Despite the recent “ceasefire” brokered by Pakistan between the US and Iran, the Straits of Hormuz are not fully open as promised.
The situation on the ground is that ships wishing to pass the Straits safely need to either run the gauntlet backed by expensive war risk insurance and presumably with the agreement of the crew or negotiate with intermediaries with links to the IRGC and pay a toll for safe passage.
The fee for safe passage varies depending on the geo-politics of the ship, where the oil comes from and the destination. But there are reports of the IRGC asking for as much as US$1 per barrel. That’s US$2M for VLCC laden with 2 million barrels. Some payments have allegedly been made in Yuan but increasingly the IRGC are asking for payment in cryptocurrency.
Some shipowners and those who have an interest in restoring oil flows from the Gulf states are actively considering their options and making a toll payment is one of those options. But what are the risks?
We have seen this issue before but in a different context. In the period from 2005-2010 there was a huge increase in piracy off Somalia with many ships hijacked and only released after ransom payments were made. The legality of paying a ransom has been considered on the basis that to make such a payment might be considered illegal being connected with a crime.
In this case, it is debatable as to whether the demand for a toll for safe passage is a crime or, as Iran suggests, a legitimate payment for safe passage through Iranian territorial waters.
The more difficult issue however is that payments to entities affiliated with the IRGC are prohibited under sanctions legislation. The IRGC is considered a foreign terrorist organisation by OFAC and it is a designated entity by the EU and OFSI. It would therefore be a breach of US, UK and EU sanctions to make funds available to or for the benefit of a sanctioned entity.
The US has issued a temporary licence permitting transactions ‘ordinarily incident and necessary’ to the sale, delivery, or offloading of Iranian-origin oil or gas. However, it is not clear that this would cover a toll payment to the IRGC. The temporary licence however only covers Iranian original oil and gas. It does not cover oil and gas from the other Gulf states. However, the President of the US has also now (12/04) stated that ships that have paid a toll to Iran will be the subject of any blockade that the US puts in place. There is also no UK or EU licence in place for such payments.
This situation may of course change if the UK, EU and US were to accept some sort of toll system but that seems doubtful given the geo-politics and the fact that tolls would presumably be used to rebuild Iranian military capabilities and/or resume their nuclear ambitions. So for now the toll route remains inherently risky as it would expose the paying party to criminal liabilities under UK, US and EU sanction regimes as well as potentially under anti terrorist legislation.
Nick Burgess
Partner
