ARTICLES | Iran, sanctions, and a disaster waiting to happen

Luke Hunt | The Diplomat, 2011.08.22

International sanctions against Iran’s national shipping line in response to Tehran’s nuclear ambitions are intensifying. The world’s largest container carrier, Maersk, has suspended operations at three Iranian ports, while the US Treasury Department has launched legal action against 121 companies and individuals affiliated with the Islamic Republic of Iran Shipping (IRISL).

The latest round of measures, aimed at Iran’s ballistic missile and nuclear programmes, came after IRISL was ostracized by the international maritime community with mortgage foreclosures on its ships and saw access to insurance greatly limited, prompting speculation IRISL is facing its own death knell.

However, as IRISL limps on, a new and potentially deadly risk has emerged – particularly in East Asia, where the monitoring of IRISL’s fleet has improved dramatically, but surveillance still remains patchy.

‘Any Iranian ship in Asian waters should send alarm bells ringing as Iran tries by all means to escape sanctions imposed for its involvement in nuclear weapons proliferation,’ says Carl Thayer, Emeritus Professor with the University of New South Wales. ‘The effect of the sanctions led IRISL to put unsafe ships to sea, where they pose a potential environmental hazard. Who will foot the bill if an IRISL ship is involved in an accident and spills its fuel? Asia states that allow IRISL ships into their ports should have second thoughts.’

Doing business with Iran and IRISL has become increasingly difficult in recent years with United Nations, European and US sanctions making even the most awkward operator cautious about trading with the country.

Tehran insists the sanctions are unjust and that its nuclear programme is purely for peaceful purposes; IRISL has echoed those sentiments and says its operations remain profitable and sound.

‘We don’t want nuclear arms, nor are we seeking to possess them,’ Iranian President Mahmoud Ahmadinejad said Tuesday. ‘These weapons are directed against people. We oppose them because of our religious beliefs – our religion says that they are prohibited. We are religious.’

While maintaining this stance, IRISL has also been accused of attempting to evade sanctions through a complex network of front companies to take advantage of loopholes in maritime security. But maritime law now poses a problem for IRISL and the waters that its ships ply.

Under the International Convention on Civil Liability for Bunker Oil Pollution Damage (2001), ship owners are required to hold insurance or other financial security to cover the liability for pollution damage in an amount equal to the limits of liability. This limit is usually up to $1 billion.

A well-documented cat and mouse game has therefore been played out as IRISL tries to buy adequate insurance for its operations. Of one specific class of insurance – protection and Indemnity, or P&I – the potential consequences could be felt well beyond the United States, Europe and Iran.

When goods are shipped around the world, the owners of the goods and vessels usually take out marine insurance. This cover, however, doesn’t generally extend to third party liability in the event of an accident.

‘P&I cover is third party liability insurance, which provides compensation to third party victims of maritime incidents,’ says Andrew Bardot, Secretary-General of the International Group of P&I Insurers.

It is essential to reassure port authorities that should a vessel run aground, collide with another ship, or become involved in an oil spill or other serious incident, that insurance cover is in place to pay for damage to ships, ports or the environment.

The enormous costs associated with the Deep Horizon spill in the Gulf of Mexico of between $2 billion and $5 billion, or the still evolving Fukushima disaster in Japan, have driven home the potential cost of nightmarish accidents. The Exxon Valdez showed litigation and reparations could take decades to resolve.

IRISL’s P&I cover was withdrawn by Lloyds of London in 2009 following UK sanctions against the shipping line. IRISL then found cover from a P&I provider operating out of Bermuda. In 2010, Bermuda passed legislation, bringing the country in line with the UK.

‘EU regulations have resulted in cover being terminated or not renewed for a number of designated Iranian shipping companies including IRISL and the NITC (National Iranian Tanker Company),’ Bardot says.

IRISL then approached the Islamic P&I club, which refused to provide cover.

Finally, IRISL secured P&I cover from Moallem, an Iranian insurer with no record of providing this type of insurance. NITC was faced with a similar issue with regards to P&I cover and has publicly stated it is using an ‘Asian P&I provider’ with cover that’s reliable, but more expensive than that secured through London. However, the lack of transparency on the identity of the provider does nothing to reassure on the reliability of the cover. Either way, on December 21, the US Treasury sanctioned Moallem.

All P&I providers re-insure against catastrophic losses, which kicks in for large exposures, but it isn’t clear who Moallem uses for re-insurance. Major European insurance houses wouldn’t be in a legal position to offer cover, leaving the Peoples Insurance Company of China (PICC) being touted as a possibility.

But analysts say that given its ongoing negotiations over access to Lloyds of London, it was highly unlikely that PICC would risk its international standing by being associated with a controversial and sanctioned client like IRISL.

Within maritime circles, the presumption is the Iranian government is the reinsurer of Moallem. But analysts say that given the doubts over Moallem and the severe restrictions on the Iranian government, banks and other institutions, the key question is how IRISL and Tehran would react to a shipping and environmental calamity, and what options would be open for redress and compensation.

It’s an issue that Greenpeace says must be addressed by the 10-nation Association of South East Asian Nations (ASEAN) given the threats to livelihoods and food security – and it says that any legal loopholes should be closed, while uninsured ships should be barred from entering regional ports.

Keith Loveard, a regional security analyst with Jakarta-based Concord Consulting, says an Iranian shipping disaster off the coast of Indonesia would likely cause a rift within government, as was seen with the leak from a Thai rig off the northern Australian coast last year.

‘The government would be caught between different currents, with the Foreign Ministry attempting to maintain smooth relations, while the Environment Ministry would be hopping mad and local communities would be left to deal with the mess,’ he says. ‘This is all very hypothetical. But the longer rogue ships operate without any insurance cover, the likelihood of something going wrong obviously increases.’

Others suggest one means of recovering costs incurred in dealing with an environmental incident would be to sequester any Iranian state-owned property or assets within the affected country, such as aircraft operated by state-owned Iran Air.

Gavin Greenwood, a risk analyst with Hong Kong-based Allan & Associates, says the recent seizure of a Thai aircraft used by the country’s crown prince in Germany to try and resolve a long standing dispute over money was one example over how this could work.

‘The International Court of Justice could also be involved, though this is a long term proposition,’ he says, adding that ‘Iran used the ICJ to claim restitution from the US after a US Navy warship shot down an Iran Air Airbus in July 1988.’

Mohan Malik, Professor of Asian Security at the Asian-Pacific Center for Security Studies in Honolulu, says the location of an accident involving the Iranian shipping line would also be important.

‘If it happens in the busy Malacca Straits or in the South China Sea, most littoral and major powers will be forced to contribute to the clean-up in order to facilitate an uninterrupted flow of energy and goods,’ he says.

‘Of course, there will be law suits against the Iranian government too, but the Islamic clerics can be expected to invoke Allah’s wrath on those who do so. Also, the International Maritime Organization (IMO) and other UN agencies would be called upon to play a greater role in ensuring that uninsured shipping lines aren’t allowed to operate in international waters.’

The IMO declined to comment on IRISL. However, sources close to the organisation say it has been undertaking amendments to its strategic direction in regards to liability and compensation claims in the wake of the Deep Horizon disaster.

Most maritime authorities demand a Blue Card from the P&I insurer as evidence that sufficient insurance is in place to meet liability requirements under the Bunker convention. But in Asia it’s not clear how routinely this is enforced or checked. If a maritime agency had doubts about the owners or operators ability to meet a liability it is able to deny a vessel entry or exit from ports or waters under its control.

Thayer says that lack of clarity in Asia demonstrates ‘yet again’ the weakness of the region’s security architecture and the reluctance of many Asian states to support sanctions.

‘By allowing the IRISL to continue in the face of sanctions, they are undermining not only good order at sea but inviting a disaster for which they will have to assume responsibility,’ Thayer says. ‘Banning IRISL ships from Asian ports would be a good first step in supporting the non-proliferation regime and protecting the marine environment against an accidental fuel spill.’

While the United States, EU and UK have taken the lead against Iran in regards to its declared and undeclared nuclear weapons ambitions, the real world impact of those sanctions are now being seen well beyond the Iranian interests that have been targeted.

IRISL continues to operate in Asian waters, with untested and unproven insurance. The responsibility for ensuring Asia doesn’t become a victim of events in Iran now rests squarely on the shoulders of Asian governments and their maritime authorities.

Source: http://the-diplomat.com/2011/08/22/maritime-disaster-waiting-to-happen/

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