CommoditiesJanuary2013COMMODITIESBULLETINIran Sanctions: focus on commoditiestradersEven commodities traders who have terminatedall business with Iran are not immune fromthe effects of the continuous expansion of EUand US sanctions against that country. Recentweeks have seen not only further restrictionson trade with Iran, but also increasing pressureon banks and other financial institutions tocarry out ever more due diligence on traders,counterparties and trades before processingany payments. This will have an impact evenon commodities traders whose activities do nothave any connection with Iran, but which arehighlighted as the result of banks’ increasedvigilance.The EU has expanded the list of productswhich cannot be traded with Iran andimposed new rules on transfers of funds toor from Iranian banks. In parallel, the US hasexpanded its extra-territorial sanctions totarget provisions of goods and services toIran’s energy sector (as well as its shippingand shipbuilding sectors) and the US regulatorhas made clear that they are looking closelyat trading companies and whether they assistcompanies to evade sanctions against Iran.This legislative and enforcement activity is areminder to commodities traders (and otherbusinesses) to ensure that they have in placerobust compliance programmes, first to ensurethat they are not inadvertently engaging inprohibited trade with Iran and second, sothat they can demonstrate to their bank thatpayments can be processed without delay.EU ban on Iranian natural gasSanctions published by the EU just beforeChristmas 2012 have added natural gas(including propane and butane) to the list ofcargoes which may not be purchased fromIran. There is also a specific prohibition onswaps involving natural gas from Iran. Bothprohibitions have immediate effect.
EU ban on sale and supply ofgraphite and metals to IranThe same sanctions add graphiteand specific raw or semi-finishedmetals (including copper, zinc andaluminium) to the list of cargoeswhich may not be sold or suppliedto Iran.Contracts concluded before22 December 2012, as well asancillary contracts necessary for theexecution of those contracts, benefitfrom a limited “grandfatheringprovision”, which allows execution ofthose contracts until 15 April 2013.EU rules on payments andtransfers of funds between EU andIranian banksNew rules on payments to Iranianbanks mean that EU banks areprohibited from transferring fundsto or from Iranian banks (even if noother Iranian person is involved inthe transaction) unless that transferis authorised. The rules extendto branches and subsidiaries ofIranian banks outside Iran, andalso to banks outside of Iran whichare owned or controlled by Iranianpersons, entities or bodies.These restrictions increase theburden on banks to carry outdetailed due diligence on their owncounterparties. This will inevitablyslow down some payments, whileEU banks satisfy themselves that thepaying or receiving bank does nothave an Iranian connection.US focus on trading companiesIn the United States, the Office ofForeign Assets Control (OFAC) hastaken aim at exchange houses andtrading companies. It says that insome cases, these are being used tocircumvent sanctions against Iran byconcealing or obscuring the identityof persons and entities so that banksprocess payments which wouldbe otherwise be blocked. OFAC isencouraging banks to increase theirdue diligence, which will inevitablyresult in delay and disruption tosome legitimate payments.While the OFAC publicationis primarily aimed at financialinstitutions and is drafted in theform of an advisory for banks,highlighting evasive practices whichthey should be looking out for, thesubtext is clear: OFAC is aware ofevasive practices which are beingadopted and will scrutinise carefullyany transaction which they considerbreaches sanctions against Iran,even if an Iranian connection is notclear on the face of the documents.SummaryThese recent developments reinforcethe need for all companies whichtrade with Iran, or which deal withcounterparties which may tradewith Iran, to have in place robustcompliance programmes to ensurethat they do not inadvertentlyengage in prohibited trade.Traders who are concerned thattheir counterparties have any Iranianconnection need to proceed withextreme care. Even traders with noIranian business need to be awareof whether the commodities whichthey trade are subject to restrictions,so that they can be prepared forincreased levels of enquiries fromtheir bank, together with possibledelays in processing payments.For more information, please contactDaniel Martin (pictured below),Associate, on +44 (0)20 7264 8146 email@example.com or your usualcontact at HFW.“Even traders with no Iranian business needto be aware of whether the commoditieswhich they trade are subject to restrictions,so that they can be prepared for increasedlevels of enquiries from their bank, togetherwith possible delays in processingpayments.”02 Commodities Bulletin
Can a charterer order STStransfers between VLCCs?Can an owner withholdapproval?In Falkonera Shipping Company vArcadia Energy Pte Ltd (20 December2012), the Commercial Court wasasked to decide whether a shipownerhad acted reasonably in withholdingapproval for a transfer of oil from avery large crude carrier (VLCC) to twoother VLCCs by means of a ship-toshiptransfer (STS transfer).The vessel mt “Falkonera”, a VLCC,was chartered under a modifiedBPVOY 4 charter form evidenced bya recap dated 18 November 2011.The parties had agreed she wouldcarry crude from Yemen to “1-2 portsfar east” but Charterers decided todischarge at Pasir Gudang, Malaysiaby STS transfer into two other VLCCswhich were being used as floatingstorage units. The Owners refused toapprove the two nominated VLCCsand Charterers had to discharge intosmaller vessels, causing delay andsignificantly increasing their costs.The Charterers claimed Owners werein breach of the charterparty.Part 2 of the standard BPVOY4form provided in Clause 8.1 that“Charterers shall have the optionof transferring the whole or part ofthe cargo ... to or from any othervessel including, but not limited to,an ocean-going vessel, barge and/or lighter ... All transfers of cargoto or from Transfer Vessels shall becarried out in accordance with therecommendations set out in the latestedition of the ICS/OCIMF Ship toShip Transfer Guide (Petroleum).”The charter also contained by wayof an addition to Part 1 a specific“STS lightering clause” whichprovided that “if Charterers requirea ship-to-ship transfer operation orlightening … then all tankers and/or lightering barges to be used inthe transhipment/lightening shall besubject to prior approval of Owners ...not to be unreasonably withheld”.The Owners argued primarily thatSTS transfers between VLCCswere precluded by the terms of thecharter. They also argued the ICS/OCIMF Ship to Ship Transfer Guide(Petroleum) did not contain anyreferences or recommendations forSTS transfers between VLCCs andtherefore implicitly prohibited them.The Court held that the wordingof Clause 8 and the STS lighteringclause was wide enough to grantthe Charterers an unqualified right toorder the vessel to perform an STStransfer to any oceangoing vessel,including a VLCC. Owners had onlya limited right of approval, limitedto the right to review the details ofthe nominated vessel to determinewhether or not she was suitable foran STS transfer.The Court rejected Owners’ argumentthat the ICS/OCIMF guide implicitlyprecluded STS transfers betweenVLCCs. The Court took the view thatthe guide provided general guidanceon same size ship operations and thisincluded transfers between VLCCs.The Owners were held to have actedunreasonably by withholding approvalon this basis.Alternatively, the Owners arguedthat they had acted reasonablyin withholding consent becauseof their previous experience of anSTS transfer between two vesselsof similar size in which difficultiesarose with the headlines, sternlines,moorings, springlines and breastlines.The Court accepted expert evidencethat there were special reasonswhy problems had occurred duringthe Owners’ previous STS transfer.Owners’ previous experienceappeared to have caused themto develop a blanket policy ofwithholding consent for STS transfersbetween vessels of a similar size. Inthis case, Owners were informed ofthe proposed mooring arrangementsand told that a number of partiesincluding an oil major had previouslycarried out an STS transfer betweenVLCCs at the proposed location.Therefore Owners had no reasonablebasis for withholding approval for theproposed transfers.In reaching this conclusion, theCourt noted the VLCCs nominatedhad no kind of peculiarity or defectthat rendered them unsuitable forSTS transfers. In fact, the Court wasagain persuaded by expert evidencethat subject to timing and properplanning there was no reason whythe vessel could not have performeda successful STS transfer withthe nominated VLCCs. The Courttherefore held Owners had breachedthe terms of the charterparty.“The Court rejectedOwners’ argumentthat the ICS/OCIMFguide implicitlyprecluded STStransfers betweenVLCCs.”Commodities Bulletin 03
This decision, particularly on theinterpretation of the ICS/OCIMFguidelines and the extent to whichowners can reasonably withholdconsent, should assist oil traderschartering VLCCs who wish to optfor STS transfers, subject to thewording of their charterparties.The most recent edition of the ICS/OCIMF guidelines on petroleum isthe 4th edition, dating from 2005. It iscurrently under review.For more information, please contactSimeon Newman, Associate, on+44 (0)20 7264 8535 firstname.lastname@example.org, or yourusual contact at HFW.Commodities BreakfastSeminarsOur Spring series of breakfastseminars, covering current issuesaffecting commodities trading, willtake place on 26 February, 12 and 26March 2013. Anyone with an interestin the field is welcome to attend.The seminars will be held at HFW’sLondon office.Those with enquiries about theseminars should contact our eventsteam on +44 (0)20 7264 8503 email@example.com.Conferences & EventsHFW MiFID SeminarHFW Geneva(31 January 2013)Robert FinneyMining IndabaCape Town, South Africa(4-7 February 2013)Alternative Dispute Resolution forCommodity TradingBeau-Rivage Hotel, Geneva(26 February 2013)Jeremy DaviesHFW Commodities BreakfastSeminarsHFW London(26 February, 12 and 26 March 2013)Lawyers for international commerce hfw.comHOLMAN FENWICK WILLAN LLPFriary Court, 65 Crutched FriarsLondon EC3N 2AEUnited KingdomT: +44 (0)20 7264 8000F: +44 (0)20 7264 8888© 2013 Holman Fenwick Willan LLP. All rights reservedWhilst every care has been taken to ensure the accuracy of this information at the time of publication, the information is intended as guidance only. It should not beconsidered as legal advice.Holman Fenwick Willan LLP is the Data Controller for any data that it holds about you. To correct your personal details or change your mailing preferences pleasecontact Craig Martin on +44 (0)20 7264 8109 or email firstname.lastname@example.org