Working with Sanctions:

A P&I Club Perspective

Identifying and dealing with complications

George J. TsimisSenior VP – Claims Director & General CounselShipowners Claims Bureau, Inc.Manager, American P&I ClubMaritime Law Association - IOCS Committee Wednesday, April 29, 2015

Sanctions

• 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?

Sanctions

Impose restrictions targeting:

individuals such as heads of state or SDNswhole areas, countries, ports, airspace ability to travel types of trade, services, productsassets

By use of prohibitions, freezing orders, attachments and penalties (both civil and criminal).

How do they work?

Sanctions

There are four major categories :

1.US

2.EU

3.UN

4.Individual countries

Who imposes them?

SanctionsUSA – OFAC SanctionsPrimary Embargoes: Iran, Cuba, Sudan, Syria, Myanmar, North Korea and Crimean conflictSDN 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 SanctionsIran – crude oil, petroleum & petrochemical products, natural gas, coal, graphite, raw or semi-finished materials such as steel or aluminumSanctioned persons or entities – EU version of SDN listing

SanctionsMyriad of Acronyms

• UN, EU, OFAC

• TWEA, CISADA, NDAA, IEEPA

• SDN, WMD, RPP, P5+1

• How do you CYA?

Sanctions

Export and delivery of refined petroleum products (RPP) to IranTransactions/goods/services related to production of Iran’s petroleum products/resources and petrochemical productsImport / transport of crude oil, petroleum and petrochemical cargoesBunkering from Iranian suppliers / sourcesProvision of shipping services for goods that could materially contribute to Iran’s nuclear technologyTransactions 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:

Sanctions

1) P&I Club / Insurer compliance with applicable sanctions regulations

2) 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

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

Sanctions

Case by case and/or regular periodic scrubbing of the following parties against OFAC and other sanctions target listings:

Correspondents, surveyors, law firms & other vendorsMembers and potential members (owners and managers)VesselsForeign banksSecurity beneficiariesPayees / beneficiariesReinsurersIG Pool contributions

P&I Club Compliance: The “Club Scrub”

Sanctions

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

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

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 regulationsClass I.1.4.55 – nullifying and voiding insurance whenever coverage would expose the Club to the risk of being subject to sanctionsClass 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

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

Sanctions

• 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 sanctionable conduct

• Based heavily on facts and circumstances of each case and an assessment of the sanctions risk

What is “Due Diligence”?

Sanctions

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

Sanctions

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

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

Sanctions

• 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?

Sanctions

• 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)

Sanctions

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

SanctionsWho are your contractual counter-parties?

• 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)

SanctionsDue Diligence - Investigation Resources

OFAC SDN List at http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx and search function at http://sdnsearch.ofac.treas.gov/EU sanctioned parties listing at http://eeas.europa.eu/cfsp/sanctions/consol-list_en.htmCompliance software • Internet search engines• Press clippings• Questionnaires • Recent movements by chartered vessels• Asset investigation services• Seek and obtain legal advice

Sanctions

• 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

Sanctions

• 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

Sanctions

• 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

SanctionsRequired Information to be provided to Insurer:

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)

SanctionsContact Insurer’s Compliance Center

• 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

Sanctions

• 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

Sanctions

• 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