Last week, the White House released Executive Order 13536 of April 12, 2010, “Blocking Property of Certain Persons Contributing to the Conflict in Somalia,” which has significant potential impacts on the payment of ransom by U.S. persons in the event of a Somalia related piratical attack.

The Executive Order blocks payments and other transfers of assets to certain persons listed in an Annex to the Executive Order. In addition to the terrorist group Al Shabaab and certain warlords and gunrunners, the Executive Order also lists four persons associated with piracy off the coast of Somalia. The President’s accompanying statement to Congress makes it clear that the Administration views piracy as a threat to U.S. national interests and seeks to undercut financial support for piratical activities.

The Executive Order has caused some concern within the maritime industry that it could be used to prohibit the payment of last resort ransoms to obtain the release of crews, ships, and cargoes. Such an outright prohibition could put shipowners, maritime employers, and cargo interests in an untenable position in the event of the seizure of a ship in which they have an interest. However, guidance provided by government officials has clarified that a ransom payment would be prohibited only if (a) it is made or facilitated by a person subject to U.S. jurisdiction, and (b) to one of the persons listed on the Annex to the Executive Order, either directly or indirectly.

Two of the persons currently on the list (persons 1 and 6) reportedly control over 1,300 pirates, collectively, which creates a significant risk that a ransom payment to a Somali pirate group could be linked in some way to one of those persons. However, the standard of care likely to be required of ship or cargo owners by the Treasury’s Office of Foreign Asset Control (“OFAC”) will be whether the potential ransom payor knows, or would have reason to know, whether the designated person would have a property interest in the potential ransom payment. Therefore, the issue will not be whether a listed person claims some form of operational control over a specific pirate group, but whether some portion of a ransom payment could reasonably be expected to reach the person.

If reason exists to believe that a ransom payment is likely to reach a listed person, then companies formed in the U.S., or present in the U.S., will not be permitted to make, or facilitate, such payments without OFAC permission. If a company is faced with a demand for payment, either directly from a pirate group, or indirectly as a result of an indemnification or general average demand, the company will need to communicate with a number of governmental agencies, including OFAC and the Department of Justice (“DOJ”) for authorization and guidance.

Therefore, if a U.S. vessel, U.S. crew, or U.S. cargo is captured by pirates, the owner, employer, or cargo interests should notify the U.S. government immediately through the Coast Guard’s Maritime Operational Threat Response system. Officials will designate a government liaison who will assist the company in addressing the situation. Such assistance could include facilitating advice and coordination with the OFAC and the DOJ with regard to whether the payment of ransom, or a related payment, may be a permitted alternative.

Although the form of the Executive Order is based on other OFAC precedents, it leaves a number of tough issues and some uncertainty for the maritime industry. For example, the Executive Order raises questions about its application to maritime circumstances such as the payment of general average contributions to ransoms paid by non-U.S. related entities, the effect on kidnap and ransom insurance, war risk insurance, or similar policies, the effect on indemnification obligations under charters or other contracts, and its application to maritime choice of law provisions. Similarly unclear is the effect on shipowner liability for claims from crewmembers forced to endure prolonged captivity, death, or other injuries as a consequence of a failure to pay ransom.

We are communicating with government officials regarding the unique maritime issues that may effect the regulations and policies under the Executive Order and are available to provide further guidance.