The container shipping industry’s business with Iran will be severely affected as a 180-day wind-down period related to shipping ended on 4 November 2018 – meaning all US-related sanctions lifted under the Joint Comprehensive Plan of Action in January 2016 have been re-imposed.
The US sanctions do not just affect US and Iranian companies but international companies, such as global container shipping lines. Watson Farley & Williams tax group partner and US sanctions expert Daniel Pilarski told Container Shipping & Trade “The sanctions apply to significant transactions by non-US individuals and entities with Iranian ports and the Iranian maritime sector. There are several potential consequences to a non-US person found to engage in significant transactions – the biggest risk is that any such person could be designated as a specially designated national, which is someone prohibited from using the US financial system.”
Watson Farley & Williams partner and global maritime sector head Lindsey Keeble added “Some companies don’t want to take the risk of doing business with Iran as they are financed by banks that rely on dollars and access to the dollar market. Because of the nervousness of financial institutions with regards to sanction breaches, many companies would have very stringent covenants in their loan documents, requiring them to comply with US sanctions even if they are not US companies.” This is because banks are nervous about being seen to breach sanctions as the OFAC “has been known to flex its muscles”.
She advised “European companies wanting to flout US sanctions must think about it very carefully and be confident they are not breaching other obligations. If they do business in the US or deal with US dollars, such transactions will be processed in the US finance system.”
Indeed, CMA CGM, Maersk and MSC have already wound down operations in Iran – and it is expected that more will follow.
Europe versus US
European shipping companies have to face another complication – the European Union has revised its “blocking statute” that rejects the extra-territorial application of US sanctions in relation to Iran and allows member states of the EU to take action against companies that choose to comply with US sanctions.
Watson Farley & Williams EU and competition law expert Jeremy Robinson said “My view is that the blocking statute is an important piece of political signalling but it is too early to say whether it will have any real practical effect on patterns of trade, as far as container shipping companies are concerned.”
Indeed, European companies are more likely to comply with the US Iran sanctions than the EU blocking statute. Ms Keeble said “People are more concerned by OFAC as it has been known to impose huge fines for non-compliance and the EU has, to date, not been as heavy-handed.”
Mr Robinson added “Enforcement of EU sanctions has lagged behind the US in terms of severity of penalties and the likelihood of prosecution.” He added that furthermore, the enforcement of the blocking statute is untested, “so we don’t know if individual states will go after businesses they believe have unlawfully complied with US sanctions.”
Of course, aside from the impact on companies doing business with Iran, the entire Iran shipping sector is hugely affected. Mr Pilarski said “The entire Iranian shipping industry is now in a world where they are completely unable to deal with the US financial system in any way or in dollars and unable to deal with anyone who doesn’t want to run the risk of having contamination affect them as well due to secondary transactions.”