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Working with S anctions : A P&I Club Perspective Identifying and dealing with complications. George J. Tsimis Senior VP – Claims Director & General Counsel Shipowners Claims Bureau, Inc. Manager, American P&I Club Maritime Law Association - IOCS Committee Wednesday, April 29, 2015.
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Working with Sanctions: A P&I Club Perspective Identifying and dealing with complications George J. Tsimis Senior VP – Claims Director & General Counsel Shipowners Claims Bureau, Inc. Manager, American P&I Club Maritime Law Association - IOCS Committee Wednesday, April 29, 2015
Key tool to put pressure on countries/governments judged to be in contravention of international standards Aimed at changing political or military behavior Human rights, international laws or in some instances a threat to the rest of the world; for example in violation of laws relating to the development of nuclear weapons (i.e. Iran) 1917 – the American Club was born out of UK sanctions; US Congress enacts the Trading with the Enemy Act where marine insurance was a primary consideration Sanctions : What are they?
Impose restrictions targeting: individuals such as heads of state or SDNs whole areas, countries, ports, airspace ability to travel types of trade, services, products assets By use of prohibitions, freezing orders, attachments and penalties (both civil and criminal). How do they work?
There are four major categories : US EU UN Individual countries Who imposes them?
USA – OFAC Sanctions Primary Embargoes: Iran, Cuba, Sudan, Syria, Myanmar, North Korea and Crimean conflict SDN List: “Specially Designated Nationals and Blocked Persons” List of roughly 5,000 foreign nationals – terrorists, drug traffickers and others - shipping companies and vessels also included on list European Union Sanctions Iran – crude oil, petroleum & petrochemical products, natural gas, coal, graphite, raw or semi-finished materials such as steel or aluminum Sanctioned persons or entities – EU version of SDN listing
Myriad of Acronyms • UN, EU, OFAC • TWEA, CISADA, NDAA, IEEPA • SDN, WMD, RPP, P5+1 • How do you CYA?
Export and delivery of refined petroleum products (RPP) to Iran Transactions/goods/services related to production of Iran’s petroleum products/resources and petrochemical products Import / transport of crude oil, petroleum and petrochemical cargoes Bunkering from Iranian suppliers / sources Provision of shipping services for goods that could materially contribute to Iran’s nuclear technology Transactions involving precious metals, coal, graphite, raw or semi-finished metals such as steel products, aluminum Dealings with IRISL, NITC, NIOC, NICO & Central Bank of Iran List of prohibited activities with Iran – OFAC and EU:
P&I Club / Insurer compliance with applicable sanctions regulations Entered vessel owner/Member compliance with applicable sanctions regulations International and multi-jurisdictional nature of shipping and insurance industries require close consideration for compliance P&I Club perspective: Two aspects to evaluating sanctions
Underwriting function - potential members and existing members – vetting procedures to investigate/assess ownership/control as well as actual and anticipated trades Claims handling function - procedures in place to ensure that claim payments are not made to sanctioned targets or SDNs or in connection with prohibited transactions General Operations – insurance contract wordings, remittance of funds, arrangement of security, reinsurance and banking arrangements P&I Club Compliance
Case by case and/or regular periodic scrubbing of the following parties against OFAC and other sanctions target listings: Correspondents, surveyors, law firms & other vendors Members and potential members (owners and managers) Vessels Foreign banks Security beneficiaries Payees / beneficiaries Reinsurers IG Pool contributions P&I Club Compliance: The “Club Scrub”
Longstanding Rules - Exclusions Class I.3.1.3 – Blockade Running, Unlawful Trade, etc. - risks and losses excluded for “[a]n insured vessel . . . being employed in an unlawful trade….” Class I.3.2.10 – Willful Misconduct – excluded from coverage – “an act intentionally done or a deliberate omission . . . done or omitted in such a way as to allow an inference of a reckless disregard of the probable consequences.” P&I insurance contract wordings & sanctions
Rules drafted within last 5 years or so whereby cover will be terminated if a Member engages in trades likely to expose Club to sanctions penalties Class I.3.1.4 – (following CISADA) excludes cover for any voyage or service relating to the sale, exportation, provision, transportation or delivery to Iran of refined petroleum products (RPP) Class I.3.1.5 – (following 2012 EU ban on Iranian oil) precludes cover where reinsurers are subject to sanctions, including IG reinsurance scheme and any other Club reinsurers P&I insurance contract wordings & sanctions
Other newly created Rules: Class I.1.4.54 – reserving the right of the Club to amend any existing wordings to comply with newly enacted sanctions regulations Class I.1.4.55 – nullifying and voiding insurance whenever coverage would expose the Club to the risk of being subject to sanctions Class I.1.4.56 – Club’s liability is limited to sums it is lawfully permitted to pay, and coverage does not extend to amounts Club is unable to recover from its reinsurers due to sanctions P&I insurance contract wordings & sanctions
Actual evaluation can only be done on a case-by-case basis but there are general guidelines and information that can be kept in mind at all times Club Circulars and Member Alerts issued regularly to the Membership on sanctions developments Burden is on the Member to ensure its compliance with applicable sanctions and to exercise DUE DILIGENCE Encourage the Member to consult with counsel Lastly, to inquire with the Club as to whether any anticipated fixture or business will prejudice P&I cover Member’s Compliance: Due Diligence
Investigation and analysis of information to ensure a transaction or activity is not in violation of sanctions Not precisely defined in U.S. sanctions legislation, but essentially includes an analysis of whether the person or entity had in place sufficient controls, procedures and safeguards to reasonably protect against the possibility of engaging in sanctionableconduct Based heavily on facts and circumstances of each case and an assessment of the sanctions risk What is “Due Diligence”?
Denial of access to U.S. banking system / USD transactions, no business with the U.S. Blocking / freezing property / assets Preventing foreign person, principals or shareholders from entering the U.S. Potential civil or criminal penalties Prohibiting entry of vessel to U.S. ports for up to 2 years U.S. Sanctions Penalties v. Foreign Persons
3/26/15 - Schlumberger Oil Field Holdings agreed to a penalty of $232,708,356 plus 3 years probation for violating trading sanctions with Iran and Sudan 4/2/14 - Sea Tel, Inc. shipped 16 antenna systems to China for re-export to Iran for use by NITC – penalized $85,113 3/31/14 – GAC Bunker Fuels (USA) LLC – fined $157,500 for supplying bunkers to an Iranian bulker at Paranagua, Brazil Banks – 3/12/15 - Commerzbank AG - $258,660,796 (Iran) 6/30/14 – BNP Paribas - $963,619,900 (Iran) * - 31 C.F.R. Part 501 (Economic Sanctions Enforcement Guidelines) U.S. Sanctions Penalties* v. US Persons
Sanctions generally target conduct done “knowingly” or “intentionally” – has actual knowledge or should have known of the conduct, the circumstances or the result Some degree of culpability required No established test or criteria, but when assessing what a person “should have known,” U.S. authorities usually examine whether the person exercised “due diligence” Intent / Culpability
Ignorance of the law is not a defense to a breach of sanctions regimes Strict liability Penalties can be severe Blocked assets, monetary fines & damage to reputation Due diligence prevents sanctions Due diligence acts as a mitigating factor Why Do Due Diligence?
Confirming that an entity owned or controlled by Iran is not involved in the transaction Reviewing SDN listing on a regular basis Investigating corporate structure/ownership of unknown contract partners Verifying that crude oil, petroleum or petrochemical cargoes did not originate from Iran Verifying that cargo destined for Iran is not prohibited or sanctionable U.S. State Department guidelines on due diligence (Iran)
Designate a compliance officer Establish sanctions compliance procedures and document retention policy Conduct a risk assessment Train/educate personnel Audit the program (internally / externally) Stay abreast of legal developments / changes Due Diligence – Compliance Program
Charterers Related companies Shippers Suppliers Receivers End user Insurers (charterer’s P&I, cargo, etc.) Banks / financial institutions to be used in transaction Paying agents Vessels (certain vessels are sanctions targets) Who are your contractual counter-parties?
OFAC SDN List athttp://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspxand search function at http://sdnsearch.ofac.treas.gov/ EU sanctioned parties listing at http://eeas.europa.eu/cfsp/sanctions/consol-list_en.htm Compliance software Internet search engines Press clippings Questionnaires Recent movements by chartered vessels Asset investigation services Seek and obtain legal advice Due Diligence - Investigation Resources
What is the precise nature of the cargo that is the subject of the transaction? Is the cargo the subject of any OFAC or EU sanctions? Consult with lists / Club Circulars What is the ultimate use of the cargo? What are the potential uses for the cargo? Is the cargo insured and, if so, by whom? Risk Assessment – Cargo Considerations
Where is the cargo being loaded? Where is the cargo being discharged? Consult listing of banned exports from Iran Bill of Lading - concealing origin of cargo could lead to two-year ban on vessel entry into U.S. ports Is the area involved excluded by any insurance cover in place? Risk Assessment – Geographic Considerations
After completing your due diligence investigation, contact your insurer Context of inquiry – coverage considerations Inquiry to Insurer is not a substitute to Member’s due diligence investigation Insurer may offer non-binding guidance Contact your Insurer’s Compliance Center
List the contract parties: charterer, sub-charterer(s), shipper, receiver, end-user Whether any parties are SDNs Specific type(s) of cargo(es) Port(s) of loading and discharge Types of B/Ls and/or C/Ps to be used Terminal operators in Iran – Tidewater Vessel names and IMO nos. (STS, FSO, IRISL, NITC) Required Information to be provided to Insurer:
Give ample advance notice - too late if fixture recap has been concluded, cargo loaded or B/L issued Insurer assesses inquiry and may consult with its OFAC / EU counsel for advice / guidance Insurer’s response is limited to interplay of policy with contemplated transaction and whether coverage is available Insurer’s reply should not be construed as legal advice Contact Insurer’s Compliance Center
US Flagged vessel carrying a cargo of wheat to Cuba – OFAC license already obtained Club PEME program in Kerch and Sevastopol – prohibited by recent OFAC sanctions involving Crimean conflict Proposed fixture for finished steel products from China to Iran Falsification of documentation involving Iranian origin oil cargoes – B/Ls altered to say Iraqi origin Bank guaranty issued by Syrian bank in connection with cargo damage case from 2006; subsequent sanctions imposed against Syria Passenger vessel grounded off Sudanese coast – refloating operations proved successful but US H&M insurers unable to contribute their proportion towards salvor’s $600,000 costs Hypothetical Queries
Frequently amended sanctions legislation and ambiguity in interpretation creates risky landscape Potential exposures can be avoided or minimized with specific measures, e.g. due diligence investigation Establish clear compliance objectives and systems US and non-US persons / entities should do so Contact all of your insurers to ensure cover is not prejudiced When in doubt, seek and obtain legal advice / guidance Conclusions