Trade sanctions: a 'neutral's perspective

Date published

31/07/2018

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On June 12 2018, Singapore played host to the highly publicized North Korea – US summit between US President Trump and North Korean Supreme Leader Kim Jong-un. While much has been said in the weeks following the summit about its significance, and its impact on US-North Korea relations – and the existing US sanctions against North Korea, we pause here to consider the position of “neutral” countries, such as Singapore, on trade sanctions, that are neither protagonists nor antagonists on the world stage and that are primarily interested in international trade.

Overview of Singapore sanctions regulations

Singapore implements sanctions primarily through:

  • The Monetary Authority of Singapore Act which applies to financial institutions such as banks and insurers; and
  • The United Nations Act – which applies to individuals and other entities.

These acts of parliament apply to persons within the jurisdiction of Singapore and to Singapore citizens outside Singapore. As a country that was founded almost 200 years ago as a free port and which still has the busiest transshipment port in the world, it is not surprising that Singapore has a genuine interest in facilitating world trade instead of restricting it. As such, Singapore generally only implements sanctions that mirror resolutions adopted by the UN Security Council through these Acts – and does not seek to independently impose its own trade sanctions against other countries or entities.

Having said that, Singapore does take its role as an international citizen seriously and does take steps to enforce sanctions regulations where there have been suspected breaches.

Singapore’s position on enforcement of UN sanctions regulations: Chinpo Shipping

Chinpo Shipping v Public Prosecutor was the first reported Singapore prosecution against a local company charged with offences under the Singapore sanctions against North Korea (implemented via the United Nations Act). While the accused company, Chinpo Shipping, was eventually acquitted, the facts of the case make for interesting reading and also illustrates how Singapore seeks to strike a balance between allowing free trade and fulfilling its obligations as a UN member country to enforce UN sanctions against sanctioned countries such as North Korea.

Chinpo Shipping was a very small Singapore registered family run company. The company had very close North Korean ties and had even shared premises with the North Korean embassy in Singapore. One of the companies that Chinpo had very close dealings with was North Korean company called Ocean Maritime Management (OMM) which was sanctioned by the UN.

An OMM vessel, the “CHONG CHON GANG”, was detained while passing through the Panama Canal and was found to be carrying two MiG aircraft, 15 MiG engines, surface to air missile components, anti-tank rockets and other weapons “hidden” under a cargo of sugar. Following investigations, it was discovered that Chinpo had been involved in the remittance of monies to pay for the vessel’s passage to and from Cuba via the Panama Canal and that between 2009 and 2013, Chinpo had been involved in 605 transactions for North Korea totaling US$40 million.

At first instance, the Singapore courts found that the transfer of monies by Chinpo had been made in connection with North Korea’s nuclear programme and therefore Chinpo was in breach of UN sanctions against North Korea.

The conviction was however overturned on appeal with the Singapore High Court finding that the fund transfers by Chinpo could not “fairly be described as a transfer that may reasonably be used to contribute to the nuclear-related… programs or activities of the DPRK”. The High Court found that the payments had no direct connection with North Korea’s nuclear weapons programme as the conventional weapons shipped were not capable of delivering nuclear explosives. The court further held that if it were to find otherwise, the court would be taking an over-inclusive interpretation of sanctions regulations such that it would be an offence to even pay for shipments of food or toiletries to North Korea if these items could indirectly facilitate the functioning of the North Korean nuclear programme. The High Court’s decision was however instructive in that the court also found that:

  • The High Court affirmed that the sanctions violations are strict liability offences – meaning that it is not necessary for the prosecution to prove that the accused company “knew” that the payments were contributing to North Korea’s nuclear weapons programme. The prosecution only had to show that the payments had been made and that these payments “may reasonably be used to contribute” to the North Korean weapons programme.
  • However, if the accused is able to show that the violation was due to a “mistake of fact”, this could be a defence to the charge. To avail itself of this defence, the accused would have to prove that it had acted “in good faith having exercised due care and attention to avoid the mistake”.
  • Courts should avoid adopting too broad or over-inclusive an interpretation of sanctions regulations as doing so would have the effect of prohibiting all financial dealings with North Korea generally rather than specifically targeting the North Korean nuclear programme – which is not what sanctions regulations are intended to do.

More recent cases: OCN (Singapore) Pte Ltd/T Specialist International (Singapore)

More recently, in March 2018, the UN issued a report identifying two Singapore companies OCN and T Specialist that had allegedly engaged in transactions with North Korea in breach of UN sanctions. The Report states that both companies had been exporting luxury goods to North Korea until at least July 2017 in breach of UN sanctions and that they had also routed payments through sanctioned North Korean banks.

In response to the UN Report, the Monetary Authority of Singapore (“MAS”) has stated that it was coordinating with the UN regarding its investigations into financial institutions implicated in the sanctioned transactions. Separately, Singapore’s Ministry of Foreign Affairs (“MFA”) has also affirmed Singapore’s dedication to upholding its sanctions regulations in accordance with the UN Security Council resolutions. In particular, an MFA spokesperson has emphasised that: “Singapore prohibits our financial institutions from providing financial assistance or services for or facilitating any trade with the DPRK, and requires them to remain vigilant against proliferation financing risks.”

While it is understood that these companies are being investigated by the authorities in Singapore, it appears that no charges have been made against the companies yet.

It is evident from these cases that Singapore does actively enforce UN sanctions regulations that are implemented through the MAS Act and the UN Act. Singapore however does not seek to unnecessarily impede trade with sanctioned countries such as North Korea in areas where trade is permitted, and further does not cut off all ties or business dealings with sanctioned countries. Accordingly, Singapore seeks to apply its sanctions regulations in a way that effectively addresses the mischief that they are intended to regulate – but without expanding the effect of the regulations to entirely prohibit all dealings / transactions with sanctioned countries.

Singapore’s position on other country sanctions regulations: Kuo Oil

While Singapore does actively enforce UN sanctions implemented through its local legislation, Singapore does not actively enforce sanctions regulations that are unilaterally imposed by other countries, such as the US. Having said that, US sanctions have clearly had an impact on Singapore businesses – even where such businesses have no direct connection with the US.

One of the first widely publicized instances of a Singapore company being found in breach of US sanctions was the Kuo Oil case. In January 2012, the US imposed sanctions against a Singapore trading company, Kuo Oil, for breaching US sanctions regulations against Iran (CISADA). The US had found that Kuo Oil had sold over US$25 million worth of refined petroleum to Iran over a two year period which was well beyond the limits permitted under US law. The US accordingly effectively banned Kuo Oil from receiving US export licenses, and restricted the level of banking and financing services that could receive from US financial institutions.

The position taken by the Singapore Ministry of Foreign Affairs when the news broke was that:

  • “(CISADA) is domestic US legislation and these are unilateral sanctions imposed by the US on individual companies for their dealings with Iran which are above and beyond the sanctions imposed by the United Nations Security Council (UNSC) which are mandatory on all UN members.”
  • “In general, we are not in a position to enforce the laws of other countries. But we expect that given the importance of the US in the world economy, companies with dealings with countries subject to unilateral US sanctions will take notice of this case and make their own calculations in the light of their own commercial interests.”

The statement issued at the time remains relevant today and accords with Singapore’s roles as a responsible global citizen that is neutral and that is pro-trade.

Continuing impact of US sanctions on Singapore: CSE Global

US sanctions continue to extraterritorial effect and have an impact on businesses in Singapore that engage in international trade/business.

In the more recent case of CSE Global, a Singapore tech company was found by the US to be breach of US sanctions, notwithstanding that it had no US presence.

The company and its subsidiary had entered into contracts with multiple Iranian companies (including US SDNs) in relation to the delivery and installation of telecommunication equipment in a gas field in Iran. CSE made various payments to these companies via its bank in Singapore – which the Singapore bank had in turn routed through US financial institutions.

CSE had however prior to making the payments issued a written undertaking to its bank in Singapore “not to route any transactions related to Iran through the bank, whether in Singapore or elsewhere”.

The US found CSE to be in breach of US sanctions in that CSE was found to have caused, by its conduct, US financial institutions to engage in the exportation / re-exportation of US financial services to Iran. This was apparently the first case where a non-US, non-financial institution had been targeted in circumstances where US financial institutions had been used to process payments involving sanctioned countries. CSE eventually paid the US a settlement of US$12 million.

As with the Kuo Oil case, what CSE had done was not in breach of Singapore sanctions regulations. Further the only real connection that CSE’s transactions had with the US was that payments had been routed through the US financial system – although CSE was primarily dealing with its own bank in Singapore.

The case however does illustrate how Singapore businesses, and those in other “neutral” countries can be caught up in sanctions imposed by third party countries. The advice by the Singapore Ministry of Foreign Affairs therefore clearly still holds true - given the importance of the US in the world economy, companies must take note of US sanctions and make their own calculations in the light of their own commercial interests. This is especially so where the Singapore businesses are actively involved in transactions involving both the US and US sanctioned countries.

About the team

Kennedys Legal Solutions’ sanctions and compliance practice group is part of a wider global offering. In Singapore, we specialise in assisting clients in the shipping, international trade and insurance sectors, with issues relating to trade sanctions, anti-money laundering and anti-bribery regulations.

As these regulations continue to change and evolve in both Singapore and globally, we recognise the importance of monitoring key developments and assessing the potential impact on our clients’ businesses. This enables our clients to make appropriate commercial decisions and to ensure their businesses and employees always comply with international trade sanctions and applicable regulations.

Together with lawyers from our offices across the globe, we are able to provide our clients with comprehensive, all-encompassing compliance and regulatory advice in relation to global sanctions, anti-money laundering and anti-bribery regimes.