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This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

 Briefing 
Author
Shaistah Akhtar and John Sendama
Date
03 November 2017

Iraq and Kurdistan - a sanctions update

In a referendum held on 25 September 2017, the people of the self-governing Kurdistan Region in northern Iraq voted overwhelmingly in favour of independence. This has resulted in a forceful response by the Iraqi government which has deployed troops to the Kurdistan Region, taken back control of oilfields and trade routes, and cut off large sources of revenue for the Kurdistan Regional Government (KRG).  

The ongoing controversy surrounding the referendum draws into sharp focus the need for EU individuals and businesses dealing with the region to be aware of the current sanctions landscape. We set out below a summary of the relevant EU sanctions affecting UK individuals/businesses, as well as how the Turkish Government's planned sanctions may have an impact, and some practical considerations to bear in mind during this period of uncertainty.

On 25 September 2017, the self-governing Kurdistan Regional Government (KRG) held a referendum in which 93% of the people of the Kurdistan Region in northern Iraq voted overwhelmingly in favour of independence. Although there is no administrative mechanism by which the result can trigger the secession of the Kurdistan Region, the referendum has caused conflict and uncertainty in respect of the future of the oil-rich region. The Iraqi central government has called for the referendum result to be annulled, whereas the semi-autonomous KRG claims that the result provides it with a clear mandate to commence secession negotiations. Clashes erupted following the referendum and the Iraqi federal government deployed troops to the Kurdistan Region, taking back control of strategically key territory. Last week, the KRG offered to "freeze" the referendum result in exchange for an immediate ceasefire and halt to all military operations in the region. The KRG hopes that this will facilitate negotiations with the Iraqi government on the future of the Kurdish people of northern Iraq.

The referendum included the oil-rich city of Kirkuk, whose status as part of the Kurdistan Region is disputed by the Iraqi federal government. The city has been held since 2014 by the KRG's Peshmerga fighters. However, following the referendum, Iraqi troops marched on the area and its oil fields.  Most of the oil produced by Kirkuk is exported by pipeline to the city of Ceyhan in Turkey. Iraq's oil proceeds are subject to a revenue sharing deal with the KRG, pursuant to which a state-controlled entity is responsible for oil exports and the KRG is entitled to a percentage of Iraq's net state revenues. However, this arrangement has been contentious, with the actual share paid to the KRG fluctuating over the years. Tensions have been heightened by the KRG's independent operation of the Kirkuk-Ceyhan pipeline and direct agreements with foreign oil companies.

As a result of these disputes and the Peshmerga forces' central role in fighting ISIS in the territory, the Kurdistan Region is part of a complex political, economic and military landscape in which neighbouring Turkey, Iran and Syria (which each have large Kurdish populations nearby) have all spoken out against the referendum. 

The ongoing controversy surrounding the referendum draws into sharp focus the need for EU individuals and businesses with dealings in the region to be aware of the current sanctions landscape. We set out below a summary of the relevant EU sanctions affecting UK individuals/businesses, how the Turkish Government's planned sanctions may have an impact, and some practical considerations to bear in mind during this period of uncertainty. 

EU SANCTIONS IN RELATION TO IRAQ INCLUDING KURDISTAN REGION (DIRECTLY EFFECTIVE IN THE UK PURSUANT TO REGULATION NO. 1210/2003 (AS AMENDED))

Trade Restrictions

It is prohibited to import or export Iraqi cultural property and other items of archaeological, historical, cultural, rare scientific and religious importance if they have been illegally removed from locations in Iraq.

Freezing of Funds  

All funds and economic resources belonging to, owned by, held by or controlled by (directly or indirectly) certain designated persons are frozen. Funds and economic resources must not be made available, directly or indirectly, to or for the benefit of designated persons.

The designated persons include immediate members of the late former President Saddam Hussein's family, senior officials of his regime and their immediate families, and any legal entities or bodies owned or controlled directly or indirectly by the aforementioned individuals. 

The Regulation provides that the relevant EU competent authority can authorise the release of frozen funds or provision of economic resources provided that certain conditions are met. The relevant competent authority in the case of the UK is HM Treasury. Companies or individuals who wish to seek such authorisation or whose business activities are affected by these restrictions should seek legal advice. 

Export restrictions

The Regulation provides that all proceeds from the export sales of petroleum, petroleum products (as listed in an Annex to the Regulation) and natural gas from Iraq shall be deposited into the Development Fund for Iraq in accordance with UN Security Council Resolution 1483 (2003). Any business operating in Iraq in the oil industry should take legal advice on these provisions.

Duty to Disclose Information

The Regulation imposes an obligation on natural and legal persons to immediately provide to HM Treasury (or such other competent authority as may be applicable) any information which would facilitate compliance with the Regulation. For example, details of any accounts frozen by the sanctions.

Turkish Sanctions

Given the instability in the region, the Turkish Government has been highly concerned about the Referendum and indicated the possibility of sanctions against the KRG even before the Referendum. 

Northern Iraq’s economy is dependent on Turkey in a number of respects, including the following: 

  • Most of the oil exports are made through Turkish territory via the Kirkuk-Ceyhan Pipeline and Khabur border gate, which is regarded as the KRG's gateway to the rest of the world. The KRG exports hundreds of thousands of barrels of oil per day through Turkey to international markets. 
  • Trade between Turkey and Northern Iraq is valued at USD 2.5 billion and Turkish investors have undertaken major projects in Northern Iraq.   
  • The majority of flights from Northern Iraq use Turkish airspace. 

After the Referendum, the Turkish Government's first actions were to cancel flights to Erbil and Sulaymaniyah and implement strict security measures at the border gates. 

Turkish President, Recep Tayyip Erdogan, has warned that Turkey will further close its border with Iraqi Kurdistan as part of the planned sanctions. Although he has not given a timetable on the introduction of further sanctions, he has indicated that it would be soon. The sanctions that are planned to be imposed are classified as economic, diplomatic and military sanctions by the Turkish Government. Accordingly, options include the following: 

  • Closing the Khabur border crossing or redirecting all dues and benefits earned at border control to the Central Iraqi Government which could substantially lower the income of the KRG.
  • Slowing down or freezing exports and oil and gas purchases from the KRG. 
  • Intensifying diplomatic efforts to convince other regional countries to implement similar measures.
  • Freezing some bank accounts.
  • Closing the air space.
  • Cancelling projects in the region and recalling Turkish investors.

Therefore, individuals and companies planning to undertake business in the region should be attentive to the new measures that are likely to be implemented by the Turkish Government. 

Practical Tips

UK individuals and companies operating in sectors affected by these sanctions, particularly the oil industry, should consider the following practical tips:

  1. Ensure that robust due-diligence procedures are in place to determine ownership structures and identify associated parties before entering into any transactions with Iraqi/Kurdish entities or individuals, to ensure compliance with relevant sanctions regimes. 
  2. Obtain information and assurances on the money trail when making payments to parties in the region.
  3. Negotiate suitable warranties and indemnities into contracts with parties close to high risk jurisdictions.
  4. Consider obtaining a licence from the relevant competent authority for certain activities which are not ostensibly covered by the relevant regulations.
  5. Ensure you have a robust internal compliance programme including an audited risk assessment, sanctions policies and procedures, training for staff and Board, and a well-rehearsed plan for dealing with sanctions violations.