Commodity traders, compliance officers and legal counsel have been obliged to keep a keen eye on the developing trends in the evolution of various sanctions on Iran, even as a significant portion of their time is taken up with the constant monitoring and identification of suspect transactions so as to avoid entanglement.

The impact of the Iran sanctions has been felt well outside of Iran, in ways which some may find surprising. For example, the UK government reportedly blocked efforts by Shell to settle a GBP1.5 billion debt to the National Iranian Oil Company (NIOC) for crude oil supplied in 2011 and 2012, before the EU embargo that came into effect on 1 July 2012. Shell had apparently attempted to make good on this debt by trying to obtain approval for an offset agreement for payment in kind using grain or pharmaceuticals.

Similarly, BP warned earlier this year that it may have to shut down the Bruce gas field in the North Sea earlier than planned, because the adjourning Rhum field, which only started production in 2005, has been closed since November 2010. The closure was on account of the Iran sanctions, as one of the joint owners of Rhum field is a unit of the NIOC. This is a matter of strategic importance for the UK given declining domestic gas output, and the UK government is reportedly seeking possible exemptions from the US and the EU. Such an exemption would be similar to that obtained from the US for the USD40 billion BP-led Shah Deniz natural gas project in the Caspian Sea.

In a curious example, Niksima Food and Beverages, the Dubai franchisee of Canadian frozen yogurt brand Yogen Fruz, was sanctioned by the US recently for accepting payments on behalf of Jam Petrochemicals Complex (JAM), an Iranian petrochemical facility that was also sanctioned at the same time, and one would wonder what the nexus between yogurt and petrochemicals is.

Exemptions from Iran sanctions

There are, firstly, avenues for trade with Iran to be carried out legitimately, without falling foul of US sanctions, which have been increasingly expanded recently to cover persons outside the United States dealing with certain financial and industrial sectors in Iran. In June 2013, the US announced that 20 countries have won continued 180-day exemptions from the US sanctions on foreign financial institutions engaged in facilitating petroleum transactions in Iran for “significant reductions in the volume of their crude oil purchases from Iran or for reducing those purchases to zero and remaining there”. This list includes Iran’s top trade partners China, India, Japan, South Korea and Singapore.

China, in particular, has been actively trading with Iran. This has included bartering for Iranian oil with Chinese consumer items, and the undertaking of major infrastructure projects in Iran. China has also apparently imported almost USD500 million of additional oil products from Iran this year, in the form of fuel oil. Given that China is forecast to surpass the US as the world’s largest net importer of oil in October, it is expected to continue to find ways to ensure its supply of Iranian oil.

Likewise, India imports about 80 percent of its oil, and India has been actively importing Iranian crude. In August, the Mangalore Refinery & Petroleum Ltd (MRPL) purchased its first three cargos of Iranian crude since April this year. MRPL also reportedly plans to purchase five cargos this month. India is preparing a 20 billion rupee (USD314 million) insurance fund to cover future imports of Iranian oil. According to reports, this is intended to cover refiners buying Iranian crude, and will be managed by General Insurance Co.

There are also specific exemptions for various specific goods and services including, amongst other things, agricultural commodities, food, medicine, medical equipment and humanitarian goods. In May, OFAC also issued exemptions (General License D) for the provision of personal communications technology, which covers services, software as well as hardware, to enable Iranians, amongst others, to more fully exercise their human rights. However, it is not entirely clear how Apple, for example, would be able to obtain payment from Iranians for iPhones sold in Iran due to certain sanctions on Iranian financial institutions and foreign financial institutions that deal with them.

However, even these specific exemptions may fall foul of the sanctions depending on whether the other conditions are met or whether there are any special circumstances that result in a particular transaction falling outside of the ambit of the exemptions.

New US sanctions

The US has also continued to roll out further sanctions against Iran. The Iran Freedom and CounterProliferation Act 2012 (IFCA) was signed into law in January 2013, and applies to conduct occurring on or after 1 July. In summary, the IFCA covers:

  1. Activities related to Iran’s energy, shipping and shipbuilding sectors.
  2. Provision of precious metals. We have previously reported on the gas-for-gold system, under which front companies were apparently used to purchase gold outside Iran. This gold is then stored in havens across the world to keep the gold liquid and facilitate redistribution, for example to back letters of credit opened by Iran’s proxies, in making payments to third parties. This sanction is plainly an attempt to close that loophole.
  3. Provision of graphite, raw and semi-finished metals (such as aluminum, steel) and coal, destined for use in specific ways such as in the energy, shipping or shipbuilding sectors, business controlled by the Islamic Revolutionary Guard Corp or an Iranian Specially Designated National (SDN) (other than certain designated Iranian financial institutions), or for Iran’s nuclear or weapons of mass destruction programmes. We have previously reported on the use of barter trade with certain commodities traders based in Switzerland (i.e. outside of the EU), for the supply of alumina/aluminum. Once again, this new sanction is intended to try and close this loophole.
  4. Insurance and reinsurance activities.

The IFCA includes exceptions on the provision of precious metals and materials in cases where a party satisfies the US that it has established and enforced proper policies and controls to ensure compliance with the IFCA.

For non-US entities that continue to trade with Iran after 1 July 2013, their commercial and legal risks have plainly increased significantly in light of the breadth of the IFCA. Those risks include, in particular, situations where that non-US entity or its counterparty seeks to avoid performance after 1 July 2013 of pre-existing contracts to avoid breaching the IFCA.

In June, President Obama also issued Executive Order 13645, which implements, amongst other things, the following additional sanctions with effect from 1st July:

  1. New sanctions on foreign (i.e. no-US) financial institutions for (i) knowingly conducting or facilitating significant transactions relating to the sale/purchase of Iranian rial or financial transactions based on the exchange rate of the rial; and (ii) maintaining significant funds or accounts outside of Iran denominated in the rial.
  2. Sanctions on financial institutions involved in the sale, supply or transfer to Iran of significant goods or services used in connection with Iran’s automotive sector. This sanction only covers the manufacture and assembly of vehicles in Iran, OEM production, and manufacture of aftermarket parts for vehicles manufactured in Iran and, thus presumably permits the export of finished vehicles to Iran . Accordingly, finished vehicles imported by Chinese car manufacturers (which have already supplanted European car manufacturers in light of pre-existing US and EU sanctions) are excluded.
  3. Authorisation of new sanctions on persons deemed to have materially assisted Iranian SDNs (other than certain Iranian financial institutions). This can include many persons involved in the transport or marketing of Iranian oil products given the large number of Iranian SDNs involved in the Iranian oil industry, and like most recent U.S. sanctions also effectively expands the extra-territorial application of the US sanctions on non-US entities.

Also in June, the Department of Treasury identified a network of companies that are said to be front companies used to hide assets on behalf of Iran, which are now sanctioned under Executive Order 13599. According to the US, the Execution of Imam Khomeini’s Order (EIKO) oversees 37 ostensibly private businesses through two subsidiaries, namely Tosee Eqtesad Ayandehsazan Company (TEACO) and Tadbir Economic Development Group, to reap income in the billions. The 37 companies sanctioned include various companies based in Germany, Dubai, Croatia and South Africa.

In July, the US House of Representatives passed the Nuclear Iran Prevention Act 2013 (NIPA) by an overwhelming 400-20 vote. NIPA is intended, amongst other things, to compel countries that currently purchase crude from Iran to reduce their combined purchases by a total of 1 million barrels per day within a year. Effectively, it attempts to cut away at the exemptions granted by the Obama administration to China and various other friendly countries. NIPA will have to be voted on by the US Senate after summer recess and signed by Obama before it comes into effect, and it remains to be seen what impact it will have on the US sanctions regime against Iran if passed.

Areas of concern that merit intensified scrutiny

Barter trade appears to have undergone intensified scrutiny by the US authorities, and is hence noteworthy for stepped-up monitoring. A prominent example would be the Niksima case. The precise reasons for the sanctions in that case are unclear, although it has been speculated that JAM may have used Niksima as a link in a complex barter arrangement involving Niksima’s sister company Paymood Petro Shipping, whereby Niksima obtained payment from JAM’s customers in exchange for services provided by Paymood to JAM. The US State and Treasury Departments have also indicated in public testimony before the Congress this year that they plan to focus on Iran’s use of non-bank financial institutions, such as exchange houses and money services businesses.

Trade in alumina remains an area of particular concern, given its nature as a dual-use material. The sanctions relating to alumina, aluminum, and other materials have since been tightened by the US (see above) and the EU. However, Europe produces about a third of the global supply of chemical alumina, and European alumina has reportedly landed in Iran via intermediaries in Dubai, who transshipped the alumina via barges.

In addition, China and India, having won 180-day waivers from the US for their reduction in imports of Iranian crude, have also increased their alumina exports to Iran significantly. India’s National Aluminum Co Ltd (NALCO) is reported as having awarded a tender for the sale of alumina to the Iranian Aluminum Company (Iralco). Iralco was sanctioned by the EU in December 2012 for supplying aluminum to a subsidiary of the Atomic Energy Organisation of Iran (AEOI). China, the world’s top producer and consumer of alumina, saw its exports to Iran increase significantly, from some 550 tonnes for the whole of 2012, to more than 15,000 tonnes in June as well as July 2013. Reports also suggest that the alumina may have come from China’s bonded warehouses, which in turn suggests that the alumina was most likely produced outside of China. This plainly begs the question of whether the parties that produced such alumina are somehow tainted or otherwise subject to sanctions as a result.

Other known techniques

Other known techniques that traders, compliance officers and legal counsel need to take note of include, for example:

  1. Passing off Iranian oil as Iraqi oil in the sale documentation.
  2. Selling Iranian oil via intermediaries.
  3. Moving Iranian oil onto foreign tankers on the open sea, and selling such oil at a discount upon discharge in places like Fujairah. Such vessels often turn off their tracking beacons before moving into Iranian waters.
  4. Moving Iranian oil to staging posts in Asia via VLCCs, and selling the oil to Asian buyers from there. For example, in May, it was reported that two VLCCs owned by the National Iranian Tanker Company (NITC) had sailed to Batam, Indonesia, before moving on to China. Three tankers operated by a Greek middle man who was sanctioned earlier this year for operating a shipping network on behalf of Iran was also reportedly seen in the South China Sea around the same time.
  5. Shipping goods bound for Iran to an intermediate destination such as Dubai and naming such intermediate destinations as the final destination. Such goods are then shipped to Bandar Abbas after Gulf middlemen change the cargo details on the documentation.
  6. Using intermediaries to make payment on behalf of Iranian importers.

Victory in Europe?

The landscape in the European Union is dramatically different than that in the US. There have been a series of cases in Europe that have cast doubt on the legitimacy of the sanctions imposed by the EU and the UK on Iran.

In March this year, the Iran’s biggest private sector lender Bank Mellat appealed to the UK’s apex court, the Supreme Court, against sanctions imposed by the UK government in 2009 over alleged links to Iran’s nuclear programme. According to the bank’s lawyers, some 183 million Euros remain frozen in London.

For the first time in its history, the Supreme Court entered a special closed session. Judgment was given in favour of Bank Mellat in open court in June 2013. The Supreme Court found, by a 6-3 majority, that the UK Treasury had breached the procedure, in failing to give Bank Mellat notice of the sanctions and hence depriving the bank of the chance to make representations.

The Supreme Court had also found, by a 5-4 majority, that there were no grounds for Bank Mellat to be singled out and that doing so was “arbitrary” and “irrational”. In coming to its decision, the members of the Supreme Court expressed their dissatisfaction with the closed session procedure (under the Counter-Terrorism Act) in strong terms.

Bank Mellat has indicated that it intends to claim some GBP500 million for loss of business between 2009 and 2013.

Bank Mellat’s victory in the Supreme Court follows a similar victory in the EU General Court in January 2013, when that court, the second highest judicial body in the EU, overturned sanctions imposed by the European Council on the basis that the European Council failed to state its reasons for imposing sanctions. In February, the General Court also ruled against sanctions imposed on Saderat Bank, in which Iran has a minority stake.

On 6 September, the General Court also ruled against sanctions imposed by the EU on eight Iranian entities, namely Post Bank Iran, Export Development Bank of Iran, Bank Refah Kargaran, Persia International Bank, Iran Insurance Company, Good Luck Shipping, Iranian Offshore Engineering & Construction Co and one Mr. Naser Bateni on similar grounds. However, the challenge mounted by Bank Melli Iran and Europaisch-Iranische Handelsbank were unsuccessful.

On 16 September 2013, Reuters also reported that the General Court has ruled against the European Council in sanctions relating to the Islamic Republic of Iran Shipping Lines (IRISL) and other related companies, on similar grounds.

The various successful entities remain blacklisted pending any appeal by the European Council to the apex court, i.e. the European Court of Justice (ECJ). Further, the European Council imposed a blanket ban on Iranian financial institutions operating in the EU. Nevertheless, these court defeats are plainly substantial setbacks for the EU and the UK, particularly given that there are more than 30 other similar cases pending before the EU’s General Court, including applications by Iran’s Central Bank and the NIOC.

According to the EU foreign affairs chief Catherine Ashton, the General Court did not rule on the substance of whether Bank Mellat or Bank Saderat were actually involved in nuclear proliferation, and the European Council apparently could not provide further information out of confidentiality concerns despite requests from the judges.

The successful court challenges thus far are expected to motivate EU’s Big Three to put in place more effective sanctions. In addition, the UK government is reported as attempting to intervene in the European Council’s appeal to the ECJ for the Bank Mellat case. However, it is not known how long it would take for the EU to refine and come to an agreement on such a refined sanctions regime. This has a direct effect on Iran’s willingness to come to the negotiating table and, in turn, the state of the existing sanctions regime against Iran.

It therefore there remains to be seen how this tussle between the executive and the judiciary in the EU and the UK will pan out. What is abundantly clear, however, that the existence or absence of due process and justification will be scrutinized in detail in the event of a challenge and the EU and UK courts will not simply take the assertions of the executive at face value.

The level of scrutiny undertaken by the courts will also provide a certain level of comfort for non-US traders that have put in place systems for complying with the sanctions obligations, but are concerned that they may nevertheless fall foul given the creativity and the techniques adopted by their trading partners as outlined above.