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Cablegate: Iranian Shipping in a Post-Unscr 1803 Environment

VZCZCXYZ0007
PP RUEHWEB

DE RUEHC #2919 2751832
ZNY SSSSS ZZH
P 021811Z OCT 09
FM SECSTATE WASHDC
TO AMEMBASSY PARIS PRIORITY 0000
MISSILE TECHNOLOGY CONTROL REGIME COLLECTIVE

S E C R E T STATE 102919

SIPDIS
PARIS FOR POL: NOAH HARDIE
BRASILIA FOR POL: JOHN ERATH

E.O. 12958: DECL: 10/02/2034
TAGS: MTCRE ETTC KSCA MNUC PARM TSPA FR BR
SUBJECT: IRANIAN SHIPPING IN A POST-UNSCR 1803 ENVIRONMENT

Classified By: ISN/MTR Director Pam Durham.
Reasons: 1.4 (B), (D), (H).

1. (U) This is an action request. Please see paragraph
2.

2. (C) ACTION REQUEST: Department requests Embassy
Paris provide the interagency cleared paper "Iranian
Shipping in a Post-UNSCR 1803 Environment" in paragraph 3
below to the French Missile Technology Control Regime
(MTCR) Point of Contact (POC) for distribution to all
Partners. Info addressees also may provide to host
government officials as appropriate. In delivering
paper, posts should indicate that the U.S. is sharing
this paper as part of our preparation for the Information
Exchange that will be held in conjunction with the MTCR
Plenary in Rio, November 9-13, 2009. NOTE: Additional
IE papers will be provided via septels. END NOTE.

3. BEGIN TEXT OF PAPER:

(SECRET REL MTCR)

Iranian Shipping in a Post-UNSCR 1803 Environment

Summary:

As a follow-up to our 2007 Information Exchange paper on
the Islamic Republic of Iran Shipping Lines (IRISL), this
paper discusses the developments of Iranian maritime
shipping of WMD- and missile-related goods in the wake of
sanctions imposed under United Nations Security Council
Resolution (UNSCR) 1803 and United States Executive Order
(EO) 13382. These sanctions, in combination with the
downturn in the global economy, appear to be having
adverse effects on Iran,s primary maritime carrier of
controlled items -- IRISL -- and its ability to do
business, thereby indirectly impacting Iran,s ability to
deliver sensitive items to its own companies for its
programs. In response to these difficulties, IRISL has
adopted a number of changes to its activities and
structure in an attempt to disguise its Iranian
affiliation and avoid sanctions. The January 2009 M/V
MONCHEGORSK case demonstrates the extent of these denial
and deception efforts. Missile Technology Control Regime
(MTCR) members should be aware of these deceptive
techniques and continue to monitor IRISL for application
of these techniques to more sensitive shipments.

Background:

As noted in our 2007 paper, IRISL is the national carrier
for Iran and the twenty-third largest shipping line in
the world in terms of cargo capacity. Headquartered in
Tehran, the company is subordinate to the Ministry of
Commerce and has historically been owned by the Iranian
government. Although IRISL was recently privatized,
having its initial public offering of shares on the
Tehran stock market in 2008, the government probably
still maintains control of a significant number of
shares, although the exact percentage is unclear. As a
result of its Iranian domestic and government
connections, IRISL has long been Iran,s preferred
maritime carrier for the import of materials for its
ballistic missile programs.

IRISL,s size and global operations allow the company to
facilitate the movement of ballistic missile-related
materials. The company controls a fleet of about 150
vessels, including ships they charter, lease, and own.
This fleet includes modern container ships, breakbulk
ships designed for carrying general cargoes, and numerous
bulk carriers designed to carry large quantities of loose
material. IRISL maintains a vast network of port calls
and schedules, although several services have been
downsized or eliminated in the wake of the recent global
downturn in trade. This global reach has long
facilitated the import to Iran of controlled materials.
In a 2009 interview, IRISL claimed the company shipped
30.6 million tons of cargo in the previous Iranian year
and had revenues of $1.6 billion in 2007. By its own
estimates, the company carried approximately 35 percent
of Iranian cargoes, and had expansion plans designed to
increase that market share to 50 percent.

This extensive reach enables the company to easily move
materials and equipment for Iran,s ballistic missile and
WMD programs into the country. The use of the Iranian
flag for some of IRISL,s ships extends the power of
Iranian law over the ships, and is likely seen as an
added security benefit by Iran,s military programs.
Additionally, the company,s numerous services to Iran, a
market not extensively serviced by other shipping lines,
provides ease and convenience of transport through direct
calls in Iranian ports. Given these factors, IRISL
serves as the preferred carrier of goods for Iran,s
ballistic missile, WMD, and military programs.

In March 2008, the United Nations Security Council
adopted UNSCR 1803, which calls upon all States "to
inspect the cargoes to and from Iran, of...vessels, at
their...seaports, owned or operated by...Islamic Republic
of Iran Shipping Line, provided there are reasonable
grounds to believe that the...vessel is transporting goods
prohibited under this resolution or resolution 1737
(2006) or resolution 1747 (2007)." In September 2008,
the United States designated IRISL and 18 of its
subsidiaries under Executive Order (E.O.) 13382,
"Blocking Property of Proliferators of Weapons of Mass
Destruction." This designation freezes any U.S. assets
IRISL might have. At the same time, IRISL and 123 of its
vessels were also added to the U.S. Department of the
Treasury,s Specially Designated Nationals and Blocked
Persons List. The listing of these ships also includes
each vessel,s unique International Maritime Organization
number, which allows for the identification of each
vessel regardless of its owner or charterer. By blocking
these ships and IRISL affiliates, the Treasury Department
instructs banks to reject any fund transfers involving
these vessels or entities - effectively restricting IRISL
from doing business in U.S. dollars. Since requirements
for the dispersal of letters of credit insist that the
name of the transporting ship be included on the bill of
lading submitted to the bank to prove shipment, banks are
in a key position to detect the movement of cargoes on
IRISL ships.

Concurrent with the imposition of sanctions, the global
economic crisis resulted in a significant drop in the
flow of international trade by sea. As the demand for
shipping declined in late 2008 and early 2009, the entire
shipping industry has experienced significant financial
hardship, and responded by reducing services and
expenses. Numerous shipping companies have mothballed
ships for lack of paying cargoes - by some estimates
these ships amount to ten percent of the global container
fleet. IRISL has not been immune to these economic
pressures. These larger commercial factors have had a
significant effect on IRISL,s corporate finances, to the
extent that the Iranian government announced its
intentions to provide IRISL additional operating funds.

Post Sanctions Reaction:

Initially, public reactions of IRISL leadership to the
sanctions were dismissive. However, changes in IRISL,s
operating procedures -- implemented since September 2008
-- suggest that the company is actively taking measures
to minimize its Iranian identity and associated
vulnerabilities. Many of these changes, which probably
result in additional expenses to the company, have been
taking place at a time when IRISL is likely suffering a
significant decline in revenue due to global economic
conditions. These changes, while probably motivated at
least in part by an effort to remain commercially viable
in the face of sanctions, have the potential to mask the
movement of shipments to Iran,s missile and WMD programs,
and in some cases appear to be contrary to expected
commercial behaviors.

New Names for Ships

Since September 2008, the most noticeable change in
IRISL,s methods of doing business has been in the
abandonment of its thirty-year policy of using Iranian
names and flags for its ships. Since 1979, when the
company was nationalized in the wake of the Iranian
Revolution, the company has been characterized by its
extensive use of Iranian nationalist symbols in the
design, dcor, flagging, and naming of its ships and
fleet - e.g., ships were painted with the company name,
stack markings included the national colors and coat of
arms of Iran, ships were registered under the Iranian
flag, and ships were usually named after Iranian
provinces, towns, or religious figures, and most had
"Iran" in the name itself. Within six months of the E.O.
13382 designation, IRISL had changed the names of about
forty of its ships, with some changing their names
multiple times. The ships now bear English-language
names with no symbolic connection to Iran. Furthermore,
76 ships have left the Iranian registry and been
reflagged under flags of convenience: 54 ships have been
registered in Malta, and 18 have been registered in Hong
Kong. Other ships have been registered in Cyprus and
Germany.

New Owners and Registries

Additionally, commercial sources indicate that IRISL has
transferred the ownership of many of the listed vessels
to nominally independent third-party ship-owning or
management companies. These companies appear to remain
connected to IRISL, and there are indications that IRISL
remains the ultimate financial beneficiary of the ships,
operations. The use of these nominally independent
companies, a long common practice in the shipping
industry, represents a significant divergence from
IRISL,s traditional practice, which maintained IRISL as
its fleet,s registered and beneficial owners.

These changes are probably intended to facilitate IRISL,s
ability to move cargoes by obscuring its involvement in
routine transfers. While IRISL executives insist these
changes are unrelated to international sanctions, this
drastic change to past practice would seem to indicate
otherwise. Furthermore, these changes represent a
significant cost for IRISL in registry fees and
affiliated expenses. In addition to the fees paid as
part of the registration process, the flag used can also
impact operating costs such as port fees - countries can
provide discounted rates and tariffs for ships of their
own flag. Interviews with independent Iranian shippers
indicate that operating under foreign flags of
convenience is more expensive for an Iranian ship. Since
IRISL is currently experiencing a significant decline in
income given the global economic crisis, incurring such
significant expenses in a period of severely declining
revenue is contrary to expected commercial practices.

Financial Issues

According to trade publications, IRISL started to have
difficulty paying for its new-build ship orders in South
Korea as early as December 2008. In April 2009, these
shipyards refused to deliver three new-build ships that
IRISL had ordered in 2006 due to IRISL,s failure to make
its payments. While the global decline in trade and the
resulting decline in the value of ships have affected
many shipping companies, ability to finance new builds,
IRISL was the first and most prominent shipping line to
default on its payment obligations, implying that the
company may be in severe financial straits.

M/V Monchegorsk Case

Another example of a change in IRISL,s operations is the
case of the M/V MONCHEGORSK. On January 19, 2009, the
USS SAN ANTONIO conducted a consensual boarding of the
M/V MONCHEGORSK in the Red Sea. Owned by a Russian
company and registered in Cyprus, the MONCHEGORSK bore no
overt connections to Iran. However, examination of the
ship,s documents revealed that it was under charter to
IRISL, carrying arms-related materiel bound for Syria
from the Iranian Defense Industries Organization, which
is designated under UNSCR 1737. Cyprus, the flag state,
recalled the ship. The cargo was inspected in a Cypriot
port, and continues to be detained in Cyprus. The
Republic of Cyprus confirmed the cargo included arms-
related materiel and reported the incident to the UN
Security Council,s Iran Sanctions Committee which
determined the transfer was in violation of UNSCR 1747,
which prohibits Iran from the "supply, (sale) or transfer
... (of) arms or related materiel." While this cargo was
not associated with Iran,s or Syria,s ballistic missile
programs, the Monchegorsk case suggests a willingness by
Iran and IRISL to employ evasive measures beyond renaming
and reflagging in order to move goods in violation of
international sanctions.

At the time IRISL chartered the M/V MONCHEGORSK, several
of the company,s own ships were laid up outside of Bandar
Abbas, Iran. These ships, each of which would have been
capable of carrying a shipment of ammunition to Syria,
had been anchored for several months, probably for lack
of cargo. Chartering M/V MONCHEGORSK likely required
additional costs given that it would probably have been
less expensive for IRISL to use one of its own ships to
deliver the arms to Syria instead of paying another
company to charter a ship and crew. However, IRISL
apparently chartered the MONCHEGORSK not to save money,
but to obscure the Iranian origin of the sensitive
shipment.

This shipment would likely not have been identified if
not for the boarding of the ship and inspection of its
cargo and documents. The ship chartering sector can be a
very dynamic sector of the industry; ships can be
chartered for short time periods or specific voyages.
Charter arrangements are not always publicized - while a
chartered container ship will often be included on a
shipping line,s published schedule, a chartered general
cargo ship conducting a point-to-point delivery on a
short-term voyage charter is rarely common knowledge.
The use of chartered ships with third-country flags and
ownership therefore has the potential to obscure the
origins of sensitive cargoes.

Conclusion:

IRISL likely continues to support Iran,s ballistic
missile programs and the company countermeasures to
sanctions may make it more difficult to identify
sensitive shipments. While this is likely an effort
primarily to ease the impact of sanctions on its vast
commercial business, the measures implemented can easily
obfuscate the Iranian affiliation of the ships, line, and
cargo. MTCR Partners must remain vigilant to the true
IRISL affiliation of reflagged, renamed, and chartered
Iranian cargo ships. This can most easily be done
through a ship,s International Maritime Organization
number, which remains the same throughout its life.

Iran,s attempt to use chartered ships to transport
restricted materials presents the risk that shipments of
sensitive materials for Iran,s missile and other WMD
programs may go undetected. While it remains to be seen
if IRISL will try to use this method again, vigilance is
required to detect and identify the methods that Iran
could use to defy sanctions.

END TEXT OF PAPER.

4. (U) Please slug any reporting on this or other MTCR
issues for ISN/MTR. A word version of this document
will be posted at www.state.sgov.gov/demarche.
CLINTON

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