John R Keough Partner, and Thomas P Myers, associate, at legal firm Clyde, have written on Sanctions Considerations for Maritime Arbitrators.
Clyde noted that the US had generally imposed economic sanctions against countries and groups to discourage malign or terrorist activities, ranging from continuing human rights violations to the pursuit of nuclear armament.
In recent months the US had increased the force and scope of its sanctions regimes and had targeted the shipping sector in particular, directing a “maximum pressure” campaign on enforcement of Iran and Venezuela sanctions.
As foreign policy and sanctions focus more closely on the maritime and shipping supply chains, maritime arbitrators in New York, generally considered US Persons within the meaning of US sanctions law, faced a growing risk that US sanctions could apply in disputes to which they are appointed – and could even expose the arbitrator to sanctions, warned Clyde.
Such exposure would impose the burden on those arbitrators to recognize the risk and to consider the due diligence and other requirements necessary to comply with the relevant sanctions.
Clyde has summarized some potential pitfalls.
The sanctions regimes pose traps for the unwary, including the substantial risks that banks might not process arbitrators’ fee payments or awards, or that the provision of an arbitral service could confer a significant value or material benefit in violation of sanctions.
Sanctions considerations might also arise in maritime disputes where the arbitrators are invited to interpret a sanctions exclusion clause in a charterparty, or where sanctions call into question or prohibit the conduct of the arbitration by contractually appointed New York arbitrators.
Intersection of sanctions and maritime arbitration
Although the US government aims that sanctions impact those who are targeted or in the targeted country, the collateral impact of sanctions stretches far wider – both to persons and entities associated indirectly with the targets and to geographic areas outside the sanctioned regions. Clyde said that “this sweeping reach of US sanctions mandates that all persons who engage in transactions or similar activities that touch designated or blocked parties must be mindful of the sanctions risks and avoid running afoul of them”.
Since maritime arbitrators often addressed disputes that were flavoured with an international scope of diverse businesses and principals in the shipping sector, often with layered, obscure and complex structures, maritime arbitrators in New York would be prudent to become familiar with the impact that US, as well as EU and UN, sanctions programs have on their work.
In recent months US sanctions officials have publicly stressed that they were now targeting the maritime sector, including marine insurers, flag registries, ship owners, managers and charterers. Sanctions compliance or enforcement could often disrupt vessel or cargo operations, resulting in delays for vessels and in other chartering issues. Moreover, US sanctions programs could include secondary sanctions, which applied to non-US persons, including third parties engaging with targeted entities. Further, the burden of complying with sanctions rested with the individual parties, as the prohibitions applied regardless of whether the party knowingly or unknowingly violates sanctions. Managing such sanctions risk, therefore, required that arbitrators gain and maintain awareness of the potential scope and application of such sanctions.
An arbitrator could be subject to OFAC enforcement action where the arbitrator was considered a US person, or be subject to designation or secondary sanctions if considered a non-US person. Where arbitrators render their service to a party subject to US sanctions, they risk contravening the sanctions, which generally prohibit directly or indirectly providing services or benefits to sanctioned persons. The sanctions often allowed the provision of specified legal services to, or on behalf of, persons blocked by a sanctions program, “provided that receipt of payment of professional fees and reimbursement of incurred expenses must be specifically licensed”.
Sanctions risk could arise in maritime arbitration if for example:
- one of the entities or persons in the dispute is listed as a Specially Designated National (SDN) under a sanctions regime, including a shipowner, charterer, manager, cargo shipper, intermediate cargo owner or cargo consignee or end-receiver;
- one of the parties is connected to a sanctioned person, such as:
- a sanctioned person owning, controlling or having an interest in a party;
- the party owning, controlling or having an interest in a sanctioned entity; or
- the party affiliated with or covering a sanctioned entity or person, or a relevant insurer, reinsurer or insured;
- the subject matter of the dispute falls within the scope of a sanctions sectoral regime, including the use of the U.S. financial system for payments;
- one of the parties is a citizen of a country subject to a sanctions regime; and/or
- an arbitrator, mediator, expert or neutral party is a citizen of a country subject to a sanctions regime.
If an arbitrator recognizes a red flag in such a scenario, suggesting that sanctions risk exists in a dispute before that arbitrator, Clyde said that “prudence would counsel that the arbitrator or the arbitration panel exercise due diligence to explore the sanctions status of the parties”.
Where the arbitrators believe there is a risk of sanctions, they should consider whether OFAC would issue a specific licence to permit the arbitration and the parties to proceed without the risk of sanctions, or whether they should seek guidance from OFAC on whether the sanctions apply.
Clyde warned that applications for OFAC licenses or guidance could take some time and might add costs to the proceeding. However, a failure to recognize such potential hazards at the outset of an arbitration can cause significant disruption to enforcement of an award, payment of the award or payment of arbitration fees”, said Clyde.
A recent arbitration and its subsequent litigation highlight these issues. In United Media Holdings, NV v. Forbes Media, LLC, No. 16 CIV. 5926 (PKC), 2017 WL 9473164, at *1 (S.D.N.Y. Aug. 9, 2017), the U.S. District Court for the Southern District of New York observed the difficulty that the parties had in conducting the arbitration due to the involvement of a sanctioned party. Although an OFAC license was sought prior to the start of the arbitration, OFAC did not grant a license in time, and the arbitration was repeatedly interrupted by sanctions concerns: initially, by the repeated withdrawal of the sanctioned party’s representation, and later by the suspension of the arbitration by the American Arbitration Association until a license was granted.
On January 27th 2020, highlighting its campaign of vigorous enforcement of sanctions in the shipping sector, OFAC announced a settlement with Marshall Islands-registered Eagle Shipping International (USA) LLC Islands, which had its headquarters in Stamford, Connecticut. Eagle Shipping agreed to pay $1,125,000 to settle its potential civil liability for 36 apparent violations of the Burmese Sanctions between 2011-2014.15 OFAC’s announcement pointed out that the potential fine could have exceeded $9m.
The subsidiary of US vessel owner Eagle Bulk Shipping was found to have violated sanctions by carrying sand to Singapore for known SDNs in Myanmar during 2011 to 2014.