A new era for sanctions?

The continuing challenges posed for shipping by the ever-developing US sanctions regime should not be underestimated. With the new year comes a new US president – CJC London Associate Simran Lajmi asks whether things will be any different under Biden.

The US sanctions regime expanded rapidly during the last three years of the Trump administration. From 2017 to 2020, more than 3,500 sanctions were issued against countries, jurisdictions, individuals, trading activities, and sectors. By comparison, the Obama administration issued around 4,300 sanctions over its entire eight-year period. 

President Trump’s re-imposition of sanctions on Iran has caused the country’s economy to fall into a severe recession. Since mid-2019, Iran’s response to the increasing sanctions has been continued non-compliance with the nuclear commitments of the Joint Comprehensive Plan of Action (JCPOA), by developing its missile capabilities force and controversially providing arms and support to numerous armed factions operating throughout the region. The US-Iran sanctions regime has been further criticised in recent months as having adversely affected Iran’s ability to respond to the Covid-19 outbreak, with Iran reporting more cases and more deaths than any other country in the region.  

During his campaign trail, Joe Biden had stated that it was his intention to revoke the sanctions placed on Iran and to re-join the JCPOA, subject to Iran ending its acknowledged breaches of the agreement. Indications from Iran at the time suggested that they would be open to this arrangement. However, in his last days in office, Trump ramped up the pressure on Tehran by both widening the scope of metals-related sanctions against Iran and adding a number of companies involved in shipping steel to or from Iran to its Specially Designated Nationals And Blocked Persons List (SDN).

During this time, Iran also took a number of retaliatory steps, announcing its decision to move ahead with plans for uranium enrichment up from 4.5% to 20%. This is the most significant breach of its obligations under the JCPOA to date. In addition, in early January Iran seized a South Korean tanker in waters near the Strait of Hormuz, ostensibly due to certain environmental violations – claims which are denied by Seoul. In reality, this appears to be the latest move in the ongoing dispute between Iran and South Korea over around $7 billion worth of financial assets which have been held frozen in South Korean financial institutions for nearly two years since the re-imposition of US sanctions.

Over the past few weeks, relations between the US and Iran have devolved at a rapid pace. On 5 January, Iran held its first ever military drill for drones, showcasing hundreds of locally built machines and their destructive capabilities. The event was held almost exactly one year on from the assassination of top Iranian general Qassem Soleimani by a US drone. Two days after the military drill, footage aired on Iranian state television unveiling an extensive new underground missile base where the entrance was painted with US and Israeli flags so that high-level commanders from the Iranian Islamic Revolutionary Guard Corps could walk over them as they entered. These recent developments have made a scenario in which both the US and Iran simply return to their respective positions under the JCPOA seem increasingly unlikely, especially if the US were to attempt to negotiate for additional concessions from Iran as a condition to lifting sanctions.

Given the turbulent state of US domestic politics, it is clear that the Iranian nuclear threat will not be a key priority for Biden. Furthermore, with such a narrow majority in both the House of Representatives and the Senate, it is unclear what kind of progress Biden will be able to make with any attempts to return to the JCPOA, given that the deal faces opposition from a sizeable portion of both Democrats and Republicans. This is the case with the US sanctions regime more generally. Despite Biden’s past criticisms of many aspects of Trump’s sanctions regime, spokespeople in Biden’s team have been keen to emphasise that the policy of the incoming administration will not be to dismantle the existing sanctions policy. It seems, therefore, that the most tangible change with respect to the US sanctions regime shall be greater dialogue with and greater consistency from the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC).

In light of this, it will be important for the shipping community to remember the lessons they have learned in relation to sanctions compliance. In recent years, OFAC has become increasingly aware that compliance within the shipping sector is a vital component to the effectiveness of their sanctions regime. By now, most readers will be familiar with the OFAC global advisory published in May last year. The advisory warned that ship-to-ship transfers are often used to evade sanctions and identified the altering of vessel identification, the falsification of cargo and vessel documents, and the disabling or manipulation of AIS on vessels as highly suspicious behaviour. Statements released by OFAC in July, following the sanctioning of several tankers and shipowners for their operations with the Venezuelan oil industry, indicated that OFAC have begun to use AIS data themselves to monitor vessel traffic in high-risk areas of the world.  

This is a significant change from the approach taken by OFAC during the last round of Iranian sanctions in 2008. At that time, Islamic Republic of Iran Shipping Lines (IRISL) managed to successfully circumvent the effects of the US government blacklist by changing the names of its vessels and transferring nominal ownership to shell companies abroad. An IHS report from 2012 – four years on from the imposition of those sanctions – showed that 130 of the 144 banned IRISL ships continued to call at many of the world’s major ports, despite the fact that the vessels would always have been identifiable by their IMO numbers. It is quite clear that such tactics will not be successful now.  

Regardless of the new US president, OFAC will undoubtedly continue to use the techniques and knowledge it has developed over the past three years to detect any sanctions breaches. OFAC has been known to de-list sanctioned entities which have successfully demonstrated either that they have taken steps to comply with applicable sanctions by way of corrective action or that they have put in place more robust procedures to ensure future compliance. Given the serious consequences of falling foul of the US sanctions regime, it is crucial that all companies working within the maritime sector have in place rigorous internal sanctions compliance and due diligence procedures which would stand up to close audit scrutiny.   

The CJC Team have helped a number of clients implement these compliance procedures and frequently advise on sanctions risks for proposed fixtures.