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
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
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
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.
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
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,
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
"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
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
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
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
"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
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.
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
Jurisdictions currently sanctioned by the US
• North Korea
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
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
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
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