Sanctions are commonly seen as “measures taken by countries to restrict trade and official contact with a country that has broken international law”. The international sanctions regime is very much shaped by the geopolitical forces of the day.
The international sanctions regime can be grouped into the following categories.
• The U.S. sanctions, issued by the Office of Foreign Assets Control (OFAC)
• United Nations sanctions
• EU sanctions
For instance, breach of the OFAC sanctions may result in costly implications for importers and exporters:
• Importers may have payments for goods blocked and never receive the goods because of “nonpayment”. Additionally, the importer may be subject to thousands of dollars in fines for violating Executive Orders or Acts of Congress.
• Exporters may have property blocked and may be fined in accordance with the Trading with the Enemy Act or International Emergency Economic Powers Act for sending goods to a Specially Designated National (SDN) or to a blocked country.
• Exported items may be blocked and an exporter may be required to pay a significant fine if documents show the products are intended for re-exportation to a blocked country.
• A company that charters a shipping vessel may be subject to civil or criminal penalties if the vessel and/or vessel owner are listed as SDNs.
• An importer is considered to be in violation of OFAC sanctions if the imported products were shipped from a non-blocked country using a vessel owned by a blocked government or entity on the SDN list.
U.S. sanctions
U.S. sanctions are imposed by presidential decrees, the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (SSIDES), and the Ukraine Freedom Support Act of 2014 (UFSA).
List of entities being subject to sanctions (SDN List) is officially published at the OFAC website. The list includes, inter alia, State Unitary Enterprise of the Crimean Republic “Crimean Sea Ports”, jointly with its branch, Kerch Commercial Sea Port. Prohibitions imposed by the sanction regime shall apply to U.S. persons only unless they are designated as SDN.
The term U.S. person means any citizen of the United States of America, a foreigner having permanent residence in the U.S., an entity incorporated under the U.S. law or under any jurisdiction within the United States (including foreign branches), and all the persons physically located within the United States.
There is no direct jurisdiction of the U.S./OFAC regarding foreign persons (i.e., citizens of a foreign country, entities incorporated under the laws of foreign states, etc.). However, each transaction with U.S. financial institutions shall be governed by OFAC rules and shall be subject to review of sanctions.
As a result of the Ukraine war, the United States, European Union and the United Kingdom have imposed sanctions on Russia.
European sanctions
The EU has imposed massive and unprecedented sanctions against Russia in response to the military aggression against Ukraine. Sanctions have been imposed also in relation to human rights violations and hybrid threats.
EU restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine apply to a total of over 2 400 individuals and entities.
The UK sanctions
Following Brexit, the United Kingdom have set up their own sanctions regime.
On 28 July, 2020, the UK was the first jurisdiction to follow the path paved by the U.S. in delivering comprehensive guidance in respect of sanctions in maritime trade.
In issuing The Maritime Guidance: Financial Sanctions Guidance for Entities and Individuals, the Office of Financial Sanctions Implementation (OFSI) is targeting all companies, banks, and individuals that are involved in maritime trade . The guidance highlights some of the key risks of sanctions evasion in maritime trade, sets out red flags and gives its recommendations on how best to safeguard against these risks.
This advisory also addresses the problem of dark fleets which are vessels carrying sanctioned cargo in contravention of sanctions. The term dark fleet emerged when tankers started turning off their vessel-tracking transponders to conceal the origin and destination of U.S. – sanctioned oil. This evasive tactic, known as going dark, quickly became associated with the growing fleet of tankers involved in shipping Iranian and Venezuelan oil.
The English Court of Appeal held in the case of Celestial Aviation Services Ltd v UniCredit Bank AG (London Branch), holding that UniCredit Bank AG was excused from making payment under various documentary letters of credit that it had issued in connection with the supply of aircraft to Russian airlines, by virtue of the UK sanctions regime.
United Nations sanctions
The United Nations sanctions are sanctions issued by the Security Council. These sanctions have taken a number of different forms, in pursuit of a variety of goals. The measures have ranged from comprehensive economic and trade sanctions to more targeted measures such as arms embargoes, travel bans, and financial or commodity restrictions.
The Security Council has applied sanctions to support peaceful transitions, deter non-constitutional changes, constrain terrorism, protect human rights and promote non-proliferation.
Malaysia
Malaysia implements domestic legislation to give effect to various UN sanctions. Generally, sanctions imposed by Malaysia through relevant legislation and ministerial orders.
The Malaysian Central Bank gives effect to the UN Sanctions through the implementation of Targeted Financial Sanctions (TFS).
The objective of the TFS is to prevent:
• Terrorists, terrorist organizations and terrorist financiers
• Persons and entities involved in the proliferation of weapons of mass destructions
from raising, moving and using funds, consistent with the relevant United Nations Security Council Resolutions (UNSCRs).
The Strategic Trade Act (STA) 2010 is the legislation that controls the export, transshipment, transit and brokering of strategic items and technology, including arms and related material, as well as activities that will or may facilitate the design, development, production and delivery of weapons of mass destruction.
The STA regulates the export, trans-shipment, transit and brokering of certain strategic items as specified in Ministerial Orders issued under the STA namely the Strategic Trade (Restricted End-Users and Prohibited End-Users) Order 2010 (as amended in 2011, 2014 and 2016) and the Strategic Trade (Strategic Items) Order 2010 (as amended in 2014, 2017 and 2018).
Malaysian Ministry of Investment, Trade and Industry has a list of strategic items covered under the Act.
Additionally, the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 gives power to the Malaysian Minister of Home Affairs to make orders for the implementation of measures to give effect to resolutions adopted by UNSC and to obtain information on possession or control of terrorist property.
Singapore
Singapore gives effect to various UN sanctions. These include arms embargoes and sanctions on missiles or nuclear related goods. Activities which contravene the decisions of the United Nations Security Council (UNSC) in their Resolutions are prohibited.
The Monetary Authority of Singapore (MAS) gives effect to targeted financial sanctions under the UN Security Council Resolutions (UNSCRs) through the Financial Services and Markets Regulations.
Case law
The Malaysian Admiralty Court addressed the application of the U.S. OFAC sanctions on Venezelua in the case of Orin Energy Investments Ltd v Futura Asia.
The case concerned a dispute over a fuel oil sales contract. Orin Energy alleged that Futura breached the agreement by delivering fuel oil of Venezuelan origin, which they claimed was sanctioned under the U.S. OFAC sanctions regime, and that Futura fraudulently concealed its origin.
This led to a breach of Orin Energy’s charterparty agreement when the vessel MT Nordic Sirius refused to accept the fuel oil upon discovery of its origin. Orin Energy also alleged that the fuel oil did not meet the contracted specifications and was subject to U.S. sanctions, leading to the termination of the contract.
Futura denied these claims, asserting that Orin Energy was aware of the fuel oil’s origin from the beginning and that it was not sanctioned. Futura counterclaimed for unpaid balances, losses on undelivered parcels, demurrage, and wasted costs caused by the aborted ship-to-ship transfer.
The Court found that Orin Energy had accepted the cargo and engaged in further transactions involving the fuel oil, which undermined its claims of being misled about the oil’s origin. Evidence indicated that Orin Energy was aware of the risks associated with purchasing Venezuelan oil and had taken steps to mitigate those risks.
The Court dismissed Orin Energy’s claims, finding that they were aware of the fuel oil’s origin and accepting Futura’s expert evidence that it was not sanctioned. The court also noted that U.S. sanctions laws apply only when the property of a SDN is in the possession or control of a U.S. person, rendering the property blocked.
Since neither Orin Energy nor Futura were U.S. persons or entities with U.S. nexus, and the transactions did not involve U.S. persons, the fuel oil was not considered blocked or sanctioned property under U.S. sanctions laws. Therefore, Orin Energy was not justified in suspending payment for the fuel oil.
The judge addressed Orin Energy’s claims regarding the risks tied to purchasing Venezuelan-origin oil but found them without merit. The Court concluded that under the relevant Executive Orders, U.S. sanctions laws only apply when the property of a SDN is in the possession or control of a U.S. person, making it blocked property.
Since the sale of the fuel oil from PdVSA (an SDN) to Futura involved a non-U.S. person, it did not become sanctioned or blocked property. Similarly, the subsequent sale from Futura to Orin Energy was not subject to U.S. sanctions. As a result, the Court held that Orin Energy was not justified in suspending payment for the fuel oil.
The issue of sanctions was also a major part of this trial in the Admiralty Court, with both parties calling experts on sanctions law to testify on the scope and application of U.S. sanctions, including the definition of SDNs under OFAC. This examination of sanctions law is relatively novel in Malaysian courts and was thoroughly analyzed during the trial.
After determining that Orin Energy’s claims were without merit, the judge considered Futura’s counterclaims for the balance purchase price of the cargo, loss of profits, and other wasted costs incurred due to Orin Energy’s refusal to take delivery of the remaining lots.
The judge allowed Futura’s counterclaims partially on the findings that Orin Energy had breached the sales contract by failing to pay for the balance purchase price and take delivery of the remaining lots.
The case clarifies the obligations of parties in a sales contract concerning the origin of goods and the implications of knowledge regarding such origin.
Sanctions clauses
Shipping contracts may have a sanctions clause which allow parties to invoke if one of the parties acts in contravention of sanctions. In the case of Orin Energy Investments Ltd v Futura Asia Ltd, there was such a clause in the charter of the vessel Nordic Sirius, but not in the charter of the carrying vessel Eser K.
BIMCO has published the BIMCO Sanctions Clause for Time Charter Parties 2020, which is intended to address two scenarios.
The first scenario is where the owners or charterers (or the third parties they are responsible for under the clause) are listed by a sanctioning authority or government and become subject to sanctions restrictions. In this scenario, the innocent party has the right to terminate the charter party and claim damages.
The second scenario is where the trade or activity itself is or become subject to sanctions restrictions in which case the owners have the right to refuse to perform.
The Singapore case of Kuvera Resources Pte Ltd v JP Morgan Chase Bank, NA involved a sanctions clause in a documentary letter of credit. In the case, Kuvera advanced funds to a seller for the purpose of funding the shipment of coal to a buyer.
It was agreed that the buyer was to make payment by issuing two letters of credit (LCs) naming Kuvera as the beneficiary. Upon the request of Kuvera, JPMorgan Chase Bank’s Singapore branch agreed to be the confirming bank of both LCs.
However, subsequently, JPMorgan prepared a sanctions screening of Kuvera’s documents and informed Kuvera that it would not pay out on the LCs as the transaction fell within the U.S. OFAC sanctions regime with respect to Syria as the vessel in this case was owned by a Syrian company.
JPMorgan’s confirmations contained a sanctions clause providing that the bank had to comply with U.S. sanctions, even though the transaction was being carried out by the bank’s Singapore branch.
JPMorgan was requested and agreed as the advising and nominated bank for the LCs, and added its confirmations thereto in September 2019 which contained a sanctions clause that provided that:
“[JPM] must comply with all sanctions, embargo and other laws and regulations of the U.S. and of other applicable jurisdictions to the extent they do not conflict with such U.S. laws and regulations (“applicable restrictions”). Should documents be presented involving any country, entity, vessel or individual listed in or otherwise subject to any applicable restriction, we shall not be liable for any delay or failure to pay, process or return such documents or for any related disclosure of information.”
The Singapore High Court decided that the foreign sanctions clause was valid and enforceable and thus, JPMorgan’s refusal to make payment under the letter of credit was justified in this case.
Following Kuvera’s appeal to the Court of Appeal, the Court of Appeal reversed the decision of the High Court in part and found that JPM had not discharged its burden of proof to entitle it to rely on its sanctions clause to deny payment to Kuvera.
This finding was reversed on appeal where the Court of Appeal held that JPM was not entitled to invoke the sanctions clause to deny payment to Kuvera upon a complying presentation of documents.
Photo credit: iStock/Liubomyr Vorona. Generic image of two office workers.
