Tuesday 20th Nov, 2018

TRADE & THE LAW: International sanctions Trumped

Image: Shutterstock
Image: Shutterstock

WHEN North Korea and the US met for coffee in Singapore, we knew that we have reached the point of no return on the globalisation spectrum. If even North Korea is prepared to acknowledge, albeit tacitly, that its future peace and prosperity is at least to some degree related to its connections and interdependence on the outside world, we have hit the tipping point; globalisation is now no longer a theory but has become a law.

The rest of the world has long recognised that individual countries and their economic growth and prosperity are connected to those around them. Apart from political exchange, trade and financial investment are the reciprocal lifelines that keep countries afloat. But the shield can also be used as a sword. Severing these critical lifelines can deprive a country of its lifeblood and force it to accede to requests in order to have the taps turned back on.

This can be done one of two ways: through a unilateral trade war or through trade and economic sanctions. Whilst both are topical, this article will consider some of the implications arising from a significant shift in the application of sanctions.

The flapper in chief
The one constant in each of the matters mentioned above (coffee with North Korea, the steel tariff trade war and shifting sanctions practices) is the US, or more accurately, President Trump. If Trump flaps his arms (and his tiny hands) in North America, cyclones can arise across the globe.

The broader international community, through the UN, has historically agreed to impose trade and economic sanctions against countries, entities and individuals where their unilateral actions pose a global security risk. The legitimacy of those sanctions comes from the fact that they are imposed by international consensus. Nations adhering to those sanctions are typically required to give effect to them through their domestic laws. Many nations, including Australia, may also choose to slightly enlarge the scope of those international sanctions and throw a few autonomous sanctions on the end. However, these autonomous sanctions are still largely in keeping with the international consensus.

In a departure from the norm, the US has unilaterally re-imposed a raft of significant sanctions against Iran that is very much at odds with the international consensus. Given that no one can sanction Trump’s tweets, it should come as no surprise that no one can sanction his sanctions. The Trump/US butterfly effect mentioned above means that this unilateral action may have some significant effects for businesses across the globe.

Why is Iran subject to sanctions?
Iran’s nuclear aspirations were seen as a threat to global security. In order to bring pressure on Iran to give up those aspirations, the international community imposed a series of trade and economic sanctions against it. As a result, the UN and many of its member nations imposed broad and far-reaching trade and economic sanctions on Iran, effectively cutting off many of the economic arterial flows into and out of Iran.

Sanctions pressure worked. In July 2015 an agreement was reached between Iran and several leading UN nations (including the US) whereby Iran would restrict its nuclear program in return for a gradual lessening of the global sanctions between 2016 and 2026. This agreement was known as the Joint Comprehensive Plan of Action (JCPOA).

The JCPOA resulted in a reduction of the broad and far-reaching sanctions imposed on Iran, leaving only those that are targeted towards its nuclear program. As implemented in Australia, those sanctions prohibited either the direct or indirect:

  • Export or supply of goods, materials, training or technical assistance to Iran which could be used for the purposes of weapons, chemicals or technology related to its nuclear program;
  • Provision of financial assistance, investment, brokering or other financial services relating to the above prohibited supplies;
  • Import, procurement, purchase or transport of arms and related material from Iran;
  • Conduct or assistance in relation to sensitive commercial activities relating to uranium mining, nuclear materials or weapons and technology related to any of the foregoing; and
  • Use or dealing in any asset owned by certain specified entities or individuals with connections to Iran’s nuclear program.

The above activities were prohibited without obtaining a sanctions permit for the activity from the Minister of Foreign Affairs, essentially on the grounds that the activity was in Australia’s national interest and subject to certain end-use and end-location verification measures.

The Trump card
However, in May 2018, President Trump announced the US was backing out of the JCPOA, reinstating all original US sanctions on Iran and revoking any sanctions licences granted under the JCPOA in two tranches, on 6 August and 4 November 2018.

The withdrawal doesn’t seem to be as a result of Iran breaching any term of the JCPOA. It seems that Trump simply thinks that he can get a better deal for the US by re-imposing sanctions.

The reintroduction of US sanctions on Iran will add further restrictions on the following:

  • Dealing in Iranian currency;
  • Iran transacting in US currency;
  • The trade of gold, precious metals, graphite, raw and semi-finished metals, coal and software with Iran;
  • Involvement in Iran’s automotive, ports, shipping, ship building, petroleum and energy sectors; and
  • Providing underwriting, insurance or reinsurance services to or in respect of the foregoing and dealing with Iran’s banking system.

Other countries, such as Australia, have maintained their commitment to the JCPOA and expressed disappointment at the US’ unilateral stance.

Implications for business
Australian businesses, indeed any non-US business may be inclined to say, “so what?” However, the enforcement of sanctions laws is an illustration of the long arm of the law. Sanctions laws typically cover the actions of registered businesses and citizens but also businesses and individuals who happen to have a presence, conduct business or simply be in a country. So, the US sanctions regime will be broad enough to cover non-US businesses and individuals who might conduct business into or out of the US, or be represented (including through subsidiaries) in the US or travel to the US. Further, there is scope for the US to add any businesses or individuals breaching its sanctions onto the “black list”. Those businesses and individuals then will likely be forced to comply with the US sanctions regime even though they are not US registered or citizens.

Previously, this saw logistics providers and shipping companies unwilling to ship goods to or destined to Iran, ports and stevedores unwilling to receive vessels registered in or owned by Iranian interests or even those that had called in Iran, banks unwilling to finance transactions relating to business in Iran or to process currency transfers to or from Iran and insurers unprepared to offer coverage in respect of goods being shipped to or from Iran or vessels owned by Iranian interests or registered in Iran.

With the reintroduction of US sanctions on Iran, businesses with any US footprint or trade will need to rethink their position, or feel the impact of the Trump-created cyclones on the other side of the world.

* Nathan Cecil is a partner (shipping, transport and logistics) at Holding Redlich

This article appeared in the August edition of DCN Magazine

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