• Bans on dealing in oil are a key feature of European, UK and US sanctions regimes targeting oil-producing countries (notably Iran and Syria). 
• An apposite illustration of the risks of unintended non-compliance with such regulations came to light in a recent employment tribunal case in London¹. The case revealed details of an instance of a large international oil trader which purchased crude oil in Iraq, apparently believing it to be Iraqi-origin oil, only to discover subsequently that it was in fact Iranian oil, in relation to which US sanctions applied. 
• The case serves as a stark reminder of the sanctions risk faced by oil traders and highlights the importance, for those who buy, trade in or transport oil, of doing thorough due diligence, to identify and verify the origin of the oil, rather than relying on the assertions of others.

The case

In 2019, an international oil company bought a shipment of 700,000 barrels of "Basrah Light" crude oil from Nigerian entity Oando² believing, based on the accompanying documentation, that it came from Iraq. Oando had, in turn, bought it from the UK arm of an Italian entity, Napag. Napag had represented to Oando that the cargo was not from a sanctioned country. Organic chloride tests had been done on the oil in line with normal practice, which produced unexpected results for Basrah Light but, through a series of mistakes (which were the focus of the tribunal’s hearing), these unexpected results were overlooked at the time. The tanker carrying the oil set sail for a depot in Europe.

Subsequent analysis of the crude produced further results inconsistent with Basrah Light, and further investigations, including using satellite tracking, established that the oil actually came from Iran. While the EU and UK no longer prohibit trade in Iranian oil, US sanctions (which were also applicable in this case) do. The company acknowledged that it inadvertently breached US sanctions and, as a result, had to reject the shipment, requiring it to be transported all the way back from Sicily to Iraq.

The risk

This episode highlights what is becoming an increasingly complex risk for oil traders: producers in countries whose oil exports are restricted by sanctions are understood to be employing increasingly sophisticated techniques to bypass sanctions in order to export the oil that provides a key source of revenue to them, by "rebadging" their own oil as coming from a non-sanctioned origin, such as Iraq. The unsuspecting purchaser of oil from the rebadged country, thinking it is buying legitimate indigenous barrels, might find itself guilty of sanction breaches, which will be treated all the more seriously if it cannot demonstrate having adopted appropriate compliance policies and procedures to confirm the provenance of the oil. 

Oil traders beware

This problem is not limited to oil from Iran. The same risk arises in relation to Syrian oil (arguably the greater risk for EU and UK operators as it may not be traded by any entity subject to EU, UK or US sanctions). By way of illustration, various reports³ suggest that Syrian oil is finding its way to northern Iraq, being mixed with local oil and sold on as Iraqi crude. This poses a risk not only for buyers of oil from Iraq, but also from other countries in the region – as one report notes: "Oilmen say that at least two pipelines violating American and EU sanctions now span the Tigris between Syria and KRG territory. Once in northern Iraq, according to Mr Allawi, some 10,000 barrels per day (bpd) flow through a pipeline to the Turkish port of Ceyhan, where it is sold as Iraqi oil."⁴ Such reports are not easily verifiable, and the precise route by which Syrian or Iranian oil may have come to the market is not the concern from the compliance perspective. Oil buyers at hub ports such as Ceyhan, cited in the quote above, which may sell oil from various points of origin, would be well advised to take particular care to verify for themselves the true origin of oil they are buying. Without conducting such checks, UK, EU or US traders risk direct regulatory enforcement, and all traders risk difficulty in selling on the oil that they buy.

This passing-off of sanctioned Iranian or Syrian oil as originating elsewhere is an issue to which sanctions authorities are increasingly alert. OFSI's Maritime Guidance⁵ warns that sellers are using elaborate techniques including document falsification to conceal true origins of oil. Indeed, in the case described above, the oil company confirmed that the documents provided to it with the shipment claimed (incorrectly) that oil was of Iraqi origin.

Precautions and procedures

So what can traders do to manage their risk? The key lessons here are these: know what sanctions restrictions apply to oil and to which countries' oil they apply; be alert to the possibility of false documentation and mixing of oil of two or more origins; have processes for, inter alia, the testing of the oil itself to establish its origin rather than relying on documents or representations; and look out for other red flags (such as price discounts and adverse media reports). Above all, proceed with caution and diligence. In the case described above, there were many red flags, including the fact that oil test results suggested a different origin than Basrah Light; the offer terms for the crude were at a significant discount to typical Iraqi trades; it was paid for in Euro (€)⁶; and was from a firm that was new to the region. Unfortunately, in this case, these red flags were simply missed until much later in the process at which point expensive remedial action was required.

There is clear regulatory benefit to managing risk appropriately. In UK and EU sanctions laws at least, sanctions prohibitions are not violated where it can be established that the offending party "did not know, and had no reasonable cause to suspect" that their actions would infringe the prohibition in question. This is a high threshold for an oil trading company. It does not mean that a blind eye can be turned, but it does mean that a trader who has appropriate policies and procedures in place (including due diligence on the provenance of the oil), and applies them, should be in a strong position to defend any sanctions breach allegation. 

As to the contents of a compliance policy, the EU published in 2019 a recommendation on trade controls⁷, which merits careful attention. The UK and US have also issued guidance, with similar elements. These would be a good place to start when framing a policy; however, any such compliance programme should be tailored to ensure it adequately tackles the risks faced by operators, taking into account its business role and sector. If a buyer has policies in place, makes all prudent enquiries and applies common sense and good judgment, they should have nothing to fear from the oil sanctions.

1. Employment Tribunal case number: 2204719/2019V
2. Oando plc
3. See, for example, Al Monitor article of 9 December 2019 and Economist article of 10 April 2021
4. Economist article of 10 April 2021 
5. OFSI Maritime Guidance dated December 2020
6. Oil trades are normally in US Dollars ($); where a party prefers to trade in Euro (€) or another currency, this may indicate (absent any other apparent explanation) that the party is looking to avoid exposure to US primary sanctions
7. Commission Recommendation (EU) 2019/1318 of 30 July 2019 on internal compliance programmes for dual-use trade controls under Council Regulation (EC) No 428/2009