European Union: Iran Sanctions Update – May 2012

On 24 March 2012, EU Council Regulation No. 267/2012 ("the Regulation") entered into force in the EU (the day of its publication in the Official Journal). It repealed and replaced EU Regulation 961/2010, which had previously served as the main EU Regulation concerning restrictive measures against Iran.

This Regulation had been long awaited by those involved in international trade and, in particular, those in the shipping and insurance industry following the publication of EU Council Decision 2012/35/CFSP of 23 January 2012 ("the Decision"), which imposed restrictions on dealings with Iranian crude oil, petroleum and petrochemical products.

EU Decisions are only binding on those parties to whom they are addressed, in this case the EU Member States. In order to be binding against EU individuals and companies, the restrictions set out in the Decision needed to be incorporated into a Regulation. Prior to the publication of the Regulation, it was not entirely clear how, to what extent, and from which dates EU individuals and companies would be prohibited from dealing with Iranian crude oil, petroleum and petrochemical products. This caused significant uncertainty with regard to shipping, trading and insuring the prohibited products.

This update highlights some of the key provisions that have been introduced which will impact on international trade with Iran and the shipping industry in particular. This update should be read together with our previous updates on sanctions which can be found on our website at www.incelaw.com.

As with all recent EU trade sanctions legislation, the Regulation applies in the following circumstances:

• Within the territory of the EU
• On board any aircraft / vessel under the jurisdiction of a Member State
• To any EU national wherever located
• To any legal person, entity or body incorporated under the law of an EU Member State
• To any business done in whole or in part within the EU.

WHAT ARE THE MAIN RESTRICTIONS?

1. Prohibition on dealing with Iranian crude oil, petroleum and petrochemical products

(a) The restrictions

Under Articles 11 and 13 of the Regulation, it is prohibited to import, purchase or transport Iranian crude oil, petroleum and petrochemical products. The restriction on transportation applies whether or not the goods are being imported into the EU. Lists of the restricted petroleum and petrochemical products, together with the relevant HS codes, are set out at Annexes IV and V respectively of the Regulation. Notable petrochemical products which fall within these restrictions include ammonia, ammonium nitrate, ethylene and methanol. It is important that any person involved in dealing with these types of goods checks the relevant Annexes to ensure compliance with the restrictions.

(b) The exceptions

Articles 12 and 14 of the Regulation provide exceptions to the prohibitions set out in Articles 11 and 13. These exceptions are available in relation to the execution of trade contracts which pre-date 23 January 2012 and ancillary contracts necessary for the execution of such contracts.

Paragraph 12 of the pre-amble to the Regulation states:

Under the Regulation, there is no definition of "trade contract" but, in our view, a charterparty would not qualify as a "trade contract" for the purposes of this exception. Accordingly, whilst a charterparty may be necessary to execute a trade contract that is dated prior to 23 January 2012 and therefore falls within the exception as an ancillary contract, a charterparty with no underlying trade contract would not appear by itself to be enough.

Even where a trade contract or an ancillary contract falls within the exception allowing the transaction to proceed, the Regulation provides that notification must be provided to the competent Member State authority at least 20 working days in advance of the activity or transaction. In certain circumstances, however, some Member States have been prepared to be flexible on the amount of notification required.

In any event, even where an exception can be utilised, there is a long stop date by which these obligations must be completed. In the case of petroleum products, this date is 1 July 2012 and for petrochemical products it is 1 May 2012.

As such, from 1 May 2012, no-one falling within the EU jurisdiction is permitted to be involved in the import, purchase, transport or insurance of Iranian petrochemical products. From 1 July 2012, the restriction applies to Iranian crude oil and petroleum products.

(c) Third party liability and environmental liability insurance

Following the adoption of the EU Decision on 23 January 2012, concerns were raised by, amongst others, the International Group of P&I clubs regarding the prohibition on providing (re)insurance in relation to Iranian crude oil, petroleum and petrochemical products. The problem envisaged was that the prohibition would have prevented the provision of third party liability and environmental liability (re)insurance. This is of concern where non-EU vessels get into difficulty, for example with regard to pollution, and at the time of such event are carrying products restricted by the Regulation. In this scenario, the EU sanctions may operate in such a way as to prevent assistance being provided by the insurer to pay for the clean up of any environmental damage.

The scope of the Regulation, however, differs from that of the EU Decision in that it allows third party liability insurance and environmental liability insurance and reinsurance to be provided up until 1 May 2012 in relation to petrochemical products and up until 1 July 2012 in relation to crude oil and petroleum products. Even voyages without any other connection to the EU (i.e. non-EU ship-owners and charterers) often rely on (re)insurance from within the EU and, but for this short-term carve-out, many legitimate voyages might have struggled to find adequate cover from non-EU markets.

There remains uncertainty as to how this situation will develop after 1 May/1 July 2012 and clarification is expected in due course following discussions between the relevant parties and EU authorities.

2. Freezing of funds and economic resources

As with the earlier sanctions legislation against Iran, under Article 23 of the Regulation, all funds and economic resources belonging to designated persons are to be frozen. A list of these designated or sanctioned persons is maintained by the EU authorities and is updated regularly. Further, funds and economic resources must not be provided directly or indirectly to sanctioned persons. The definitions of "funds" and "economic resources" are wide and therefore every transaction should be checked carefully and due diligence must be undertaken to ensure that no sanctioned persons are involved.

Parties involved in trade with Iran or Iranian entities should remain cautious as it is apparent that, on occasion, sanctioned persons/entities have set up front companies to try to circumvent the sanctions. Equally, sanctioned Iranian banks are sometimes named on contractual documents which can give rise to problems. Careful consideration must, therefore, be given as to who is benefiting or potentially benefiting from any transaction.

3. Further restrictions:

The Regulation sets out a number of further restrictions which we list below:

• Restrictions on the sale, supply or export of listed goods to Iran which assist in Iran's nuclear enrichment programme.
• Restrictions on dealing with goods on the Common Military List.
• Restrictions on key equipment and technology which can benefit the crude oil and natural gas industries in Iran.
• Restrictions on the sale, supply, transfer or export directly or indirectly of gold, precious metals and diamonds to / from Iran.
• Restrictions in relation to the financing of enterprises related to the oil, petrochemical and natural gas industries in Iran.
• Restrictions on the transfers of funds to and from an Iranian person, entity or body.

Given the broad reach of the restrictions, it is important that anyone trading with Iran keeps a careful check on what products and services are restricted.

LIABILITY FOR BREACHING A CONTRACT AS A RESULT OF THE REGULATION?

The Regulation also contains a provision at Article 38 pursuant to which claims made by Iranian entities will be subject to certain restrictions where made within the EU. This is a new provision which has not appeared in the previous sanctions legislation against Iran.

Article 38 will make it difficult for Iranian entities whose contracts have been affected by EU sanctions to bring claims relating to those contracts within the EU. This would not, however, appear to stop claims being made outside the EU where the Regulation and this particular provision will not have a legally binding effect.

IS THERE A DEFENCE?

In common with previous EU sanctions against Iran and other countries, a defence is provided by Article 42 of the Regulation. This states:

"The measures set out in the present Regulation shall not give rise to liability of any kind on the part of the natural or legal persons, entities or bodies concerned, if they did not know, and had no reasonable cause to suspect, that their actions would infringe these prohibitions." (our emphasis)

As noted in our previous sanctions updates, it is important that due diligence is carried out on all transactions in order to ensure that the relevant sanctions issues are covered and complied with. This includes checks on the nature of the cargo, checks on the involvement of any sanctioned persons and consideration of any payment provisions under the contract which may be affected by sanctions.

OTHER CONSIDERATIONS

Parties should also check with any (re)insurers how their cover may be affected by the Regulation, remembering that insurers outside the jurisdiction of the EU may be reinsured within the EU or the US. In relation to the latter, this may require consideration of the US sanctions position. Sanctions provisions are now frequently included in insurance contracts and may impact on the recovery of claims which are linked to sanctions issues.

With international companies and insurers transacting business across the globe and, with the ever-changing landscape of sanctions, we recommend that all individuals and companies check transactions diligently and carefully to ensure that they and their businesses are in full compliance with the sanctions.

Penalties for the breach of sanctions can be significant, even when the breach is inadvertent, and breaches may also result in negative media coverage.

A link to EU Regulation 267/2012 can be found at the following address:

http://eur-lex.europa.eu/JOHtml.do?uri=OJ:L:2012:088:SOM:EN:HTML

The above summarises the most notable changes to EU sanctions against Iran introduced by Regulation 267/2012 but is not intended to act as an alternative to obtaining legal advice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.