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COSCO Shipping Tanker (Dalian) Co., Ltd. (“COSCO Tanker”) and COSCO Shipping Tanker (Dalian) Seaman and Ship Management Co., Ltd. (“COSCO Management”), as well as four other Chinese companies and several individuals, were placed on the list of “Specially Designated Nationals and Blocked Persons” (“SDNs”) by the US Office of Foreign Assets Control (“OFAC”). US Secretary of State Michael Pompeo announced that the sanctions were imposed due to these companies continuing to import Iranian oil in contravention of US “secondary sanctions” on Iran. For our earlier discussion of Iran sanctions, see here.
SDN: Full Blocking Sanctions
COSCO Tanker, COSCO Management and the other four sanctioned entities are SDNs effective immediately, and therefore are subject to full US blocking sanctions. There is no grandfathering or wind-down period. As a result, effective immediately, “US persons” (i.e., individual US citizens or permanent residents, entities organized in the US and any other persons in the US) must cease all transactions with these entities. Any charters with US persons (whether chartering in or out) should be terminated. Any loan agreements with US lenders should be subject to an event of default or termination for illegality. Any accounts that the sanctioned entities have in the US generally must be “blocked” or “frozen,” meaning that the funds cannot be accessed until sanctions are lifted. Furthermore, because US dollar payments are processed through the US, the sanctioned entities generally cannot deal in US dollars, meaning that they cannot make or receive payments on US dollar loan agreements, charters and other contracts.
Secondary Sanctions
The SDN designations also subject the sanctioned entities to “secondary” or “extraterritorial” sanctions, which target non-US persons. Following such designation, any non-US persons who have “materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” any of the sanctioned entities are themselves at risk of being added to the SDN list. In this way, the taint of a sanctions designation subject to secondary sanctions can be passed on from one entity to another[1].
"Any subsidiaries of COSCO Tanker and COSCO Management are subject to the same blocking sanctions. However, other entities in the COSCO group that are not owned, directly or indirectly, by COSCO Tanker or COSCO Management are not subject to sanctions."
Which COSCO Entities are Sanctioned?
Under the 50% rule, any entity that is owned 50% or more by one or more SDNs is itself treated as an SDN. Therefore, any subsidiaries of COSCO Tanker and COSCO Management are subject to the same blocking sanctions. However, other entities in the COSCO group that are not owned, directly or indirectly, by COSCO Tanker or COSCO Management are not subject to sanctions.
That said, due to the close proximity of the sanctioned entities, any transaction with a non-sanctioned COSCO entity should be carefully scrutinized to ensure that there are no violations. For example, a transaction with a non-sanctioned COSCO entity in which a sanctioned entity or individual is involved could be treated as an indirect violation of sanctions.
Next Steps
All (US and non-US) parties that have entered into agreements with COSCO Tanker, COSCO Management or any of the other sanctioned entities should carefully review their agreements and determine what recourse they have and what their options are. US persons that continue to deal with these entities are in violation of US sanctions law. Non-US persons that continue to deal with these entities are at risk of themselves becoming sanctioned.
Parties to agreements with other, non-sanctioned COSCO entities should carefully review these agreements as well. Many loan and other agreements include language providing that ownership or control of, or “affiliation” with a sanctioned entity constitutes a breach of the agreement. An agreement that contained such a provision may permit the counterparty to terminate or pursue other remedies.
Conclusion
The Trump administration has long threatened to enforce secondary sanctions against companies that transport oil from Iran. The designation of these Chinese entities and individuals should not come as a surprise. How the market and the shipping community will react remains to be seen.
[1] Following publication of this briefing, OFAC has provided informal guidance suggesting that non-US persons will not be subject to secondary sanctions for engaging in transactions with COSCO Tanker or its subsidiaries that do not otherwise violate sanctions.
