of Rome which provides for the interruption or reduction of economic relations with third countries to achieve the aims of the CFSP.
The different sources of sanctions carries with it substantial headaches for traders and banks attempting to stay within the various sanctions regimes. Particular issues arise because sanctions regimes usually:
- Prohibit individuals as well as companies from participating in actions which are against the sanctions;
- Apply extra territorially e.g. US companies and individuals based abroad.
The result is that an export of goods from Brazil to Iran by a Swiss company with UK and US directors, financed by a French bank, shipped on board a vessel owned by Greek interests involves looking at no fewer than 7 sanctions regimes to check whether the activity is prohibited.
The interruption of economic relations by the imposition of sanctions usually involves:
- Prohibition of import to and export from the sanctioned country (with certain humanitarian and other savings – see below);
- Freezing of assets belonging to the sanctioned country including bank accounts and “economic resources”. “Freezing” involves preventing transfer, movement, change of ownership or possession. This is coupled with:
- Requirements to provide information to relevant authorities if requested to do so, to facilitate compliance with sanctions legislation and to report to those authorities certain information or request guidance if you have a belief or well founded evidence that sanctions are being breached or circumvented.
- Various regulatory bodies in each country being able to licence certain activities which would otherwise be prohibited, either by “Open General” licences (e.g. to allow movement of private mail) or licences available on specific written application.
Breach of sanctions is almost always a criminal offence – leading to fines (e.g. the Swiss Bank, UBS, paid a US$100 million fine for breach of US sanctions for supplying Iran, Cuba, Libya and Iraq with US Dollars) and possible imprisonment (e.g. criminal trials of the Matrix Churchill directors in the 1990s, conviction of Banca Nazionale del Lavoro officials in the 1990s for illegal loans).
New Contracts involving Iran
Parties entering into new contracts which may involve Iran should consider how best to protect themselves and limit potential losses in case sanctions are imposed prior to completion of performance. The difficulty in trying to do this is that each time sanctions are imposed, they are slightly different in terms of scope and wording. Some general suggestions are:
- A cancellation clause which gives either party the right to cancel in case of the imposition of new sanctions against Iran;
- A suitably worded force majeure clause which covers and excuses nonperformance due to the imposition of sanctions against Iran;
- Express alternative destination provisions in sale contracts and charterparties where intended delivery is to Iran to permit final and contractual delivery elsewhere. If, however, you are contracting directly with Iranian interests, it may be that a delivery to Iranian interests is prohibited even if delivery is made outside Iran;
- An express right in FOB contracts for a written guarantee from the buyer that the destination is not Iran nor are the goods being sold to Iranian interests, should the seller request such a guarantee, together with proof of delivery outside Iran. An alternative is to provide an option for the seller not to perform if (i) sanctions are imposed; and (ii) the seller reasonably believes that the goods may be destined for the sanctioned country. This is a wide type of clause and could be open to abuse, but after the imposition of Iraqi sanctions, there was a major headache for traders who had contracted on FOB terms but had a suspicion that goods were likely to be destined for Iraq (often via Jordan) or destined for Iraqi interests. Contractually, the sellers could not refuse to perform because of the FOB nature of the contract, where the seller is not involved nor interested in the destination. The sanctions, however, were sufficiently widely drafted to impose criminal liability on sellers who “acquired well founded evidence” that the goods were destined for Iraq or Iraqi interests;
- Payment mechanisms which depend on Iranian companies and/or Iranian banks are clearly a risk, whereas a confirmed L/C or performance bond issued by a non-Iranian bank would provide more protection. However, banks may look at the underlying sale transaction if sanctions are imposed because of recent legal cases suggesting that banks may be entitled to refuse to pay in cases where the underlying sale/transaction is tainted with illegality (see e.g. Mahonia Ltd  2 Lloyds 911).
- One area to think about is exposure between payment for the goods and final discharge of any vessel. Problems have arisen previously when goods were already paid for and the bill of lading was in the hands, therefore, of the sanctioned party, but the vessel could no longer deliver because of the interim imposition of sanctions. The safe diversion of the vessel and resale of the parcel elsewhere was impossible because the bills of lading were not available, nor could the bills of lading be “bought back” from the sanctioned party because such transactions were no longer permissible. Thus, if sanctions become more imminent, it is important to try to engineer a situation where control of the bills of lading is maintained until the last possible moment, so that the gaps between loss of control of the bills of lading, actual discharge and release of the vessel are kept to a minimum.
Within all sanctions regimes there are humanitarian exceptions for foods and medicines. The definition of “humanitarian goods” has in the past become extremely wide. Under Iraqi sanctions, humanitarian goods included Russian caviar and Indian footballs! The list of approved humanitarian goods is usually decided by a U.N, Committee and is partly based on political trade offs rather than humanitarian need. However, the humanitarian exceptions are cumbersome to operate and slow, usually requiring a U.N. licence plus a country licence for the country of export, plus identification and approval concerning where the payment funds are to come from. Typical delays in licensing under the Iraqi sanctions was 6-9 months.
There may also be savings and exceptions for transactions entered into prior to the imposition of sanctions, to try to minimise the impact of sanctions on innocent third parties. However, the extent of these savings is uncertain until the sanctions are imposed and there is a real danger of immediate escalation of the problems by retaliation by Iran, for example by detaining vessels within Iranian waters. Pre-Zero savings, therefore, may not in practice assist traders.
Dealing with sanctions became second nature to traders, banks and lawyers during the Iraqi sanctions, followed by the Yugoslav/Serbian sanctions. It is to be hoped that the Iranian nuclear problem is sorted out without trade and financial sanctions being imposed. However, the time to review contracts and agreements to try to ensure minimum exposure would seem to be now to give suitable exits and protections if sanctions are imposed in the near future.