Iran's Asian Fleet Hits Sanctions Wall

International efforts to thwart Iran's nuclear ambitions have heralded a change in the sanctions strategy of the United Nations Security Council, with an increased focus on the financial services and shipping that deliver Teheran the materials needed to pursue its disputed nuclear program.

Heading the list of targets is the Islamic Republic of Iran Shipping Lines (IRISL). With perhaps the biggest fleet in the Middle East, the carrier is struggling as banks foreclose on mortgaged vessels and insurers refuse to underwrite its operations. This has resulted in IRISL ships in Asian ports being literally “arrested” – defined under the 1999 International Convention on the Arrest of Ships as "any detention or restriction on removal of a ship by order of a court to secure a maritime claim" – as banks clamor for their money, causing delays to customers and incurring additional financial penalties.

IRISL vessels – numbering about 170 – are among the biggest and newest in the world, and were once routinely sighted in Hong Kong, Singapore, Thailand, the Cambodian port of Sihanoukville and in the Malaccan Straits dividing Malaysia and Indonesia.

Most of the goods shipped by IRISL were supplied by Chinese companies – a key factor in Iran's nuclear program.

David Albright, a US nuclear physicist who inspected Iran's nuclear facilities for the UN's International Atomic Energy Agency, said Iran was a regular purchaser of Chinese goods, including ultra high-strength maraging steel, specialty vacuum pumps, Kevlar and carbon fiber.

"Over and over, Iran goes there to buy things," Albright, president of the Institute for Science and International Security in Washington, told the Woodrow Wilson International Centre for Scholars.

No one doubts that sanctions are causing significant delays to Iran's nuclear enrichment plans, legal or otherwise. The US and its allies argue that Iran's nuclear program is a cover for weapons development and sanctions have been credited with hindering Iranian efforts to acquire carbon fiber and maraging steel, which are used in centrifuges that can enrich uranium to make a nuclear bomb.

"Iran has consistently used its national maritime carrier to advance its missile programs and to carry other military cargoes," said Stuart Levey, US Treasury undersecretary for terrorism and financial intelligence, after the fourth round of sanctions were imposed in June last year.

Teheran denies the allegations, saying its nuclear industry is for civilian use. However, it has yet to show any evidence of making fuel from enriched uranium.

The sanctions recently came to a head in Singapore, where a sheriff's sale of three IRISL ships was organized. The vessels were seized but released by the courts – spoiling a bargain hunters' day out – after the IRISL stumped up the funds to meet loan repayment demands.

The commotion over IRISL has left the authorities in Iran in a flap, prompting the carrier's chairman, Mohammad Hossein Dajmar, to go on the offensive through selective local and international media.

He has said the sanctions violate international law and he was scathing of Singapore and the banks after his three ships were impounded by the island-state.

"We had a loan and they [the banks] changed it from a loan to a due payment because of sanctions. In other words, they committed a violation. Because the loan contract was signed before the sanctions."

He also told the Financial Times that sanctions had not hurt the company's bottom line and that revenue for the eight months from March, 2010, was up 40 percent, while shipping transactions had grown 25 percent.

That stretches plausibility, however, given that another four European financial institutions are seeking the arrest of five recently built IRISL ships after alleged defaults worth $268 million.

Last November, two of the vessels were detained, the Decretive in Hong Kong and the Dandle in Malta – at the request of banks.

Twenty Hong Kong companies were linked to Teheran's weapons build-up and the territory says it is striving to pass laws that would allow it to seize Iranian-linked assets.

Typically each company is responsible for one vessel.

Japan, the European Union, Canada, Australia and the US have all passed laws enacting sanctions, and in some cases stronger measures have been enforced. South Korea temporarily closed 102 companies believed to be helping Iran's nuclear program, including the Seoul branch of Bank Mellat, an Iranian state-owned bank responsible for Korea's exports to Iran. it also has been sanctioned by the US and the EU as an IRISL lender.

Even older Iranian allies within the Organization of the Islamic Conference are distancing themselves. Indonesia has told Iran not to proceed with its weapons program, while Malaysia has signed off on a Strategic Trade Bill that signals a change in its stance, backing sanctions. The bill will enable authorities to crack down on companies and seize material bound for export that could be used in weapons of mass destruction. Kuala Lumpur had previously been forced to repudiate allegations it was aiding Iran's nuclear program.

WikiLeaks cables named two Malaysian companies – Electronic Components and Skylife Worldwide – for possible breaches of sanctions and acting as front companies for Teheran.

"As members of the UN Security Council, Southeast Asian states are obligated to comply with its resolutions. But capacity and political will are areas that often inhibit compliance. Singapore is generally the exception," Carl Thayer, with the Australian Defense Force Academy in Canberra, told the Bangkok Post.

Thayer said that in the case of Iran, there are different factors at play in each country.

He said Malaysia has begun to tilt more to the US in recent years. However, in Thailand, Universal Transportation Limited had proudly boasted of its position as an agent for IRISL with 14 vessels, despite Thailand being designated a major non-Nato ally by the US. The Cambodians are unlikely to act unless encouraged by China.

The UK acted unilaterally, freezing all business ties with IRISL under its terrorism laws, meaning the shipping line has been denied access to British underwriters and the first class insurance providers in London.

This has forced the carrier to take up insurance from the relatively unknown Iranian provider Moallem. It remains unclear whether Moallem is re-insured by the Iranian state or whether it purchases re-insurance coverage outside the usual European and US markets. This means that financing for IRISL's ships that existed prior to sanctions, although legal in principle, is now a much more risky proposition for the banks concerned, to say nothing of potential damage to a bank's reputation from dealing with a sanctioned entity.

IRISL also stands accused of attempting to evade sanctions through a complex network of front companies to take advantage of loopholes in maritime law. The companies amount to a paper shuffle, sharing the same address, staff and office space as the initial IRISL operations.

"The company started to use an array of deceptive practices to conceal its identity and skirt sanctions – including falsifying shipping documents, changing names and nominal ownership of vessels and even repainting ships," Levey said.

In 2009, IRISL established Hafiz Darya Shipping Company (HDSL), which focused on containers, and Sapid Shipping Lines, which specialized as a bulk carrier. A third company, Hanseatic Trade and Trust, was established to manage four new IRISL vessels.

As a result, another 24 affiliated companies were blacklisted in January. Sixteen were traced to the same Hong Kong address and another four to the Isle of Man. IRISL-owned vessels are often registered in a third country like Hong Kong, Germany or Malta.

The doubtful quality of insurance now held by IRISL and the failure to meet scheduled repayments on loans began prompting creditors to demand repayment in full.

The three IRISL vessels – the Tuchai, Sabalan and Sahand – that were seized in Singaporean waters late last year were German registered and impounded after a court warrant was issued on behalf of French banks Credit Agricole and Societe Generale and The Export Import Bank of Korea.

The banks were seeking $210 million in alleged loan defaults and damages.

Additional costs incurred by ship owners for an impounded ship can amount to about $35,000 a day in docking and fuel charges. Further fines are imposed for delays and there are outstanding loans for the 80 new IRISL ships, according to Iranian press reports.

"IRISL's other older ships are also thought to be at high risk of seizure, having also been re-mortgaged in exchange for new ones," one Western maritime source said. "It is impossible that the company can pay back all the loans ahead of time."

As a result of all the fees and impoundments, IRISL is being forced to close some routes and the carrier's days as a shipper of ballistic missile parts appear to be all but over.

Also finished is its future as a trusted name in trade, the latest casualty of sanctions on Iran.