The U.S. Office of Foreign Assets Control (OFAC) on Sept. 25, 2019, designated COSCO Shipping Tanker (Dalian) Co. Ltd. (COSCO Dalian), Kunlun Shipping Company Ltd., and certain other entities and individuals as Specially Designated Nationals (SDNs) under Executive Order 13846 for transporting Iranian oil and petroleum products contrary to U.S. sanctions. Notwithstanding the long lead-up to this action, the designations took many in the maritime industry by surprise. In late 2018, as part of its withdrawal from the Iran nuclear accord, the Joint Comprehensive Plan of Action (JCPOA), the United States reimposed "secondary sanctions" on petroleum exports from Iran. However, the U.S. granted several countries, including China, waivers to continue to import Iranian crude-oil. These waivers expired on May 2, 2019.
In summer 2019, the maritime trade press reported on suspicious activity involving certain vessels that appeared to carrying Iranian petroleum products to the Far East. Suspicious activity included ship-to-ship transfers during blackout periods, where vessels had switched off their Automatic Identification System (AIS) transponders. In fact, in early September 2019, OFAC issued an "Advisory to the Marine Petroleum Shipping Community" warning industry of this suspicious activity, identifying vessels, cautioning non-U.S. entities of the sanctions risk they face and highlighting the expectations of the U.S. government regarding due diligence.
Although OFAC has in the past designated maritime entities under secondary sanctions authority, OFAC typically designates specific vessels by name. In this case, OFAC has not identified vessels and issued only one guidance note indicating that the sanctions apply only to the listed entities, and entities that they own individually or in aggregate a 50 percent or more interest. OFAC advised that sanctions do not apply to COSCO Shipping Corporation Ltd. (COSCO), or its other subsidiaries or affiliates (e.g., COSCO Shipping Holdings) that are not 50 percent or more owned by the designated entities. However, determining which COSCO entities and vessels are subject to sanctions is difficult.
Based on news reports, there may be as many as 50 tanker vessels indirectly owned by COSCO Dalian. In addition, COSCO Dalian has a joint venture with Teekay LNG that may be affected. In the absence of clear information as to which COSCO entities and vessels are subject to sanctions, banks, charters and other parties may take conservative positions with respect to continued dealings with certain COSCO entities.
Because these sanctions were issued under Executive Order 13846 (relating to Iran), they have both "primary" and certain "secondary" sanctions implications.
Regardless of the legal scope of sanctions, the practical implications of these sanctions cannot be understated. In the current sanctions environment, many banks, insurers and major maritime companies will not take the risk of U.S. sanctions, and will cease or wind-down business transactions with designated entities.
Historically, the U.S. government has used the imposition of secondary sanctions designations as a means to change behavior, then has removed sanctions once the sanctioned party has taken adequate measures to change the behavior. However, because COSCO Dalian is ultimately state-owned, its actions and the removal of sanctions will likely be tied to U.S.-China negotiations at the highest levels of government. Hence, the timing of any removal of sanctions is unclear. In the interim, it is likely that OFAC will issue further guidance regarding the scope of sanctions and/or general licenses to allow transactions with certain entities.
The designation of COSCO Dalian and other entities creates numerous challenges, and it is hoped that the U.S. government will move swiftly to issue general licenses, clarifications and/or additional guidance as companies reach out to OFAC with questions and concerns.