"Sanction-Evasion Challenges in Maritime Industry: Growing risks & implications. Shipowners face complexities in proving breaches & avoiding damages."
Adam GraySenior Counsel,Transport & Insurance
The use of sanctions as a diplomatic tool of pressure, particularly by the West, seems here to stay. Those in the maritime industry have grown accustomed to enhanced screening & due diligence. The fear of becoming unwittingly embroiled in sanctioned activity and being “designated” or “blacklisted” by the US, UK, EU, or UN, permeates through the industry. The implications of engaging in sanctioned activity or servicing sanctioned entities are serious and disruptive. Reputational damage is inevitable. Credit lines with the Western banking system evaporate overnight & dollar transactions are made near impossible. Financial losses usually follow and can compound rapidly.
The governments of Gulf States will only recognise and enforce UN sanctions according to their obligations at international law. Iran is subject to UN sanctions whilst Russian is not. However, with respect to US, UK, and EU sanctions (applicable to Iran & Russia to varying degrees), Gulf States have taken a neutral position, & they do not have the force of law domestically. That is not to say that maritime businesses in the Gulf region avoid the implications of unenforced Western sanctions for the reasons set out above. In a globalised world, sanctions are sticky & for that reason, largely effective.
In the Middle East, it is well documented that nation-states in the East, particularly China and India, are regularly importing Russian and Iranian oil. Shippers, receivers, and vessels involved in its export employ a variety of tactics to evade sanctions, including falsifying cargo documents, AIS spoofing (or “going dark”), regularly changing flags and ownership, reporting false flags, and undertaking multiple STS transfers to cover their tracks. These practices heighten the risk of shipowners in the region becoming inadvertently involved in sanctioned activities if they do not conduct proper due diligence.
We expect that the EU 60$ oil price cap, which came into force on 5th February 2023 and targets Russian oil revenues, will lead to another wave of sanction-evasion incidents, inevitably involving the falsification of cargo origin and price by way of fraud and STS transfers.
But it must be recognised that the very purpose of sanction-evasion practices is to avoid detection, obfuscate voyage data and conceal the origin of cargo and the sanctioned entities behind it. It has become a sophisticated operation, underpinned by lucrative rewards for those who succeed in executing it. Diligent and alert shipowners may not be able to prove a connection to sanctioned entities or activity despite reasonable efforts and often enter into charterparties before the first suspicions arise.
We expect that the EU 60$ oil price cap... will lead to another wave of sanction-evasion incidents, inevitably involving the falsification of cargo origin and price.
In 2022, we saw multiple instances of unsuspecting shipowners being approached by Chinese or Russian motherships seeking to charter their vessels to perform STS transfers in the Arabian Gulf. A typical Iran operation involves the loading of cargo in Iran by Chinese-owned motherships whilst spoofing the AIS. The legitimate AIS is then resumed from a legitimate position, and a daughter-vessel (often an innocent vessel) loads the cargo via STS. The daughter-vessel is often told the cargo originates from Basrah-Iraq or some other neighbouring state, and may be supported by forged cargo documents, or not supported at all. The daughter-vessel then usually proceeds to Singapore-East anchorage for another STS with a new daughter-vessel, or directly to China where she discharges her Iranian cargo. This process has been thoroughly documented by institutions like United Against Nuclear Iran with satellite imagery and detailed AIS tracking. A similar operation is undertaken in respect of Russia-related sanctions avoidance in the Caspian Sea and off the coast of the UAE.
In our experience during 2022, we were approached by clients wanting to exit charterparties under which they had an obligation to load cargo via STS transfer from a mothership and carry it to the Far East. Usually, suspicions were aroused when the mothership failed to produce valid or consistent cargo and ship documentation. The presence and choice of a sanctions clause in the charterparty or bill of lading was key to options available to the shipowner.
Consider the BIMCO Sanctions Clause for Voyage Charter Parties 2020, which provides that the innocent party may terminate the charterparty (or possibly the bill of lading) if the other party, either owner or charterer, is found to be in breach of a warranty that they, or those closely connected with them (including shippers and receivers), are not a sanctioned party. Furthermore, if the proposed activity, service, carriage, trade or voyage is subject to sanctions imposed by a sanctioning authority, then the party not in breach may either cancel the charterparty prior to loading or refuse to proceed with orders and discharge at a safe port or place of their choice. A similar BIMCO clause exists for time charterparties, with logical differences.
Although the BIMCO clauses are described as “balanced”, the problem shipowners face is that they must prove on the balance of probabilities (assuming it is governed by English law) that a breach has occurred In other words, if a charterer sued a shipowner for terminating a contract on the grounds of the BIMCO sanctions clause, the court or tribunal would ask “Have owners established that it is more than 50% likely that they would have become involved in a sanctioned activity had the charterparty been performed?”. The test would not be whether there was a risk of being involved in a sanctioned activity or even a reasonable belief that shipowners would become involved in a sanctioned activity. The test would be whether shipowners would have been involved in a sanctioned activity.
As mentioned above, the practice of avoiding sanctions means that it is not often straightforward for shipowners to obtain evidence that the charterer is in breach of warranty or that continuing with a proposed activity, such as loading via STS transfer, would more likely than not constitute a sanctioned activity. The objective test to be applied is an unfortunate departure from the earlier 2010 version of the clauses which entitled the shipowner to terminate the charterparty based on its “reasonable judgment”.
It is more common for shipowners to have a reasonable judgment, a strong suspicion, or an educated guess about sanctioned activity, but not any tangible evidence. This leaves shipowners who have already entered into a charterparty in the difficult position of having to decide whether to accept the sanctions exposure, or to wrongfully refuse orders or terminate the charterparty, resulting in a potentially large damages claim for breach of contract. Even if there was a reasonable judgment, it would take time for shipowners to investigate and gather evidence of their reasonable suspicions and a charterer would not be expected to wait for shipowners to complete an investigation whilst paying for use of the vessel. In the author’s opinion, the BIMCO sanctions clauses (2020) do not account for this blind spot which leaves shipowners vulnerable in such circumstances where they have reasonable grounds to suspect sanctions exposure, but no readily available evidence. It is not owner friendly.
Compare the abovementioned BIMCO clauses to the INTERTANKO sanctions clause 2011 which provides shipowners with “absolute discretion” to refuse orders and request alternative orders where any trade employed by the vessel could expose its Owners, Managers, crew, or insurers to a risk of sanctions imposed by a specified sanctioning authority. Shipowners are given much more discretion and flexibility to manage sanctions exposure under this clause.
Shipowners may wish to incorporate a more favourable clause than the clauses referenced above or draft their own to ensure they have sufficient flexibility to exit charterparties where sanctions exposure is identified once the contract has become operative.
Shipowners looking to take additional precautionary steps should consider incorporating the BIMCO ‘AIS SWITCH OFF CLAUSE 2021’ which limits AIS handling to the IMO Revised Guidelines for the Onboard Operational use of Shipborne Automatic Identification Systems, Resolution A.1106(29).
For further information,please contact Adam Gray.
Published in August 2023.