Sanctions consequences - BIMCO Bulletin

Sanctions consequences

REGULATION March 2020 The consequences of violating sanctions With sanctions on the rise, shipowners and operators face a tough task when it comes to ensuring they do not enter into business with a person or company subject to sanctions. If they fail the task, what are the consequences? Even with the best screening software in place, making sure sanctions are not violated can be a near impossible task, and the consequences of getting it wrong – from financial penalties to designation – can be devastating, according to law firm Crowell & Moring. Insurance The consequences of getting it wrong – from financial penalties to designation –canbe devastating By Mette Kronholm Frænde, Communications Manager and Editor at BIMCO An immediate consequence for a company finding itself dealing with a sanctioned entity – whether that entity was not identified at the outset or whether it was sanctioned in the middle of a contract – is the potential loss of insurance. With indemnity insurance, hull insurance and the rest of the usual precautions in place, discovering that a charterer – which looked ok at the first level of screening – is owned by a sanctioned person, will mean you have violated sanctions. “The biggest issue is that if your insurer finds out, they will take a look at it and – depending on the regime and whether the person is sanctioned by the US or by the EU – may decide to discontinue the cover,” says Michelle Linderman, partner at Crowell & Moring in the UK. “Insurers cannot run the risk of exposing themselves to the risk of breaching sanctions. This can mean no coverage is in place if there is an oil spill, an injury on board or other accident at sea,” says Linderman. Designation Another consequence could be designation. “If you breach a US sanction or transact with a US sanctioned party or geography, you yourself could get designated for dealing with that sanctioned party,” says Dj Wolff, a US-based partner at Crowell & Moring. “If you get designated, you will have no access to financial institutions. The banks will stop taking your money, they will stop dealing with any of your payments.” Such was the case when a number of companies got caught up in Venezuela to Cuba trade in 2019. For most companies this would likely lead to a bankruptcy filing, unless the business had a wealthy backer, such as a government. To take an example of how far-reaching sanctions can be, Wolff points to an example of a medium- sized German company operating in Germany, using neither US goods nor US banks. The company may believe that the US sanctions are primarily a US problem and will go about their business of contracting in Germany. If, however, that company is transacting with a US-sanctioned party or sanctioned jurisdiction, even a German business with no US ties is likely to face both practical and legal consequences. “Practically speaking, the vast majority of German banks, and most multinational banks, of which we are aware, will not bank their customer’s business with designated parties. Even if they are legally allowed to, they will decline because of internal risk policies. Legally speaking, such activity could get the German company designated, and that – for most companies integrated into global markets – can sound a death knell,” says Wolff. “The net result is that even companies with no US exposure find themselves declining activity with US sanctions targets because they can’t get paid, and to avoid a small, but devastating, risk of designation,” he adds. According to Wolff, over the past 12 months, the US has increasingly indicated that it will be more aggressive in trying to impose jurisdiction over non-US legal entities transacting outside US jurisdiction. If you get designated, you will have no access to financial institutions I believe the US will keep ramping up its pressure Reputation Getting appropriate sanctions clauses in the contract to try to protect the company is, however, unlikely to offer full protection from all the problems associated with contracting with a party that is – or becomes – designated, or finds itself involved in restricted activities. There can be lost earnings and significant costs may be incurred trying to sort out the mess. In addition, another consequence for which it is difficult to find protection for is that of damaged reputation. “It is very important that people carry out their due diligence, and that they have done their risk assessment. Most will go about their business every day and be absolutely fine, but when it does go wrong, the chances are that you will be all over the front pages of the major newspapers. Reputationally, that can be very damaging indeed,” says Linderman. Read also in the Bulletin: Are you violating sanctions? Connect with BIMCO Photo (top): Adobe Stock / lillolillo and alexlmx “I believe the US will keep ramping up its pressure over the next few months or years, using all the tools in its toolbox – including sanctions – to try to influence non-US behaviour,” he says. This can be done in a number of ways. Using so-called “secondary” sanctions, the US can limit a foreign company’s access to aspects of the US market: sourcing products in the US; shipping products to and from the US; or, most likely, accessing US banks by using the US dollar. Alternatively, it can go further and designate an entity as a “Specially Designated National” (SDN), effectively prohibiting all activity with that entity. “The worst-case scenario is an SDN designation, which will most likely wipe out your company,” says Linderman. “The best-case scenario is that you might lose your insurance. You may need to terminate services with your counterparty and try to sort things out, but much will depend on what sanctions protection you have in your contract, what clauses you have to protect you and what the actual sanctions breach is,” she says. In December 2019, BIMCO published two new sanctions clauses to meet geopolitical challenges. The clauses are available to download (registration required) from BIMCO’s website for time charter and voyage charter parties. Explanatory notes are for members only. Facebook Twitter Linkedin YouTube