Strait of Hormuz Tensions: Sanctions and Safe Passage Payments

The OFAC Position

OFAC confirms that US persons are generally prohibited from engaging in transactions with the Government of Iran, including the provision or receipt of services. This prohibition extends to dealings with the Islamic Revolutionary Guard Corps (IRGC), as well as Iranian digital asset exchanges.

The alert is explicit that sanctions risks arise irrespective of the method of payment. In that context, it refers to the possibility that such payments may take many forms, including digital assets, informal swaps or in-kind contributions (including payments framed as 'charitable donations'). As such, any form of toll or facilitation payment designed to secure transit through Hormuz is likely to fall within the scope of US sanctions and will be prohibited unless authorized by OFAC or otherwise exempt.

Risk to Non-US Parties (Secondary Sanctions)

Non-US parties are also directly affected through secondary sanctions exposure. OFAC indicates that foreign financial institutions involved in such transactions risk restriction or loss of access to the US financial system. In addition, non-US parties may incur liability where their conduct causes US persons (including insurers, reinsurers or financial institutions) to breach US sanctions.

Enhanced Due Diligence Expectations

OFAC expects maritime stakeholders to undertake enhanced due diligence on vessels transiting the Strait of Hormuz. This may include:

- Reviewing voyage histories, identifying any links to Iranian ports;

- Identifying any coordination with Iranian authorities;

- Seeking confirmation on whether any safe passage fees have been or will be paid.

Contractual Implications

Under English law, sanctions can affect charterparty performance in several significant ways.

In general terms, a charterparty may be illegal and void, or at least unenforceable, if by the law of the forum or the contract's applicable law there is a prohibition against the contract being concluded with or performed by one of the parties because that party is a national of a country against which there is applicable sanctions legislation. Illegality may be caused by the performance of a voyage or the payment of freight, contrary to sanctions legislation.

To the extent that these more specific sanctions clauses have been included in the charterparty, detailed analysis including an assessment of certainty and clarity of the parties' obligations is to be expected, should disputes be referred to the courts. As well as assessing the facts including the myriad further operational issues (see previous alert) against the relevant agreements, certainty as to the nature and level of sanctions exposure required by any specific clauses will be key.

Examples scenarios may include:

1. Payment prevented by the relevant financial institutions – particularly difficult, in circumstances where some financial institutions have adopted blanket policies confirming that they will not engage with certain jurisdictions, whether payments are actually prohibited or not;
2. Counterparty directly subject to sanctions – this too may not be straightforward, as the specific facts may present the possibility of securing a licence to permit the payment/activity and 'good faith' or 'reasonable endeavors' requirements may dictate that the parties should cooperate to apply for such a licence;
3. An unverified suspicion – for example, where one counterparty is concerned about another's ownership structure, having identified links to a directly sanctioned individual or entity. This could lead to a dispute about the extent to which the link is sufficient to assert that a party 'may' be exposed to a breach of sanctions or is in fact already so exposed.
4. Cargoes and attestations - where a vessel is fixed to carry cargo that is not prohibited and is supported by charterer or shipper attestations as to sanctions compliance. During the voyage, information emerges casting doubt on the accuracy of those attestations, for example suggesting a sanctioned origin. Even in the absence of conclusive proof, a party may be required to assess whether continued performance or discharge could expose it to sanctions risk.

It should be noted that some sanctions clauses will require a more definitive identification of a sanctions breach than may be the case. The BIMCO issued general sanctions clauses[1] - commonly adopted across the charterparty market – require the actual and demonstrable involvement of a 'Sanctioned Party' or 'Sanctioned Activity'. In an ever-changing geopolitical environment, coupled with dynamic sanctions regulation internationally, such certainty is not easy to identify.

Practical Considerations

Screening individuals and entities against restricted party lists and other tools is fundamental to a sanctions compliance programme. Common best practices include a proportionate, risk-based approach, with the extent of screening influenced by all of the appropriate factors (including jurisdiction, delivery channels and the value and significance of the relevant contracts), all assessed with risk appetite as in mind.

Due to the way in which sanctions have the potential to apply indirectly to companies as a result of ownership structure, screening the directors and officers of counterparties is crucial. In most cases, such screening should be extended to other parties in a transaction, such as agents, banks, and logistics companies. Where there are gaps in the information provided by counterparties, further requests can be made, however; those requesting such information should be prepared to react the responses received – or a lack of response - and to navigate towards a solution.

UK Sanctions Comparison

So far, the UK's regulator (the Office of Financial Sanctions Control) has remained silent on the sanctions implications of such 'safe passage' payments. However, there are some key distinctions between the UK and US regimes as concerns Iran, including a more targeted approach to prohibitions which seek to restrict the activities of specific groups, as opposed to the more comprehensive US-approach.

Conclusion

The Strait of Hormuz disruption now presents a dual risk profile of operational disruption and sanctions exposure. Stakeholders must carefully navigate overlapping sanctions regimes, ensuring compliance while managing commercial realities in a rapidly evolving geopolitical environment.

[1] https://www.bimco.org/contractual-affairs/bimco-clauses/current-clauses/sanctions_clause_for_time_charter_parties_2020/