Syria Sanctions 7 May 2012

In this Alert, the Club sets out the current position on sanctions imposed in relation to Syria. Should Members have any queries in relation to the contents of this Alert, they should get in touch with their usual contact at the Club.

European Union Sanctions

The EU has imposed sanctions which provide for an arms embargo, a ban on the supply of equipment which could be used for internal repression, and for the freezing of funds and economic resources of individuals responsible for repression in Syria.

To whom does the EU sanctions legislation apply?

The EU sanctions legislation applies in the following places and to the following persons and entities:

(a) within the territory of the EU;

(b) on board any aircraft or vessel under the jurisdiction of an EU Member State;

(d) to any person, entity or body which is incorporated or constituted under the law of an EU Member State; and

(e) to any person, entity or body in respect of any business done in whole or in part within the EU.

The Legislation

The EU has to date published several Regulations dealing with sanctions against Syria. The first Regulation to be published was Council Regulation (EU) No. 442/2011. This Regulation included, at Annex II, a list of persons and entities whose funds and economic resources were to be frozen. Several subsequent Regulations were published which amended this initial Regulation, and added further parties to the asset freeze list.

The most recent Regulation to be published is Council Regulation (EU) No. 36/2012 (published on 18 January 2012). This repealed Regulation No. 442/2011, and by extension the Regulations which amended and added to it. Regulation No. 36/2012 essentially consolidates all previous measures into one Regulation, as well as extending those measures yet further. The key provisions state that it is prohibited:

(a) to sell, supply, transfer or export equipment which may be used for internal repression. Such equipment is listed at Annex I (Article 2).

(b) to sell, supply, transfer or export the equipment, technology or software listed in Annex V to any person or entity in Syria, or for use in Syria. It is also prohibited to provide financial assistance and services such as brokering services in relation to such goods (Article 4).

(c) to import into the EU crude oil or petroleum products originating in or exported from Syria, to purchase crude oil or petroleum products located or originating in Syria, and to transport such products if they originate in or are exported from Syria. It is also prohibited to provide any financial assistance, insurance or reinsurance in relation to such activities (Article 6).

(d) to sell, supply, transfer or export key equipment and technology for certain sectors of the oil and gas industry in Syria. It is also prohibited to provide financial assistance and certain services, including brokering services, relating to such equipment and technology (Article 8).

(e) to grant loans or credit to, acquire or extend participation in or create a joint venture in relation to any Syrian person or entity involved in the exploration, production or refining of crude oil, or the construction or installation of new power plants for electricity production (Article 13).

(f) for certain credit and financial institutions to open a new bank account with any Syrian credit or financial institution, to establish a new correspondent banking relationship with such an institution, to open a new representative office or establish a branch/subsidiary in Syria, or to establish a joint venture with a Syrian credit or financial institution (Article 25).

(g) to provide insurance or reinsurance to the Syrian State, its Government, its public bodies, corporations or agencies, or to any person or entity acting on behalf or at the direction of any such organisation (Article 26).

In addition to the above, Annexes II and IIa set out lists of persons and entities whose funds and economic resources are to be frozen pursuant to Article 14. No funds or economic resources are to be made available to or for the benefit of those persons. Annex II currently lists 86 individuals and 29 entities. Annex IIa contains only one name: the Commercial Bank of Syria. There are specified derogations to the provisions of Article 14, by which certain transactions may be authorised by Member States in specific circumstances. These are set out in detail in the text of the Regulation.

Further parties were added to the asset freeze list in Annex II by way of Council Implementing Regulation (EU) 55/2012. These included five Syrian banks and three petroleum companies (the Deir ez-Zur, Ebla and Dijla Petroleum Companies).

Council Regulation (EU) 168/2012

On 28 February 2012, Council Regulation (EU) 168/2012 came into force. This Regulation introduces various prohibitions on the sale, purchase, exportation and importation of gold, precious metals and diamonds. Prohibitions are also introduced in respect of financial and technical assistance and brokering services provided in respect of such goods.

This Regulation also added further parties to the asset freeze list, including the Central Bank of Syria. Certain transactions involving the Central Bank of Syria are still permitted, as set out in Article 1 of the Regulation, but such transactions are limited and must be approved by the competent authority of the relevant Member State.

Council Implementing Regulation (EU) 266/2012

This Regulation came into force on 24 March 2012, and added 12 individuals and 2 entities to the asset freeze list in the Annexes to Regulation 36/2012. The corporate entities added to the list were Mahrukat Company (a.k.a. Syrian Company for the Storage and Distribution of Petroleum Products) and the Syrian Petroleum Company.

Council Decision 2012/206/CFSP

On 24 April 2012, Council Decision 2012/206/CFSP was published, which imposes yet further restrictive measures. Specifically, it imposes a prohibition on the sale, supply, transfer and export of equipment, goods and technology which might be used for internal repression. The provision of technical assistance, brokering services, financing and financial assistance in respect of such items is also prohibited. In addition, the sale, supply, transfer and export of luxury goods is prohibited.

It should be noted that the Council Decision is only effective as against those parties to whom it is addressed, i.e. the governments of all Member States. An implementing Regulation must be published in order for the provisions to be effective against individuals and companies subject to EU law. This Regulation will also provide further details as to exactly what goods the prohibitions will apply to.

The EU is expanding the sanctions in place against Syria on a regular basis. Members must therefore exercise caution and conduct thorough investigations prior to entering into a transaction with a Syrian party, including checking the current asset freeze lists. It should be remembered that even if a party is not listed, it may be associated with a listed party and as such still subject to sanctions.

Penalties for breach of EU Sanctions Legislation

EU Regulations are required to be implemented by way of national legislation in each Member State. As such, the penalties for breach will vary from State to State. They are, however, likely to include criminal convictions, fines and/or prison sentences.

United States Sanctions

To whom does the US sanctions legislation apply?

Compliance with the requirements of the Executive Orders listed below is required of all “US persons”. This includes US citizens and resident aliens, entities organised under the laws of the US or any jurisdiction within the US (e.g. companies, non-profit groups, government agencies, including foreign branches, wherever located), and any person within the US.

The Legislation

The US sanctions legislation takes the form of Executive Orders, which are listed below in chronological order. Members should note that all of these Executive Orders are currently in force, and their terms are equally applicable to the parties listed above.

Executive Order Date Key Provisions

Executive Order 13572 29.04.11 Blocks the property of certain listed individuals identified as being involved with human rights abuses in Syria.

This Executive Order also blocks the assets of the Syrian

General Intelligence Directorate and the Islamic Revolutionary Guard (Qods Force).

Executive Order 13573 18.05.11 Blocks the assets of certain listed senior officials of the Government of Syria.

Executive Order 13582 18.08.11 Blocks all assets of the Syrian Government, and bars dealings by US persons with the Syrian State. This Order also prohibits:

(a) New investment in Syria by a US person, wherever located;

(b) Exportation, re-exportation, sale or supply from the US, or by a US person, of any services to Syria;

(d) Any transaction/dealing by a US person, wherever located, in or related to petroleum or petroleum products of Syrian origin;

(e) Any approval, financing, facilitation or guarantee by a US person, wherever located, of a transaction by a foreign person where the transaction by that person would be prohibited if performed by a US person or within the US.

The following were added to the list of blocked parties:

(a) General Petroleum Company;

(b) Syrian Petroleum Company (also known as the Syrian Crude Oil Transportation Company);

(d) Syrian Gas Company; and

(e) Syrol.

These Executive Orders supplement sanctions already in effect against Syria, which include the Syria Accountability Act 2004. This prohibits the export of most US-origin goods to Syria. Another piece of legislation, the USA Patriot Act 2001, restricts correspondent banking with the Commercial Bank of Syria.

There are several General Licenses which authorise otherwise prohibited acts and transactions in specified circumstances. The text of each of these General Licenses can be accessed through the link at the end of this alert.

Penalties for breach of US Sanctions Legislation

The US Government can impose both criminal and civil penalties for breach of the sanctions legislation. As regards criminal penalties, these may include up to 10 years in prison, up to US$500,000 in corporate fines and up to US$250,000 in individual fines. Civil penalties can also be imposed of up to US$11,000 per violation.

United Nations Sanctions

No UN Resolution has yet been issued in relation to Syria. There is continued pressure on the UN to publish such a Resolution. In light of the measures imposed by the EU and United States, a UN Resolution may soon follow.

Key Issues

The sanctions regimes in relation to Syria are currently being extended on a regular basis. More and more individuals and entities are being added to the lists of parties whose assets are frozen and with whom it is essentially prohibited to do business. As a result, Members must be very careful when entering into a commercial relationship with a Syrian party. Thorough due diligence must be carried out to ensure that dealings with that party will not breach any of the sanctions legislation in force.

In addition, there are certain key practical issues to consider.

Issues affecting hire and freight payments

The issue of both making payments and getting paid will be complicated by legislation limiting parties’ abilities both to deal with Syrian banks and to make funds available for the benefit of listed parties. There are certain derogations listed in the various sanctions legislation, which permit payments for the benefit of listed parties in specific circumstances where authorised by the relevant authorities. It must not be assumed, however, that a particular payment will fall within such a derogation.

If it is not possible to circumvent these problems by bringing the payment within one of the specified derogations, it may be necessary to look for other ways of making and receiving payment, for example via a source which is not a designated person or entity. However, caution must be exercised here. An attempt to circumvent the provisions of sanctions regimes may itself amount to a breach. EU Regulation No. 36/2012 specifically prohibits “the participation, knowingly and intentionally, in activities the object or effect of which is, directly or indirectly, to circumvent” certain of the measures specified in that Regulation.

The Club recommends that Members contact it for advice, or seek independent legal advice, should they be at all concerned that a payment will be made for the benefit of a listed party.

Owners’ position where Charterers’ orders amount to a breach of sanctions

Owners may wish to refuse Charterers’ orders, where the vessel is ordered to a country against which sanctions are in force as part of a commercial arrangement which may be in breach of sanctions legislation. Such an arrangement may, for example, require money to be paid to a party on an asset freeze list, or provide for the carriage of goods which are prohibited under one or more sanctions regimes. Whether Owners are entitled to refuse those orders is not straightforward.

Sanctions are likely to impact on Charterers as well as Owners. A first step, therefore, could be to highlight the risk that Charterers would face by ordering the vessel on such a voyage. This may be sufficient to prompt a revision of the voyage orders.

If, however, the original orders are restated (and there is no express exclusion in the charterparty preventing Charterers from doing so), Owners would be left with a number of arguments. It may be possible to argue that such an order should be considered illegal as the vessel is only permitted to carry lawful merchandise in lawful trades. Under English law a voyage order would be illegal not only if it is contrary to English law but also, it is thought, if it is illegal under the law of the vessel’s flag state or the law of the “place of performance” of the charterparty. Looking at US sanctions for example, which may require the freezing of assets and funds, it could be argued that if hire payments are routed through the US then the payment of hire is effectively prohibited by US legislation.

The Club recommends that Members seek legal advice if they are at all concerned about a particular set of voyage orders.

Negotiating future charterparties

Should Owners wish to avoid calling at Syrian ports, the Club suggests that Syria be excluded from charterparty trading limits. Owners can also protect themselves by incorporating specific wording into the charter (and, where appropriate, the sub-charter) to provide a mechanism to deal with a situation when orders are given by Charterers that would breach sanctions. BIMCO and Intertanko have both published a standard form of wording.

The Club strongly recommends that such a clause be included in charterparties, although legal advice should be obtained to ensure that the clause is in keeping with the other terms of the charterparty in question.

Steps to avoid falling foul of sanctions legislation

It is essential that Members carry out thorough investigations where there is even a possibility that interests related to a country against which sanctions are in force may be involved in a transaction. The Club suggests that the following points, in particular, are considered: a) Identify all parties involved in the transaction. This may include Charterers, customers, suppliers, receivers, ultimate end users and financial institutions. Members should also make themselves aware of any third parties or middlemen, as well as the ultimate beneficial owner of the vessel/s in question and of all companies involved in the transaction. All of these parties must be investigated thoroughly in order to determine whether they are linked to a person/entity on one or more of the asset freeze lists, or indeed are on those lists themselves. b) Identify the precise nature of the cargo to be transported, as well as the ultimate use to which the cargo will be put. The sanctions provisions in force contain extensive prohibitions in relation to certain listed goods. Pleading ignorance of this is unlikely to provide a defence to a breach of sanctions legislation. c) Regularly check the published lists of parties with whom trade is prohibited or restricted. The relevant websites are listed later on in this alert. d) Ensure that all contracts, for example charterparties, are drafted to permit the refusal by Owners of orders that require trading with entities who are targeted by sanctions legislation,

and permit a refusal of cargo which will put any party at a risk of a breach of sanctions legislation.

If in any doubt as to whether a particular contractual arrangement will result in a breach of any sanctions legislation, the Club recommends that Members seek legal advice.

Resources

US Department of the Treasury Resource Centre for Syrian Sanctions: http://www.treasury.gov/resource-center/sanctions/Programs/pages/syria.aspx

List of all EU Regulations: http://www.hm-treasury.gov.uk/fin_sanctions_syria.htm

Consolidated list of EU financial sanctions targets: http://www.hm-treasury.gov.uk/d/syria.htm

Disclaimer: This Member Alert is intended to provide only general guidance and information pertaining to the issues identified and commented upon herein. The content of this Alert is not intended to be, and should not be treated as being final and binding legal advice. If Members consider they are likely to or in fact have encountered problems or difficulties as discussed in this Alert, they are asked to contact the Club and obtain further legal advice relevant to their specific circumstances.