United States: Navigating The Recent U.S. Sanctions On COSCO (Dalian) And Other Chinese Companies

Highlights

  • The recent designation of COSCO's energy subsidiary and other Chinese companies as Specially Designated Nationals (SDNs) creates enormous challenges for the international shipping industry.
  • Unlike past designations, the U.S. Office of Foreign Assets Control (OFAC) neither identified specific vessels nor provided guidance or wind-down general licenses that would have eased the disruption caused by such a major action.
  • The resolution of these designations is likely a bargaining chip in the larger trade negotiations between the United States and China, and is not likely to be resolved at the agency level.

The U.S. Office of Foreign Assets Control (OFAC) on Sept. 25, 2019, designated COSCO Shipping Tanker (Dalian) Co. Ltd. (COSCO Dalian), Kunlun Shipping Company Ltd., and certain other entities and individuals as Specially Designated Nationals (SDNs) under Executive Order 13846 for transporting Iranian oil and petroleum products contrary to U.S. sanctions. Notwithstanding the long lead-up to this action, the designations took many in the maritime industry by surprise. In late 2018, as part of its withdrawal from the Iran nuclear accord, the Joint Comprehensive Plan of Action (JCPOA), the United States reimposed "secondary sanctions" on petroleum exports from Iran. However, the U.S. granted several countries, including China, waivers to continue to import Iranian crude-oil. These waivers expired on May 2, 2019.

In summer 2019, the maritime trade press reported on suspicious activity involving certain vessels that appeared to carrying Iranian petroleum products to the Far East. Suspicious activity included ship-to-ship transfers during blackout periods, where vessels had switched off their Automatic Identification System (AIS) transponders. In fact, in early September 2019, OFAC issued an "Advisory to the Marine Petroleum Shipping Community" warning industry of this suspicious activity, identifying vessels, cautioning non-U.S. entities of the sanctions risk they face and highlighting the expectations of the U.S. government regarding due diligence.

Who Are the Targets of the Sanctions?

Although OFAC has in the past designated maritime entities under secondary sanctions authority, OFAC typically designates specific vessels by name. In this case, OFAC has not identified vessels and issued only one guidance note indicating that the sanctions apply only to the listed entities, and entities that they own individually or in aggregate a 50 percent or more interest. OFAC advised that sanctions do not apply to COSCO Shipping Corporation Ltd. (COSCO), or its other subsidiaries or affiliates (e.g., COSCO Shipping Holdings) that are not 50 percent or more owned by the designated entities. However, determining which COSCO entities and vessels are subject to sanctions is difficult.

Based on news reports, there may be as many as 50 tanker vessels indirectly owned by COSCO Dalian. In addition, COSCO Dalian has a joint venture with Teekay LNG that may be affected. In the absence of clear information as to which COSCO entities and vessels are subject to sanctions, banks, charters and other parties may take conservative positions with respect to continued dealings with certain COSCO entities.

What Are the Implications of the Sanctions?

Because these sanctions were issued under Executive Order 13846 (relating to Iran), they have both "primary" and certain "secondary" sanctions implications.

  • Primary Sanctions. U.S. persons (i.e., U.S. companies and U.S. citizens), and foreign entities owned or controlled by U.S. persons, must "block" the property of these sanctioned entities, and must refrain from directly or indirectly engaging in transactions with the sanctioned entities. This effectively means that U.S. banks processing wire transfers related to sanctioned entities must block such transactions and report them to OFAC. The entities designated SDNs were also subject to other more limited sanctions restrictions enumerated in the designations.
  • Secondary Sanctions Related to Iran Trade. To the extent that future transactions involved trading in Iran petroleum and petroleum products or dealings with Iranian SDNs, a non-U.S. entity could be sanctioned for providing material support, goods or services to such designated entities; foreign financial institutions could be sanctioned for knowingly facilitating significant financial transactions; and foreign insurers could be sanctioned for providing coverage to such entities. Hence, even if there is no U.S. nexus to a transaction, non-U.S. entities could be subject to sanctions.
  • Secondary Sanctions with Designated Entities Unrelated to Iran Petroleum Trade. Although there is no definitive guidance yet from OFAC, the sanctions do not appear to have broad secondary sanctions implications for non-U.S. entities engaging in transactions with COSCO Dalian and other entities sanctioned on Sept. 25,2019. Generally any non-U.S. person that provides material support for or engages in significant transactions with SDNs designated under most Iran sanctions laws and executive orders, is potentially subject to U.S. secondary sanctions. This includes transactions with persons designated as SDNs under Sections 1 and 2 of Executive Order 13846. However, the designations on Sept. 25, 2019, appear to have been made pursuant to Section 3 of Executive Order 13846, which at least facially does not provide for designation of non-U.S. entities for providing material support or engaging in significant transactions with such non-Iranian SDNs (provided the transactions are not otherwise sanctionable). OFAC reportedly has issued informal advice to certain parties confirming this interpretation. Given the major disruptions caused by the designation of COSCO Dalian, it is hoped that OFAC will issue a clarification on this point in the near future.

Regardless of the legal scope of sanctions, the practical implications of these sanctions cannot be understated. In the current sanctions environment, many banks, insurers and major maritime companies will not take the risk of U.S. sanctions, and will cease or wind-down business transactions with designated entities.

Will Sanctions Be Lifted on COSCO Dalian in the Near Future?

Historically, the U.S. government has used the imposition of secondary sanctions designations as a means to change behavior, then has removed sanctions once the sanctioned party has taken adequate measures to change the behavior. However, because COSCO Dalian is ultimately state-owned, its actions and the removal of sanctions will likely be tied to U.S.-China negotiations at the highest levels of government. Hence, the timing of any removal of sanctions is unclear. In the interim, it is likely that OFAC will issue further guidance regarding the scope of sanctions and/or general licenses to allow transactions with certain entities.

What Can Companies Do to Mitigate Sanctions and Commercial Risk?

  • A critical step is to identify the relevant business relationships that may be affected, and develop a plan to address the sanctions and commercial risk created by the designations. This may include: in-depth research to determine who owns particular counterparties, taking steps to wind-down or terminate contracts, or other actions. For many companies, the commercial risks of counterparties refusing to provide services, risk of contractual breaches and the inability to engage in financial transactions are likely the most pressing issue.
  • OFAC has not provided any "wind-down" general license to allow U.S. companies to disengage from designated entities. However, upon application, OFAC may issue specific licenses to facilitate winding-down transactions and/or divestment of U.S. persons from designated entities.
  • In other circumstances, OFAC has created regulatory safe harbors from secondary sanctions for limited wind-down transactions by foreign persons with SDNs (where there is no U.S. nexus). Non-U.S. companies may seek informal guidance from the U.S. government or from U.S. trade lawyers regarding whether, under a particular set of facts, a transaction would be deemed "significant" or "material" enough to expose the company to sanctions.
  • Where particular vessels have been effectively stranded because of sanctions, OFAC upon application may issue safety and security type licenses that provide a basis for insurers to continue to insure vessels, as well as for other parties to continue to provide services while the vessel is at anchor (i.e., not trading).

The designation of COSCO Dalian and other entities creates numerous challenges, and it is hoped that the U.S. government will move swiftly to issue general licenses, clarifications and/or additional guidance as companies reach out to OFAC with questions and concerns.  

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
Akin Gump Strauss Hauer & Feld LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
Akin Gump Strauss Hauer & Feld LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions