
Judicial Interpretation of US Sanctions Law
One of the main issues concerning sanctions regimes is the uncertainty as to where the boundary lies between prohibited and permitted activities. This issue is caused largely by the lack of precedent in this area of law. At the end of 2024, the Court of Appeal of the Dubai International Financial Centre (DIFC) issued a rare judgment providing an analysis of certain provisions of US sanctions law. The court acknowledged the lack of prior judicial interpretation of applicable sanctions legislation. It provides a unique opportunity to understand how sanctions regimes should be interpreted in the DIFC and how they may be interpreted by other jurisdictions.
Factual Background
Iranian nationals ordinarily resident in Iran were the owners (“UBO”) of a company incorporated in Hong Kong (“Company”). The Company had a bank account in the UAE at United Arab Bank PJSC (“Bank”). The bank had indemnity insurance from the Dubai branch of Qatar Insurance Co (“Insurer”). The Insurer had a reinsurance policy with UK-based companies ultimately owned by US-based companies (“Reinsurers”).
The Bank’s employees fraudulently withdrew the Company’s funds. Following their conviction, the Bank settled the Company’s claim by paying the withdrawn amount plus expenses. In turn, the Insurer was found by the Dubai Court of Cassation to be liable to indemnify the Bank. The Insurer paid an indemnity to the Bank, however the Reinsurers, refused to indemnify the Insurer. They sought declaratory relief from the DIFC Courts and argued that payment should not be made because it would amount to the provision of services or funds to Iran, which would violate US law.
The Court of First Instance analysed relevant provisions of US sanctions law and held that payment was not prohibited by US law. The Court of Appeal agreed with this conclusion.
Relevant Law
The US primarily administers sanctions against Iran through the Iranian Transactions and Sanctions Regulations (“ITSR”).
Paragraph 560.204 of the ITSR prohibits a US person from supplying any services to Iran. This includes services provided in a third country with the knowledge or reason to know that such services are intended for supply to Iran. The prohibition applies to both direct and indirect supply.
Paragraph 560.410 of the ITSR provides that the prohibition on the provision of services to Iran includes services provided by a US person outside the US if performed on behalf of a person in Iran or if the benefit is received in Iran.
Paragraph 560.427 of the ITSR provides that the prohibition on the provision of services to Iran includes the transfer of funds or the provision of insurance services.
Paragraph 560.208 of the ITSR prohibits a US person from facilitating any transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a US person or in the US.
Reasoning
The judgment of the Court of Appeal addressed the following questions:
Would the supply of insurance services or payment to the Company be deemed to be “to Iran”?
The Court of Appeal reasoned that, since the UBO were Iranian nationals ordinarily resident in Iran, services or payments provided to the Company could potentially be deemed to be provided to Iran, but not necessarily. The court explained that they would not be provided to Iran if, for example, payment was subject to a security interest outside Iran, or if the Company was insolvent and the payment would be for the benefit of the creditors rather than the UBO.
On the facts, the court found that the Reinsurers did not provide any evidence that the insurance services and payment would be provided to the UBO and thus to Iran.
Did the Reinsurers have the knowledge or reason to know that the services or payment were intended for supply to Iran?
As to the phrase “reason to know”, the Court of Appeal reasoned that it requires a higher standard of notice than ‘ought to have known’, i.e., it requires specific information leading to belief, rather than just information giving rise to a sufficiently strong suspicion.
The Court of Appeal held that the Reinsurers did not provide any evidence that they had actual knowledge or had a reason to know that the insurance was intended for supply to Iran.
Did the provision of insurance by the Reinsurer to the Insurer constitute a supply of service to the Company?
The Court of Appeal held that it was clear that there was no direct provision of services. Neither the reinsurance cover nor the insurance provided cover to the Company. The court held that there was no indirect supply of services either. To arrive at this conclusion, the court had to answer the following question:
Did the law prohibit the supply of services, or the supply of the benefit of the service, in the context of the prohibition on providing services in a third country that are intended in turn for supply to Iran?
The Court of Appeal held that it was clear that the law prohibited the provision to Iran of the same service as supplied in the third country. The court went on to explain that “[i]f the US legislators had wished to prohibit the transfer of the benefit of the services as opposed to the services themselves, they would have said so.”
On the facts, the court found that the Reinsurers’ services were not re-supplied to the Company through intermediaries. At each stage, there was a separate, discrete, and free-standing liability between the relevant parties (the Reinsurers, the Insurer, the Bank, and the Company). The court also noted that the Bank paid a settlement amount to the Company before receiving the indemnity from the Insurer, and the Reinsurers had still not paid to the Insurer at the time of the judgment. The Company received services only from the Bank as its customer, and it did not need any services to be supplied by the Insurer or the Reinsurer. It was the Bank’s independent decision to obtain indemnity insurance, and it was the Insurer’s decision to obtain reinsurance cover from the Reinsurers. In other words, the court concluded that the Bank’s settlement payment to the Company was completely independent from payments under the insurance and reinsurance covers. Further, the court stated that even if one considers that indirect supply of services encompasses the supply of the benefits of those services, the Reinsurers’ case would fail on evidence. There was no evidence that the Company was even aware of the existence of the insurance or reinsurance covers.
Was it required to establish an intention to circumvent the sanctions to establish that a US person is liable for facilitating a prohibited transaction under paragraph 560.208 of the ITSR?
The Court of Appeal held that the intention to circumvent the sanctions was not required to establish the violation of facilitation. This was the only key point on which the Court of Appeal disagreed with the Court of First Instance, as the latter considered that such intention was a necessary ingredient of facilitation.
Did the Reinsurers facilitate a transaction prohibited under paragraph 560.208 of the ITSR (i.e., a transaction by a foreign person which would be prohibited if performed by a US person or in the US)?
The Court of Appeal agreed with the Court of First Instance that the definition of “facilitation” was “to enable or make easier.” Further, it held that the Reinsurers did not provide evidence to support the proposition that the Bank would not have been able to obtain insurance without the reinsurance. It was therefore not possible to conclude that there was a causative link between the reinsurance and insurance. Without that link, it could not be said that the Reinsurers facilitated the provision of either banking or insurance services to the Company.
Conclusion
The analysis of the Court of Appeal suggests the following principles in relation to US sanctions law in respect of Iran:
- Provision of services or payment to a foreign company owned by Iranian nationals ordinarily resident in Iran is likely to be considered a supply to Iran if there is evidence that the company owners benefit from the services or payment.
- To constitute a violation, a US person needs to have specific information leading to belief that the services provided by it in a third country are intended for supply to Iran.
- In the context of a US person providing services in a third country with the belief that the services are intended for supply to Iran, a violation will occur if the services themselves are supplied to Iran, rather than only their benefit.
- It is not necessary to demonstrate an intention to circumvent the sanctions in order to establish that a US person is liable for facilitating a prohibited transaction.
The judgment of the Court of Appeal has, no doubt, clarified the issues it analysed. On the other hand, the answers it provided raise new questions. For example:
- If the provision of service or payment to a company whose owners are Iranian nationals ordinarily resident in Iran is presumed to be a supply to Iran, what evidence needs to be provided to establish this? Is it necessary to provide evidence that the company is solvent and that payment is not subject to a security interest outside Iran? Is any other evidence required? How can a party that has no direct legal relationship with the Company obtain such evidence?
- What is “specific information leading to belief” as opposed to “information giving rise to a sufficiently strong suspicion”?
- When is the service itself provided, as opposed to the benefit of the service, in the context of indirect supply?
ADG Legal is a law firm headquartered in Dubai which specialises in dispute resolution and sanctions law. If you need assistance, do not hesitate to contact Arthur Dedels at ad@adglegal.com.