Sanctions pile pressure on mineral suppliers to track deliveries

By IM Staff
Published: Friday, 01 November 2019

As the reach of international trade sanctions increases, Rose Pengelly considers how whole supply chains are coming under scrutiny.

International mineral supply chains are facing growing disruption and the risk of crushing fines from aggressive trade sanctions.

The extra-territorial reach of US sanctions in particular, coupled with more sophisticated technology that enables law enforcement and insurance companies to track cargos, are forcing industrial mineral market participants to conduct forensic due diligence to avoid violating international law.

According to Jochen Beck, a Brussels-based sanctions expert at European law firm, Fieldfisher, mineral, metal and fuel commodities are particularly susceptible to being caught out by sanctions.

"Sanctions legislation - such as, for example, the EU’s Syria Sanctions Regulation 36/2012 (Annex II.B, position number 56), Article 14(2) - prohibits the provision of any economic resources to sanctioned entities, referred to as 'designated parties’," he explained.

Most of the specific sanctions apply to oil and gas and materials used in the petroleum industry. For example, under the EU’s Syrian Sanctions Regulation, it is prohibited to sell alumina and zeolite (natural or synthetic), specially designed for catalytic cracking and reforming of gases, to Syria.

The United Nations, meanwhile prohibits the import of rare earths and titanium ore from North Korea.

In May, the United States extended sanctions to Iran’s iron, steel, aluminum and copper sectors and anyone engaging in transactions for the sale, supply or transfer to Iran of goods and services used in connection with these sectors - a measure that includes refractory minerals and products.

For suppliers to sanctioned entities, prohibitions are context-specific, while importers from sanctioned entities are not allowed to buy any prohibited products, regardless of their intended use. 

Liability chains

Any part of the supply chain can be a sanctioned entity, including producers, consumers, traders or shipping companies that provide the logistical means of violating sanctions.

Speaking at the Lloyd’s List Transparency Forum in London in September, panelists remarked on the widening obligations of ship owners to track both the source and the ultimate destination of cargos they carry.

"Going backwards to trace the origin of your cargo is one aspect; finding out where cargo eventually ends up is another. You really have no control over that," Mark Church, director at marine liability insurer North P&I Club, said.

He noted that clauses in shipping contracts, where parties agree not to transact with sanctioned entities, are unlikely to carry much weight with international law enforcement if a cargo ends up with a prohibited buyer.

Technology aids transparency

Until a few years ago, it was possible to evade sanctions by taking advantage of grey areas in international shipping practice, such as ship-to-ship (STS) transfers, where cargos are offloaded from one ship to another without being recorded, making tracking nearly impossible.

If ships claiming to be bound for certain destinations turned off their automatic identification systems (AIS), there was little that could be done to prove where the cargo was eventually offloaded - especially if it was trans-shipped en route. 

But the development of increasingly accurate global positioning system (GPS) and geospatial technology has made it more difficult for ships to hide. 

"Big data is now widely available, opening up tracking and analysis opportunities which were only available to military before," Catherine Gwilliam, chief executive of United Kingdom and US-based geospatial intelligence analysis company, Geollect, said.

Greater transparency creates liability issues. In addition to law enforcement, insurance companies have a vested interest in tracking ships’ compliance with sanctions and have invested heavily in technology that allows them to keep tabs on ships.

Insurers like Lloyds now include clauses in their contracts, which rescind cover if a ship owner breaches sanctions.

"If suspicions are raised, insurers will go to their members and ask to see evidence of what due diligence they have done on a cargo," Church explained. 

"The ship owner may produce a certificate of origin, and the insurer may then ask them to trace back the vessel they did an STS with. But working backwards can result in dead end, if certain actors in the supply chain are trying to deceive," he added.

Some countries, such as Germany, do not politically support all US sanctions, which also makes it difficult to enforce sanctions clauses in some contracts.

Tracking technology is not infallible, and ascertaining an accurate picture of compliance is further complicated by the high volume of inaccurate information published online. Companies, governments and the press have all been guilty of posting allegations of sanctions breaches on social media.

This can create confusion and spark unwarranted investigations, causing problems for legitimate market participants while distracting attention from illegal activity, according to Neil Roberts, head of marine and aviation at Lloyd’s Market.

Another issue that technology has so far not been able to address is that the beneficial ownership of vessels and who controls their flags remains largely opaque. 

This is important, because it affects whether a sanctioning government has jurisdiction over a particular ship owner. 

Sanctions compliance

Given that the sanctions landscape is likely to get tougher to navigate, lawyers are urging mineral exporters, importers and shipping companies to draw up detailed compliance policies, setting out know your customer (KYC) processes and checks on origins and destinations of cargos. 

Staff at all levels also need to be trained to implement these policies, so that there are no weak links in the compliance chain.

Having a comprehensive sanctions policy and evidence of implementation will help to mitigate any fine, if a company or individual finds themselves caught up in a sanctions breach.

"The risk of being caught out is very small, but the consequences are huge - potentially business-ending; significant fines, being unable to trade in US dollars, ships being unable enter any ports worldwide," Church said.

Roberts suggested that there is not currently enough understanding of the reach or impact of sanctions within the commodity trading or shipping industries and a lack of guidance from bodies like the US Office of Foreign Asset Control (OFAC), which enforce sanctions law.

"OFAC has the power to be arbitrary while most of the world relies on US dollars," he said, adding that because the Middle East does not generally rely on the US banking system, companies operating there can avoid many sanctions restrictions.

Although the direction of US sanctions policy remains to be seen, following the departure of the country’s National Security Adviser, John Bolton, in September, lawyers and insurers say exporters, importers and shippers are better to be safe, by putting robust sanctions policies in place, than risk being penalized.

Ship seizures

Heightened political tensions have been illustrated by the seizing of ships by both sanctioning and sanctioned sides in recent months.

Vessels seized include the Iranian oil tanker, the Adrian Darya 1, by British Royal Marines off the coast of Gibraltar in July, for allegedly carrying oil to Syria.

Later that month, two British-operated oil tankers, the Stena Impero and the Mesdar, were captured by by the Iranian Revolutionary Guard in the Strait of Hormuz, for reputedly violating maritime law.

"Due to the political tensions between Iran and the US, in the context of the US’ withdrawal from the JCPOA [the Joint Comprehensive Plan of Action, which lifted EU and US sanctions against Iran in 2015] and the re-imposition of sanctions against Iran, the seizure of the Adrian Darya 1 further escalated political tensions, despite not being related to Iran sanctions," Fieldfisher’s Beck said.

The extended reach of international sanctions

Jurisdictions currently sanctioned by the US include:

• Cuba

• Iran

• North Korea

• Russia

• Syria 

• Venezuela

Different countries have their own lists of sanctioned jurisdictions and individuals, and it is possible to check these using various open data sources and lists of Politically Exposed Persons (PEPs). 

The UK implements its own sanctions, overseen by the Office of Financial Sanctions Implementation (OFSI), as well as EU sanctions.

Both UK and EU sanctions have similar jurisdictional reach, applying to all EU persons and businesses incorporated in the EU, even if part of a business or its customers are outside the EU.

US sanctions apply to US companies as well as foreign companies with a presence in the US.

The US’ OFAC is increasingly seeking extra-territorial reach to target foreign entities, and has created a new concept referred to as "secondary sanctions" for this purpose.

Secondary sanctions allow OFAC to target foreign individuals who facilitate significant transactions with entities sanctioned under US primary sanctions, even if the entity or the transaction has no connection to the US.

Individuals caught by secondary sanctions may find themselves sanctioned, or blocked from using the US banking system.

The EU has sought to neutralize the extra-territorial effect of US sanctions by introducing a Blocking Statute and a trade vehicle called the Instrument in Support of Trade Exchanges (INSTEX).

But most international organizations remain wary of OFAC’s ability to levy multi-billion dollar fines for non-compliance with its rules, as well as its power to block companies or individuals from using the US banking system.

This compares with OFSI, which has the power to impose fines of up to £1 million ($1.24 million*) or 50% of the estimated value of the breach, but which has so far barely flexed its muscles.

*Conversion made September 2019