On Sanctions and Deregistration of Vessels: The Recent Practice of Panama

[Alonso Illueca is a lawyer and adjunct Professor of International Law at Universidad del Istmo]

On July 12, 2019, Panama announced its decision to withdraw its flag from any vessel violating “sanctions and international legislation”. This decision resulted in the removal of 59 ships (mostly tankers) from Panama’s shipping fleet due to their link with the Islamic Republic of Iran (“Iran”) and the Syrian Arab Republic (“Syria”). While Panama has the right to withdraw its flag from any vessel, its practice as the State with the world’s largest shipping fleet remains relevant for other stakeholders in the maritime industry. In addition, Panama’s interpretation of the concept of “international sanctions”, its de-registration of vessels policy and its obligations under a bilateral treaty with the United States, may complicate the country’s international legal standing and its status as the leading flag of convenience within the shipping industry.

Currently, neither Iran nor Syria are the subjects of a multilateral sanctions regime approved by the United Nations Security Council (“UNSC”). Sanctions regimes of a multilateral nature are traditionally viewed as instruments used to collectively exert influence in order to change undesired policy behaviors of the targeted States. While both Iran and Syria have certainly committed undesired acts (to say the least), the UNSC has failed to impose sanctions on such States. Particularly, in the case of Iran there is the Joint Comprehensive Plan of Action (JCPOA), endorsed by the UNSC through Resolution 2231(2015). This resolution was adopted under article 25 of the Charter of the United Nations (“UN Charter”), which establishes that “the Members of the United Nations agree to accept and carry out the decisions of the Security Council in accordance with the present Charter”. The JCPOA, which is also annexed to Resolution 2231 (2015), temporarily lifted a comprehensive sanctions regime established by the UNSC against Iran, in exchange for establishing caps on its enrichment activities and ensuring the peaceful nature of Iran’s nuclear program. Through Resolution 2231, the UNSC requested all Member States, including Panama, to take the appropriate actions to support the implementation of the JCPOA, and to refrain from any action which could undermine the implementation of commitments undertaken by the parties of the JCPOA.

In May 2018, President Trump announced the US’ withdrawal from the JCPOA, creating a complex legal dilemma for Panama. By “withdrawing” without claiming Iran’s non-compliance with the JCPOA and, consequently, activating the “reverse veto” mechanism, which would have allowed for the re-imposition of UNSC sanctions regime against Iran, the US left Panama with presumably conflicting obligations between the JCPOA and a Ship Boarding Agreement signed with the U.S.

Given Panama’s membership to the UN, it remains bound by the obligations imposed by Resolution 2231. However, due to its close security ties with US, there are an important number of bilateral agreements which confer rights and obligations to both parties. Specifically, Panama’s membership in the Proliferation Security Initiative could conflict with its UNSC’s obligations, as long as the central American country fails to define its position towards the Iran’s nuclear program, i.e. if it endorses the U.S. position towards the JCPOA or remains committed to its implementation.  

Since May 2004, Panama joined, by way of a  Ship Boarding Agreement, the US-led Proliferation Security Initiative. Through this Agreement, the U.S.  gained authorization to board and search Panamanian flagged vessels in international waters whenever it suspected the transport of weapons of mass destruction, items of proliferation concern and related equipment. Up until the US’ withdrawal from the JCPOA there was no apparent conflicting obligations for Panama. But as soon as the US re-imposed and tightened its unilateral sanctions regime against Iran, a conflict arose between Panama’s obligations under the Resolution 2231 and the Ship Boarding Agreement. Given that the US considers Iran as a State that it is currently undertaking nuclear proliferation activities, the Ship Boarding Agreement can be invoked by the US for boarding and searching Panamanian vessels. Furthermore, due to the new “comprehensive” nature of the sanctions against Iran, the US decided to target the Iranian oil and gas sectors through economic measures. Under an ordinary interpretation, neither oil nor gas would be the subject of a board and search operation under the Ship Boarding Agreement, as long as they are not used to produce or enrich fissile material. But it is very likely that an expanded interpretation of the Ship Boarding Agreement would include those sectors. 

While the UN has repeatedly confirmed Iran’s compliance with the JCPOA, the US has reasoned that the path of unilateral and extraterritorial sanctions will force Iran to capitulate to its demands and end its nuclear program. As a result of this situation, the JCPOA is now in jeopardy as Iran decided to exceed the enriched uranium limit as established and in contravention with the JCPOA.

In June 2019, I warned that it was very likely that a Panamanian flagged vessel could be involved, in the near future, in an incident were the US applied the Ship Boarding Agreement in order to board and search a vessel even though it was not carrying any nuclear or related material in violation of the JCPOA. In that scenario, the vessel would be carrying materiel considered to be in violation of the US’ own sanctions regime, not the JCPOA.

In July 2019, my warning materialized with slight variations. The British Royal Marines seized the Panamanian flagged supertanker “Grace 1” in Gibraltar. The vessel was being used by Iran to deliver crude to Syria. The US asked the United Kingdom (“UK”) to detain the vessel, igniting a controversy with Spain who has a longstanding claim over Gibraltar. Apart from the US request, the UK’s rationale for intercepting the vessel was the sanctions regime imposed by the European Union on the Syrian Government, which targets crude cargo and imposes restrictive measures pursuant to Regulation (EU) No 36/2012.

Once the vessel was seized (without Panama’s permission), Panamanian authorities, when inquired  about the UK-led operation, informed that the vessel had been removed from its registry since May 29, 2019 because of sanctions and/or illegal activities. This is not the first time Panama has been involved in such an incident. In 2018, Panama de-registered the vessel KOTI due to non-compliance with the UNSC sanctions regime on the DPRK. This time, however, it is different as Panama decided to remove 59 vessels from its registry not based on binding sanctions issued by the UNSC, but on sanctions issued by a single State (US). This new criterion would contradict Panama’s domestic legislation and its own process for removing a vessel from its registry. As provided by Law No. 57 of 2008, article 49, Panama can remove ex officio a vessel from its registry whenever international law requires the country to do so. In the case at hand, there is no international legal instrument requiring Panama to remove from its registry any vessel for the sole reason that it is transporting crude to, from or by Iran. The issue would become more complex if the reason for such de-registration was to combat the financing of terrorism. Recently, Panama adopted Executive Decree 32 (February 4, 2019) which establishes a procedure for withdrawing the Panamanian flag from any vessel involved in acts proscribed by the International Convention for the Suppression of the Financing of Terrorism and other relevant UNSC Resolutions. In accordance with such Decree, any cancelation or annulment of a ship’s registry must be undertaken in compliance with a resolution issued by the UNSC. As of this moment, the UNSC has not imposed a sanctions regime or issued a resolution against Iran or Syria for their presumed involvement in terrorism financing or related activities.

As noted in Panama’s Maritime Authority statement, there was an international alert regarding the vessel Grace 1, which indicated that the vessel “might be participating or being linked to the Financing of Terrorism, or in support of the destabilizing activities of certain regions led by terrorist groups”. The latter amounts to publicly linking Iran to terrorist financing or supporting destabilizing activities of terrorist groups, particularly, given the Iranian position in regards to the Grace 1 incident (see here and here). At this time, the official policy and the best accommodation Panama has found is to equate multilateral and binding sanctions issued by an international law body such as the UNSC with the ones unilaterally issued by States such as the US, Canada and the UK (see Panama’s Unidad de Análisis Financiero web page). This approach is problematic to say the least.

In response to Panama’s actions, Iran announced it had impounded a Panamanian flagged vessel MT Riah in the strait of Hormuz. The vessel, according to Iran, was apparently smuggling fuel in the Persian Gulf. This incident could be considered as an Iranian reprisal against the US and its allies, but involves, yet again, a small central American State with a Canal which it has pledged to maintain neutral. As soon as it became aware of this situation, Panama began a flag withdrawal process against MT Riah, citing as its reasoning the ship’s deliberate violation of “international regulations” by not reporting any unusual situation. There have been, at this time, no statements regarding the exercise of diplomatic protection of the vessel or its crew (see here, on the possibility of exercising diplomatic protection in favor of the crew irrespectively of their nationality).  

Given the size of Panama’s shipping fleet (+8,000 vessels), it is very likely that such incidents will be repeated. Consequently, Panama needs to avoid repeating its mistakes and establish an official stance towards the JCPOA taking due consideration compliance of the parties concerned (recently, Iran has ceased to comply with the JCPOA) and the separate nature of its other bilateral obligations. Most importantly, Panama needs to distinguish between unilateral and multilateral sanctions in order to ensure compliance with international norms. Some say that the devil is in the details; hopefully this becomes more evident in Panama’s future interactions with the international community.