Monday, December 17, 2018

Guarantees and Indemnities in the Sultanate of Oman

Guarantees are instrumental in providing a means of security to the beneficiary of a guarantee by the person giving the guarantee (i.e., the guarantor) for the performance of a physical or monetary obligation by another party.  This concept has been recognised by law of the Sultanate of Oman in Sultani Decree 04/1974 promulgating the Commercial Companies Law (the “CCL”) (as amended), in Sultani Decree 55/1990 promulgating the Law of Commerce (the “CL”) (as amended), and in Sultani Decree 29/2013 promulgating the Omani Civil Transactions Law (the “Code”) (as amended).

Guarantee

A company or government entity may guarantee the obligations of its parent, subsidiary or, as the case may be, a government-owned company.  However, before a guarantee is given, it is essential that the shareholders of the guarantor give the necessary internal approvals to bind the company.  It is also necessary to be aware of the limitations placed on partners, managers and directors of a company.  Article 8 of the CCL stipulates that the aforementioned individuals cannot without the prior consent of the members of the company, or in the case of a joint stock company, its consent at general meeting, use the company’s property for the benefit of third parties.

Additionally, to guarantee third-party debts outside the ordinary course of business, or to mortgage company assets for matters other than securing company debts, requires express authorisation by the articles of association of a joint stock company or by resolution of the company’s members at a general meeting, in accordance with Articles 102(c)–(d) of the CCL.

Receiving a guarantee

It is worth noting that Article 758 of the Code stipulates that if a debt becomes due and the beneficiary under a guarantee does not claim the same from the debtor, the guarantor is entitled to notify the beneficiary that legal proceedings are necessary against the debtor to settle the debt.  If the beneficiary fails to initiate proceedings within six months of the date of such notification, and the debtor does not make the requested payment, the guarantor is discharged from his liability towards the guarantee, save where the debtor provides adequate security in respect of the guaranteed obligation.

From a lender’s perspective it is advisable to add wording to the guarantee agreement explicitly excluding and disapplying Article 758 of the Code.

Claiming on a guarantee

Guarantors are jointly and severally liable together with the debtor under Article 238 of the CL.  As such, the beneficiary of a guarantee can claim against the debtor, the guarantor or both at his option, and does not forfeit his right to claim against the other, until he has received full satisfaction of the debt owed and covered by the guarantee.  Notwithstanding the above legal provision, it is advisable that when drafting a guarantee, the beneficiary requests the inclusion of a clause which will allow him to make a claim directly against the guarantor under the guarantee in the event of default of the debtor, without first having to exhaust all claims against the debtor.

Obligations of the beneficiary

In the case that a beneficiary receives any property (i.e., security) from the guarantor to secure the guarantee, Article 241 of the CL imposes on the beneficiary an obligation to safeguard this property and, in so doing, take account of the interests of the guarantor.  If the beneficiary does not fulfil his obligation and the guarantor suffers a loss to the property as a result, the guarantor is released from his obligation to the extent of the loss suffered.

In case the debtor becomes bankrupt, the beneficiary of a monetary guarantee must make a claim for the debt in bankruptcy.  If he does not, as stipulated by Article 242 of the CL, his right of recourse against the creditor will be barred to the extent that the guarantor suffers a loss as a consequence of the beneficiary being at fault.

The beneficiary is further under an obligation to seek the approval of the guarantor prior to granting the debtor an additional period of time in which to fulfil his obligation.  In the event that the beneficiary does not obtain the consent of the guarantor, the guarantor may be “release[ed] [from] his liability for the guarantee” under Article 246 of the CL.

Obtaining a release of guarantee

The most common way to be released from a guarantee is through performance of the guaranteed obligation, or to receive the consent of the parties to the guarantee.  If a party in the latter case does not consent, and the debtor’s obligation is deferred, the guarantor’s obligation must also be deferred in accordance with Article 235 of the CL.

Indemnities

The courts of the Sultanate of Oman have not drawn as clear a distinction between the two concepts.  Whilst the CL specifically provides for guarantees, it is silent on the issue of indemnities.  However, if an indemnity has been agreed in contract, in principle there is no reason such agreement should not be recognised by the courts of Oman.  The contract would have to make explicitly clear that the beneficiary had the right to claim directly against the guarantor for a fixed amount without having to prove his losses were caused by the default of the debtor, and without any duty to mitigate his losses.

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Monday, December 10, 2018

The Maritime Law of Oman

The Maritime Law pursuant to Oman Sultani Decree 35/1981 (the “Maritime Law”) is the main source of law for matters relating to shipping and maritime in Oman. It is anticipated that a new maritime law shall be issued next year which may, among other matters, include updated provisions relating to vessel registration, vessel management and the arrest of vessels in case of abandonment. Until such time as a new maritime law is effective, some key aspects of the Maritime Law are as follows:

Nationality of a vessel 

A vessel shall acquire the nationality of Oman if it is owned by an Omani national or an Omani company, in accordance with Omani laws.[1] Vessels adrift at sea that are picked up by Omani vessels, as well as vessels which are confiscated for violating Omani laws, shall also be deemed to have Omani nationality.[2] Vessels with Omani nationality are required to be registered in Oman, fly the Omani flag and adopt a name pre‐approved by the competent maritime authority. Particulars such as the name of the vessel, the number and port of registration and the net tonnage must also be written in Arabic together with Latin characters in specified places on the vessel.

Port authorities 

The Omani port authorities carry out all of the inspections of a vessel, for example, ports regulate the arrival and departure of vessels as well as pilotage and towage together with berthing and the shifting of vessels.

Ports are also concerned as to safety and conduct of berthing and will ensure that adequate fire and safety precautions are taken. The port authorities also regulate port operations including licensing and permitting, communications and the handling, storage and delivery of cargo. The port authorities aim to ensure the prevention of accidents and ensure general safety within its ports.

The Maritime Inspection Department of the Ministry of Transport and Communication may carry out inspections in relation to Omani national vessels wherever they are located, and on foreign vessels at the ports or passing through Omani territorial waters.[3] In respect of national vessels, inspections will include verification that the ship is registered, that it has the documents required under the Maritime Law on board, and that compulsory conditions under the Maritime Law are complied with.

Inspectors of foreign vessels must be able to verify that the conditions laid down in international agreements relating to safety at sea and shipping lanes are being complied with.

The head of the competent maritime authority or his deputy may prevent a vessel from sailing if it has not passed its applicable inspections conducted pursuant to Article 28 of the Maritime Law.

Removal of a wreck 

In jurisdictions with a developed maritime legal system, a central authority is usually responsible for arranging the removal of wrecks in territorial waters. A central authority either has the power to order the removal of a wreck by a vessel owner or to remove the wreck itself and recover the cost of doing so from the vessel owner.

The applicable port authority shall have the right to seise the wreck of a ship by way of security for the costs of removing the wreck.[4] It may sell the wreck administratively by public auction and recover the debt due from the proceeds and in that regard it shall have priority over other creditors. The balance of the proceeds shall be retained in its treasury department for distribution to such creditors, if any.

Vessel operator’s responsibilities 

The Maritime Law contains detailed provisions relating to the crew and the regulation of marine employment. The operator of a vessel is obliged to pay wages in full, despite injury or sickness on the voyage, though certain exceptions apply. The operator, during the period of the voyage, is obliged to feed and accommodate the crew of a vessel without requiring payment from them and in addition the operator is bound to provide medical treatment free of charge to a crew member if he is injured in the service of the vessel or falls ill during a voyage.

The Maritime Law sets out detailed provisions relating to the powers and responsibilities of the master (otherwise referred as commander of the vessel). Among these, the master has the following powers:

  • Command of the vessel;
  • Maintain order;
  • Right to impose disciplinary penalties; and
  • Act on behalf of and represent the operator. 

  • The master’s responsibilities include the following:

  • To observe the technical principles of maritime navigation, agreements, maritime custom and provisions in effect at the Omani ports where the vessel is located;
  • To arrange the manning of the vessel, conclude the necessary contracts and take beneficial measures for the voyage;
  • To carry out the investigation of crimes committed on board the vessel and, if necessary, to order the arrest of the accused, conduct searches and take the necessary measures to prove the crime;
  • To carry out the instructions of the operator and keep him notified on matters relating to the vessel or the cargo;
  • To maintain on board the vessel documents required by law; and
  • To take necessary steps to protect the interests of the owner, operator, crew and passengers. Further to the provisions above, our June 2018 article “Arresting a Vessel in Oman” sets out the key steps to arresting a vessel in Oman.
[1] Article 10 of the Maritime Law
[2] Article 11 of the Maritime Law
[3] Article 28 of the Maritime Law
[4] Article 170 of the Maritime Law

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Monday, December 3, 2018

Key Considerations for Analysing Management Fee Provisions

The sponsor of a closed-ended fund, such as a private equity fund, typically receives a management fee to cover the basic overhead expenses of operating the fund and managing its investment activities, including salaries of the investment professionals and administrative staff, rent, utilities and travel. In the course of conducting due diligence on a prospective investment in a fund, investors should pay attention to the fund documentation and reporting by sponsors, and carefully review the provisions relating to the calculation of the management fee and allocation of expenses to the fund and its investors. Regulatory agencies, such as the U.S. Securities and Exchange Commission (“SEC”), have reviewed the business practices of many private equity firms and found that they pass on fees and expenses that should be covered by the management fee to clients without their knowledge. For example, Andrew Bowden, the former director of the SEC’s Office of Compliance Inspections and Examinations, said at a private equity conference in 2014 that “[b]y far, the most common observation our examiners have made when examining private equity firms has to do with the adviser’s collection of fees and allocation of expenses. When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50% of the time.”[1] Prospective investors may wish to consider the following questions when evaluating an investment in a closed-ended fund and the determination of the management fee:

  • What is the applicable rate of the management fee? Generally, the rate of the management fee is in the range of 1% to 2% per annum, though we have seen instances where the applicable rate has been higher or lower than this range.
  • Are there any discounts available on the rate? With increased competition to attract capital commitments and an escalating pressure to raise larger funds, it is becoming more commonplace for sponsors to offer discounts on the stated rate. Discounts may be offered in circumstances where (i) an investor’s commitment exceeds a stated minimum threshold (a size-based discount), (ii) an investor has invested in prior funds raised by the sponsor (a loyalty discount), or (iii) an investor participates at the first closing (an early closing discount).
  • What is the base on which the management fee is calculated? During a fund’s investment period, the management fee should be expressed as a percentage of capital committed to the fund by investors unaffiliated with the sponsor. It would be unusual for the sponsor to charge a management fee for managing its own committed capital (or the committed capital of its affiliates). To the extent it does, however, the investor should ensure that the management fee is also being charged to the sponsor and its affiliates such that they bear their proportionate share of the management fee.
  • Is the management fee subject to any offsets? Generally, sponsors agree to offset or reduce the management fee by amounts of any placement fees or organisational expenses incurred by the fund as well as certain transaction fees that may be received by the sponsor, its affiliates and their respective members and employees in respect of any portfolio investment. These transaction fees may include monitoring fees, director fees, commitment fees, break-up fees, investment banking or similar services and topping fees. The management fee will typically be offset and reduced by a specified percentage of these transaction fees. Normally, the percentage is in the range of 50% to 100%, and it is now viewed as market for the management fee to be offset by 100% of these transaction fees.
  • When does the management fee start to accrue? Historically, the management fee started to accrue from the fund’s first closing date as the sponsor effectively begins to manage the committed capital from that date. As sponsors tend to focus the first 12 to 18 months on raising additional capital and having subsequent closings, it is becoming more commonplace to see the management fee start to accrue from a later date, such as the fund’s final closing date, a “commencement date” or “effective date” which is a date determined by the sponsor, or the date on which the fund makes its first investment.
  • Who is responsible for paying the management fee? It is important to determine whether the management fee is paid by the fund rather than by the investors directly. In other words, is the management fee included within an investor’s capital commitment or is it expected to be paid on top of the investor’s capital commitment? An investor typically expects that its capital commitment represents its entire obligation to contribute capital to the fund and that it will not be expected to make further contributions in addition to its capital commitments to fund the management fee.
  • When does the management fee “step down”? Generally, the management fee should “step down” when the sponsor is no longer actively managing committed capital and/or devoting all of its time to the fund. This “step down” usually occurs at the end of the investment period where investors are, subject to certain limited exceptions, released from their obligations to make further contributions to the fund or once a successor fund starts to accrue fees.
  • When the management fee steps down, what adjustments are made to the base on which the management fee is calculated? Following the expiration of a fund’s investment period (or other event that gives rise to the stepping down of the management fee), the management fee should be expressed as a percentage of invested capital. Sponsors may, however, seek to have other amounts included in this calculation, such as amounts reserved and committed for investments or follow-in investments and outstanding indebtedness and borrowings. Further, to the extent that the fund makes acquisitions or dispositions of investments, or otherwise undertakes a write-down or write-up of an investment, such events may affect the base on which the management fee is calculated.
  • When does the sponsor stop earning the management fee? Generally, the management fee will continue to accrue during the fund’s term for so long as their remains invested capital. Where the sponsor seeks to extend the fund’s term or the investors elect for an early termination of the fund’s term, the investors (or the limited partner advisory committee) may be faced with negotiating an appropriate management fee for the sponsor to continue to manage the fund for the duration of the extended term and/or through its winding up and dissolution.

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Monday, November 26, 2018

Arrival of Value Added Tax (VAT) in Oman

Towards the end of 2016, the Gulf Cooperation Council (GCC) member states agreed and signed a Unified VAT Agreement (the “Unified Agreement”) for the introduction of value added tax (“VAT”).  The Unified Agreement sets out the framework through which each individual GCC member state will implement domestic VAT legislation.  The intention was that VAT would be implemented by the GCC states by 1 January 2018.

Implementation so far

The United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA) introduced VAT in accordance with the terms of the Unified Agreement on 1 January 2018.  Both countries enacted a VAT Act together with Implementing Regulations.  Bahrain has recently announced that VAT will be introduced in the country on 1 January 2019 and has published the Arabic version of its VAT law.  Qatar has indicated that it may introduce VAT later in 2019, while Kuwait may potentially delay implementation until 2021.

We understand that the Omani VAT legislation is currently being prepared and that VAT may be introduced as early as 1 September 2019, though it may be delayed until 1 January 2020.

Key terms of the Unified Agreement

Under the terms of the Unified Agreement, VAT will apply to goods and services at the standard rate of five percent.  Although the majority of the VAT compliance requirements are left to the discretion of the member states to be determined in their respective VAT legislations, the Unified Agreement requires businesses with an annual turnover of SAR 375,000 (or its equivalent from any other GCC member state currency) to register for VAT.  Businesses generating half of the turnover threshold may register for VAT on a voluntary basis.

Under the terms of the Unified Agreement, the following must be zero rated (i.e., subject to zero percent VAT rate):  medicine and medical equipment; the transport of goods and passengers (intra-GCC and international) and associated ancillary services; export of goods outside of the GCC; and certain transactions in gold and silver.  Certain food items (e.g. bread, milk), oil and gas including oil derivatives, and the supply of means of transportation for commercial purposes may be zero rated at the discretion of each individual member state.  The member states also have the discretion to exempt or zero rate, as they deem fit, supplies made in the education, healthcare, real estate, and local transport sectors.

The Unified Agreement requires VAT due on import of goods to be paid at the first point of entry in the GCC.  However, in the event that goods imported are exempt or zero rated in the country of importation or exempt from customs, such goods will be exempt from VAT.  Financial services are also exempt from VAT under the terms of the Unified Agreement.

Preparing for VAT in Oman

Although VAT is unlikely to be introduced in Oman until 1 September 2019 at the earliest, it is best to start preparing for the implementation of VAT sooner rather than later.  The UAE did not issue its VAT Implementing Regulations until November 2017, while KSA only issued them in September 2017.  In both instances, companies waiting for the issuance of the Implementing Regulations in order to prepare for VAT realised they did not have enough time to fully comply with the legislation.

It is imperative for companies to review existing contracts which will continue until 1 September 2019 or beyond and determine if the contracts include clauses relating to the payment of VAT.  In the event that such transitional contracts do not have VAT clauses, it may be useful to determine if the counterparty will agree to an amendment to include a VAT clause, and if it is in the company’s interest to do so.  It may also be helpful to identify what portion of the supply will be subject to VAT.

In the event that transitional contracts do have VAT clauses, it is worth considering whether the company will practically be able to collect the amount of VAT chargeable in respect of such contracts, particularly if the payment in respect of such contract has already been made.  For example, in the UAE insurance companies struggled during the transitional period to collect VAT in respect of individual insurance policies where the premium had already been paid.

All contracts expected to continue until 1 September 2019 or beyond should include relevant VAT clauses and the parties should determine who will be responsible for paying VAT.  Companies should also consider the impact VAT will have on cash flow, particularly in instances where customers are invoiced but will not be required to make payment until later (or where a customer usually pays the invoiced amount late).  VAT is payable upon the issuance of a tax invoice, regardless of whether the customer has paid such amount.  This may have a significant impact on a company’s cash flow, and may require reconsideration of payment terms.  Third-party vendors may also be reconsidered on the basis of whether or not they are VAT registered, which will allow the company to deduct input tax.  In the event that a company has many customers outside of Oman, yet within the GCC, the treatment of VAT on supplies to such customers should also be considered.

In the case of group companies, the Unified Agreement provides for a group of companies in the same member state to be treated as a single taxable person (a “tax group”).  The group of companies will need to determine if it advantageous for them to register as a tax group.

On a practical note, companies will need to ensure that their software takes into account VAT pricing and that they are able to issue tax invoices in accordance with the relevant legislation.  For example, in KSA, VAT invoices for amounts over SAR 1000 are required to be in Arabic.  As a result, all companies needed to ensure that they had the relevant software to issue VAT invoices in the requisite form from the day the VAT legislation went into force.

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Monday, November 19, 2018

Secondment of Employees in Oman

The Oman Labour Law issued by Royal Decree 35/03 (as amended) does not provide for or recognise the concept of secondment.  However, in practice, it is fairly common for foreign commercial companies to second their employees to local entities pursuant to a secondment agreement with the new company or the local partner.  This facilitates compliance with local law requirements, which require mandatory permits for the secondee to be employed and to reside in Oman.

Over the years, certain conventions have evolved which do not have the force of law, but which most companies follow when seconding employees in Oman.  Below we set out some of the more important of these conventions:

  1. The secondee always remains the employee of the foreign company regardless of any agreement that the local company may be required to enter into with the secondee for the purpose of obtaining employment permits.
  2. The local company “employing” the secondee and the foreign company providing the secondee should enter into a secondment agreement setting forth the terms of secondment and providing essential safeguards for the local company, foreign company, and the secondee.
  3. The local company should act as the local sponsor for the secondee for the purpose of procuring the requisite visa and the residence permit for the secondee and, as the case may be, for the family members of the secondee under the same sponsorship.
  4. The local company should provide the necessary amenities to the secondees (and to the dependants, if agreed) during the secondment in accordance with the agreement between the parties as indicated in the secondment agreement.
  5. The secondees are expected to perform their duties in Oman in accordance with the terms of their secondment and the policies of the local company.
  6. The foreign company is expected to withdraw the secondee immediately in case of misconduct or breach of any provision of the local laws by the secondee.
  7. Any material change to the job profile or designation of the secondee is subject to mutual agreement between the foreign and local companies.
  8. As the provisions of the Omani labour law would apply to all persons employed in the private sector including secondees, sufficient safeguards must be provided in the secondment agreement to exclude the applicability of Omani labour law and the jurisdiction of Omani courts in case of disputes arising from the secondment. 


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Monday, November 12, 2018

Replacing London Interbank Offered Rates (LIBOR)

Current background

Following the 2008 financial crisis, liquidity in the interbank loan market fell significantly to the point where over seventy percent of the bank quotations on which LIBOR is set were based on judgements by the panel banks as to their own costs of credit, rather than being based on the interest rates for actual interbank loan transactions.  Not surprisingly, as came to light in 2012, the LIBOR market became subject to manipulation by bank participants.  While UK bank regulators undertook various reforms to address the problem, because liquidity has not returned to the market, concern over the reliability of LIBOR persists.  Consequently, the UK Financial Conduct Authority (FCA), which began regulating LIBOR in 2013, has promoted the phase-out of LIBOR in favour of reference rates based on verifiable market transactions.  The FCA has targeted the end of 2021, a little over three years from now, for the phase-in of new risk-free reference rates (RFR) to be completed.  While it remains possible that LIBOR also will continue to be quoted after 2021, given the uncertainty, floating rate debt, as well as swaps and derivatives, with tenors extending beyond 2021 should include appropriate LIBOR fallback and replacement provisions.

Alternative RFRs

Various currency-specific industry working groups, in coordination with their relevant regulators and central banks, are developing the new RFRs expected to replace LIBOR.  In the U.S., with respect to the dollar, the effort is led by the Alternative Reference Rates Committee (ARRC).  ARRC is an ad hoc committee convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York and is comprised of representatives from leading U.S. banks, industry groups, and regulators, including the U.S. Treasury, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission and Securities Exchange Commission.  ARRC has identified the so-called Secured Overnight Financing Rate (SOFR) as the reference basis for a U.S. dollar RFR.  SOFR is a volume-weighted median of rates on overnight repos collateralised by U.S. Treasury securities.  The New York Fed began publishing SOFR in April 2018, and overnight indexed swaps and futures in SOFR already have begun trading.  Once sufficient liquidity develops, ARRC intends to fashion term reference rates based on SOFR derivatives.

In the UK, the effort is led by the Working Group on Sterling Risk-Free Rates operating under the auspices of the Bank of England.  This Working Group has identified the Sterling Overnight Index Average (SONIA) as the RFR basis for pounds sterling.  SONIA, which is administered by the Bank of England, has long served as the reference rate for sterling overnight indexed swaps.  It represents the mean of interest rates paid on overnight wholesale deposits, where credit and liquidity risks are minimal. 

The challenge posed by SOFR, SONIA, and equivalent RFRs being developed for the euro, yen and Swiss franc is that they all are backward-looking overnight rates and so do not compensate for the forward risk and time value of term lending, whether it be one week, one month, or longer.  LIBOR, by contrast, is forward-looking over several different maturities.  LIBOR compensates for term risk and provides lenders and borrowers certainty as to the cash flows during each interest rate period.  In addition, SOFR is secured by U.S. treasuries and so nearly risk-free, while LIBOR is unsecured and responsive to bank risk generally.  SONIA is similarly low risk.  SOFR and SONIA, therefore, are likely in most circumstances to be lower, less volatile rates than LIBOR, implying that different margins will be required to achieve equivalent effective interest rates.  At this point, while under development, the mechanics, timing and ultimate availability of forward-looking term rates based on the new RFRs remain uncertain.

Implications for current floating rate debt

Although the phase-in of RFRs is not targeted to be completed until the end of 2021, floating rate notes and syndicated loans with tenors beyond that date are already being placed in the market.  It is important, therefore, that new debt instruments include provisions which, as best they can at this point, anticipate the replacement of LIBOR.

While the ultimate nature of the RFRs to be implemented by the end of 2021 is not yet known, it is likely that they will not be economically interchangeable with their corresponding LIBOR rates, and so it is unlikely that the new RFRs can be slotted into existing loans with their margins as currently priced without resulting in unintended value transfers to either lenders or borrowers.  Consequently, it appears the best that can achieved at the moment in new loan documentation to address the risk that LIBOR will become unavailable, unreliable or non-standard during the term of a loan is to include provisions which facilitate amendments undertaken specifically to reset the interest rate reference and margin to accommodate the mechanics and economic metrics of the new RFR.

In the syndicated loan market, the general rule has always been that the unanimous consent of all lenders and the agreement of the borrower is required in order to change the rate of interest.  In the case of conversion to new RFRs, however, because the new metrics will be well established and understood by the time replacement is necessary, and the transition will be undertaken on a market-wide basis, lenders and industry groups appear comfortable with relaxing the lender consent requirement, generally to a majority in interest of the lenders.

In the UK market, the Loan Market Association (LMA), which works to standardise documentation for English law-governed credit agreements, has published a set of provisions addressing the replacement of LIBOR.  These provisions (i) identify the changes in LIBOR or the market, including but not limited to the cessation of LIBOR quotations, which would trigger the relaxed lender consent threshold for interest rate amendments and (ii) delineate the nature and scope of amendments that qualify for such treatment, including the prerequisite characteristics of qualifying RFR benchmarks.

In the New York law-governed syndicated loan market, similar though varied clauses have begun to appear in recent floating rate credit agreements, without any dominant market standards having yet taken hold.  In addition, on 24 September 2018, ARRC published for comment proposed LIBOR replacement provisions for floating rate notes and syndicated loans.  These are similar in format to the LMA provisions, although ARRC also includes provisions which, in addition to replacing the benchmark, would adjust the credit spread in certain cases.

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Monday, November 5, 2018

Simon Ward Returns to Curtis as Muscat Managing Partner

We are pleased to announce that Simon Ward re-joined Curtis in October as a partner in the international arbitration and litigation groups, and has also been appointed Managing Partner of the firm's Muscat office. Former Managing Partner Bruce Palmer has agreed to take on an advisory role as Director of Middle East Strategic Planning.

Mr. Ward stands out among Oman’s most experienced arbitration counsel with over a decade of experience in the region. He is currently ranked by Chambers Global as a top Commercial Litigation and Arbitration lawyer for his heavyweight commercial arbitration practice, and has advised on some of the highest-profile commercial arbitration and court cases in the Sultanate.


He was appointed to the Oman Court of Appeal Roll of Arbitrators in 2011 and has acted as both arbitrator and lead counsel before the Omani courts. He has also acted in domestic and international arbitrations under the auspices of the ICC and LCIA, and in Omani/UNCITRAL ad hoc arbitrations.
Before leaving Curtis last year to return to his native New Zealand for family reasons, Mr. Ward had spent nearly five years in our Oman office, including most recently as Curtis’ Head of Disputes in Oman.

You can contact Simon in our Muscat office, or read our full press release here.

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Monday, October 15, 2018

Personal Debts of Members of Commercial Companies

Many companies have a joint ownership structure.  Indeed, many types of commercial companies – for example, limited liability companies or joint stock companies – are required by law to have multiple shareholders.  However, joint ownership can make matters complicated when an individual shareholder of the company, whose assets include his interest in the company, is pursued by a creditor for personal debts (let us call this creditor the “personal creditor”).

The personal creditor will wish to access any of the shareholder’s assets that it can in order to claim payment of the member’s debts.  However, if the personal creditor were able to withdraw the shareholder’s share of a company’s capital, this reduction in the company’s capital could adversely affect the company and its remaining shareholders.  Likewise, if the creditor were able to accede to the shareholder’s interest in the company and become a shareholder in the company without the consent of the company’s remaining shareholders, this could adversely affect those other shareholders.  Particularly in a privately held company (as opposed to a publicly traded joint-stock company), many shareholders are active in the company’s affairs – voting on key decisions; serving on the board and committees; even participating in day-to-day management – and are very selective about who they want to work with as fellow shareholders.

Fortunately, the Commercial Companies Law (RD 4/74) does prescribe rules for dealing with these types of issues.  The statute provides that:

  • A personal creditor may not claim the shareholder’s share in the company’s capital as payment of the shareholder’s debt; however, upon dissolution of the company, the personal creditor may claim as payment the shareholder’s share of the company’s assets remaining after settlement of the company’s liabilities.
  • When the shareholder’s interest is in a company other than a joint stock company, a personal creditor may claim payment of the shareholder’s debt out of the shareholder’s share in the company’s profits.
  • When the shareholder’s interest is in a joint stock company, a personal creditor may claim payment only out of the shareholder’s share of the declared dividends; however, the personal creditor may also – subject to the company’s articles of association and applicable law – require the public sale of the shareholder’s shares and claim payment of the debt from the proceeds of this share sale.

In addition to these statutory requirements, companies can impose additional requirements – e.g., via the company’s commercial contract or a shareholders’ agreement – to govern such matters as shareholder composition and capital withdrawals.

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Monday, October 8, 2018

Oman Applies for Enforcement of an ICSID Costs Award in Massachusetts

On 20 June 2018 the Omani government made an application to a Massachusetts Federal Court to enforce a US$5.7 million award.

This is a significant development for Oman in light of the fact that this award was rendered in the first-ever investor treaty claim brought against Oman.  The award, which was issued under the International Centre for Settlement of Investment Dispute Rules, was a big win for the government of Oman.

Oman and bilateral investment treaties

The International Centre for Settlement of Investment Disputes (ICSID) Convention is a treaty ratified by 153 contracting states, including Oman.  The ICSID Convention provides a mechanism for investors from signatory states to make a claim against a government of another signatory state.  The aim of the ICSID Convention is to encourage cross-border investment by providing a means of enforcing contractual rights.

In addition to the ICSID Convention, Oman is a party to 38 bilateral investment treaties and numerous multilateral investment treaties with other countries, all of which include investment protection mechanisms with arbitration in accordance with the ICSID Rules as the means to resolve any disputes that arise under such treaties.

The case

The award for which enforcement is being sought in Massachusetts Federal Court is an award for costs that was issued against Adel Hamadi Al Tamimi.  In 2011 Mr. Tamimi filed a claim for US$273 million against the government of Oman under a 2008 US-Oman free trade agreement (FTA).  In his claim Mr. Tamimi alleged that the government of Oman improperly ended leases that permitted his company to mine for limestone and, in doing so, the ending of these leases violated his rights under the US-Oman FTA.  In alleging that his rights had been violated, he made three claims:  (i) a claim that his rights had been expropriated in accordance with the US-Oman FTA; (ii) a claim for failure of the Omani government to treat his investment in accordance with the minimum standard of treatment under the US-Oman FTA; and (iii) a claim for breach of the national treatment standard in accordance with Article 10.3 of the US-Oman FTA.  Virtually all investment treaties provide that they will treat investors of the other country no worse than its own nationals.

An ICSID tribunal found that the claim was entirely without merit, dismissed the claim, and rendered an award for costs of US$5.7 million in favour of the government of Oman, which the government is now seeking to enforce.

This is not the only instance in which the Omani government and Omani nationals have been involved in investor-state arbitration.  The remainder of this article will summarise the other cases in which either the government of Oman or private Omani investors have been involved in investor-state arbitration.

Oman and investor-state arbitration

From an Omani perspective, the Tamimi case is particularly notable as it was the first ICSID case ever filed against Oman and the first case filed under the US-Oman FTA.  Since the filing of this case against Oman, there have been two other ICSID cases filed against Oman.  The first was a claim filed by Samsung in 2015 under the 2003 South Korea-Oman bilateral investment treaty in relation to a US$2 billion contract for the upgrade of an oil refinery.  This case settled in January 2018.  The second case against Oman was brought by a Turkish company, Attila Doğan Construction & Installation Co. Inc., over an oil project run by Petroleum Development of Oman.  This case was filed in 2016 under the 2007 Turkey-Oman bilateral investment treaty and is ongoing.

On the other side of the coin, there have been two investment treaty arbitrations filed by Omani investors.  The first was filed by Desert Line Projects LLC in 2005 against the government of Yemen under the 1998 Oman-Yemen bilateral investment treaty.  In this case, Desert Line Projects claimed OMR 40,000,000 against the government of Yemen for moral damages which included loss of reputation as a result of the respondent’s breaches of its obligations under the bilateral investment treaty, namely that the claimant’s executives suffered the stress and anxiety of being harassed, threatened and detained by the respondent as well as by armed tribes.  In 2008, the tribunal awarded Desert Line Projects US$1,000,000, 70% of the arbitration costs and US$400,000 towards the claimant’s legal fees.

The second case commenced by an Omani entity was filed by the State General Reserve Fund of the Sultanate of Oman against Bulgaria in 2015 under the 2007 Bulgaria-Oman bilateral investment treaty.  This case is currently ongoing and relates to the collapse of Corporate Commercial Bank (Corpbank).  Oman’s State General Reserve Fund owned a 30 percent stake in Corpbank, which had its licence withdrawn by the government of Bulgaria, went bankrupt and was shut down by the Bulgarian central bank.

Remarks

While Oman has been involved in relatively few investment treaty cases, the summaries above shed light on the disputes that are arising under the various bilateral investment treaties into which Oman has entered.  Being a party to such treaties is important for Oman as these treaties encourage investors to invest in Oman by providing investors with safeguards and a mechanism to make claims to protect their investments in Oman.

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Monday, October 1, 2018

Curtis Welcomes Zainab Aziz to our Team in Oman

We are excited to welcome new counsel Zainab Aziz to our team this month. Zainab is a seasoned commercial lawyer with experience in M&A, capital markets, and banking and finance matters, and is admitted to the New York Bar. She also brings significant Islamic Finance experience, having advised clients in the issuance of sukuk, the implementation of wakala agreements, and the development of ijara documentation. You can contact Zainab in our Muscat office.

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New Law to Govern Public Private Partnerships in Oman

Current market conditions for infrastructure finance present numerous challenges.  Government revenues are shrinking and private infrastructure investors are both scarce and risk averse, thereby creating an acute need for alternative sources of capital.  Privatisations have become increasingly unpopular and difficult to execute, largely eliminating another source of government liquidity.

Public Private Partnerships (PPPs) are defined by the World Bank as “long-term contracts between a private party and a government entity for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.”  PPPs typically do not include service contracts or turnkey construction contracts, which are categorised as public procurement projects, or the privatisation of utilities where there is a limited ongoing role for the public sector.

PPP project contracting is commonly used for major public infrastructure projects such as new roads, hospitals, schools, telecommunication systems, airports or power plants.

PPPs in Oman

In Oman, as in other civil law jurisdictions, a distinction is made between public contracts such as concessions, where the private party is providing a service directly to the public and taking end-user risk, and PPPs, where the private party is delivering a service to a public party in the form of a bulk supply, such as a build-operate-transfer project for a water treatment plant, or the management of existing facilities (e.g., hospital facilities) against a fee.

Oman has been a pioneer in the Middle East for PPP projects especially in the form of independent power producer projects (IPPs) and independent water and power projects (IWPPs).

In 1994 Oman saw its first PPP project, the Al-Manah independent power project, and has since regularly used the PPP model.  As recently as April this year, the Oman Power and Water Procurement Company (OPWP), advised by Curtis, signed agreements to establish the Salalah Independent Water Project with an ACWA Power-led consortium with Veolia and DIDIC.

A quarter of a century on from the Al-Manah project, Oman is now on the verge of issuing a new PPP law.  Oman will also establish a dedicated authority to oversee the implementation of this law.

Why regulate PPPs in Oman? 

PPPs in Oman are not wholly unregulated. Local laws that apply to PPPs include Oman’s Privatisation Law, Royal Decree 77/2004, which allows public utilities to be privatised or restricted under the law.  Further IPPs and IWPPs are currently tendered by the OPWP pursuant to Royal Decree 78/2004 amended by Royal Decree 59/2009 (Energy Sector Law) and Royal Decree 36/2008 (Tenders Law).  The Tenders Law is the key legislation that regulates government procurement in Oman.  It establishes a Tender Board and sets out requirements relating to advertising of tenders, forms of bid submission, bid timetable and evaluation, etc.

Key elements to look for in the new law

Effective PPP programs hinge on the ability of governmental entities to delegate some of their functions to one or more private parties.  Thus, PPP legislation should unambiguously identify the governmental entities authorised to enter into PPPs, the types of functions or services that may be delegated to private parties and the types of assets or facilities that may be developed, constructed, owned and operated under a PPP structure.  These determinations require careful balancing of government policy objectives, the public interest and the need to incentivise private sector participation.

Legislation authorising government entities to enter into PPPs also may specify categories of permissible transactions.  For example, some jurisdictions may wish to limit PPP transactions to a build-lease-transfer format, while others may contemplate more long-term (or even more permanent) arrangements for private participation.  At a minimum, the PPP-enabling legislation should identify the sectors in which PPPs are authorised and any limitations on the structure and duration of private sector participation.

Legislation should designate, or create, a governmental entity to oversee and facilitate PPP development and implementation (PPP Entity).  For example, a PPP Entity should be authorised to both receive PPP proposals from constituent government entities (e.g., authorities, municipalities) and propose PPP projects and issue “requests for proposals” (RFPs) for PPPs.

In evaluating proposed projects, the PPP Entity should be required to perform an economic analysis and an initial risk/reward assessment of the proposed project.  The PPP Entity also should have the authority to enter into PPP contracts and ancillary arrangements including contracts to retain professional advisers (e.g., engineers, financial advisers, attorneys) and take other actions necessary or desirable to effectuate the goals of PPP legislation.

Finally, PPP legislation may authorise certain types of government financial support including credit enhancement instruments (e.g., bonds, letters of credit) and, in limited cases, sovereign guarantees.  Other types of governmental support may be appropriate depending on the project and the government’s objectives.  At bottom, however, PPP legislation must answer the central question of whether the delegation of public functions will require the commitment of public credit to or on behalf of private parties and, if so, whether such commitments conflict with constitutional or public policy constraints in the relevant jurisdiction.

Conclusion 

PPPs have an important role to play in meeting Oman’s long-term public infrastructure needs.  The implementation of a comprehensive PPP law can improve the volume and efficiency of PPP transactions while mitigating the costs assigned to the government’s balance sheets.  An effective PPP law also will improve the ability of the Omani government to compete for private sector partners and capital.  Although natural resource wealth will mitigate the short-term need for such capital, Oman’s long-term infrastructure needs will require increased utilisation of PPPs as a cost-effective vehicle for programmatic infrastructure development.

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Monday, September 17, 2018

Debt Recovery in Oman

In the current climate, increasing numbers of contractors and consultants are finding it difficult to recover payment for work they have already undertaken in Oman.

In the past, many companies working in the region have been wary of pursuing their entitlements through formal dispute resolution processes, due to perceived cultural sensitivities.  However, many now feel that they have no choice but to consider the available debt recovery options.

In many instances, the amounts owed are not disputed.  However, in the current market, some developers/contractors consider that they should not be obliged to pay their debts in full, and are attempting to avoid, defer, reduce and/or make piecemeal payments over a substantial period of time.

How to recover your debts in Oman

Wherever you are from, outstanding payments can be frustrating, not to mention costly.  However, a contractor will usually be aware of the tools available in its home jurisdiction in order to speed payment along.

When working overseas, however, the different cultural, legal and practical issues can make the whole process much more challenging.  In Oman, this challenge is in part due to the local civil legal system.  Those instruments that common law practitioners are used to wielding are not present in quite the same form.

The options available to pursue non-payment of due monies will depend on the dispute resolution mechanisms contained within the relevant contract.  Typically, a contractor/consultant will have to litigate or arbitrate to recover payments.

In addition, there are a number of procedures available under local laws that could assist in the recovery of debts.  Potential options available under Oman law include:

An order of payment

An order for payment within Oman is a developing area of law.  It can therefore often be hard to determine the likelihood of success before the Omani courts when making such an application.  It is a procedure by which a party applies to the courts for summary judgement against a defendant for commercial debts, substantiated by a commercial instrument such as a bill of exchange, promissory note or cheque, which are valid, but not paid.

If a party has a successful application for an order for payment, the outcome would be a direction from the courts for the outstanding debts to be paid by the debtor.  Success is by no means guaranteed, but the mere threat of an order for payment can be a persuasive tool for the creditor, as an outstanding debt can bring with it considerable public embarrassment within the local community.  This in turn can act as an incentive for the debtor to settle any outstanding debts.

Precautionary attachment order

A precautionary attachment order, if granted, essentially allows the court to seize the assets in question at the claimant’s request prior to judgement/arbitral award in order to preserve those assets during the trial.  It is as close to seeking injunctive relief as it gets in Oman.  The procedure, timing and effect of precautionary attachment orders can at times be somewhat unclear.

Precautionary attachment orders are made in absence of the other party and are ordinarily used as a tool to ensure that assets are not disposed of prior to receiving the court’s judgement/arbitration.

The order can be made against any assets in Oman, including machinery, bank accounts, goods or other assets owned by the defendant and under his possession, or owned by a defendant but in the possession of a third party.  It should be noted that the assets, money or material to be attached must be specified before the application will be granted.

If a precautionary attachment order is granted, the substantive case must be filed at court within eight days.

An order for sale

This is a procedure whereby a claimant applies to court for an order that a property or part thereof be sold where a defendant has failed to pay for material and equipment supplied for that property.

An order for a charge over property

In certain circumstances a contractor can exercise a form of charge over a property on which it is doing work until payment for that work is received.

Substantive action

As discussed above, pursing substantive action is also a possibility, either through the local courts or via arbitration.  Litigation in Oman can be both costly and time-consuming.  There are cases that continue for five years or more, and only local advocates can appear and plead before the courts. 

Arbitration might allow a claimant to remain within their common law comfort zone; however, cases usually take at least a year to reach a decision and the costs are not insignificant.

Practical tips

(a) Examine the payment terms in the contract;

(b) Ascertain entitlement to the outstanding debt and collate all the documentation in support of it;

(c) Review the dispute resolution mechanism in the contract, if any;

(d) Determine what assets the debtor owns and where these assets are held; and

(e) Review the amount in question and determine what is the best avenue for recovery.

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Monday, September 10, 2018

The Effect of Insolvency in Oman

The Oman Commercial Law issued by Sultani Decree 55/90 (the “OCL”) is the primary legislation governing insolvency in Oman.  Pursuant to the OCL, if a business is in financial distress and is unable to pay its debts, it will be forced to apply to the Commercial Court for a declaration of bankruptcy.  Otherwise, an application can be made by one of its creditors when such debtor has ceased payment of the debt.

In addition, any creditor pursuant to a commercial debt which is not yet due shall have the right to apply for the declaration of the bankruptcy of a debtor, if such debtor has no known domicile, has absconded, has closed the relevant business or initiated the liquidation thereof, or has effected dealings detrimental to its creditors.

How to apply for declaration of bankruptcy

A declaration of bankruptcy shall be by statement submitted to the registry of the Commercial Court, supported by reasons for the cessation of payment of debt.  An application must also attach certain documents, including but not limited to:

(a) the principal commercial books;

(b) a copy of the last balance sheet and of the profit and loss account;

(c) a statement of personal expenditure for the three years preceding the making of the application;

(d) a detailed statement of the immovable and movable property owned by the debtor and the approximate value thereof on the date of cessation of payment;

(e) a statement as to the names of the creditors and the debtors, their domiciles, the amounts of their entitlements or their debts, and the securities securing the same; and

(f) a statement of the protests for non-payment made against the debtor during the two years preceding the making of the application.

The effect of bankruptcy

After an application has been submitted, the Commercial Court may order the taking of measures necessary to preserve or administer the assets of the debtor until it makes its decision on the declaration of bankruptcy.  This may include delegating such person as it sees fit to conduct investigations into the financial state of the debtor and the reasons for its/his cessation of payment, and to submit a report thereon.

A consequence of a judgement declaring bankruptcy is such that as of the date it is rendered the bankrupt shall relinquish in favour of the administrator in bankruptcy the management of all his assets, including assets passing to him while he is in a state of bankruptcy.  This does not apply, however, to earnings and certain other assets that a judge considers commensurate with the bankrupt’s need to support himself and his family.

Further, the bankrupt may not effect any dealing in relation to any part of his assets, and he shall not be entitled to effect any act of payment or of receiving save where the receiving is of a commercial instrument and bona fide.

Right to restitution

1. Actual items

Any person may obtain restitution from the estate in bankruptcy for specific items in respect of which he can prove ownership, but the administrator may not deliver any item to the person seeking restitution before first obtaining leave of the respective judge.

If the administrator refuses to return items in respect of which restitution is claimed, the dispute will be placed before the Commercial Court.

2. Instruments of value

It is permissible to obtain restitution of commercial paper and other instruments of value delivered to the bankrupt in order to realise their value or to apply them to a specific payment, if they are actually present in the estate in bankruptcy and their value had not already been paid out when bankruptcy was declared.  Restitution will not, however, be permissible unless the instruments in question have been recorded in a current account between the person seeking restitution and the bankrupt.

Restitution of bank notes deposited with the bankrupt will not be permissible until the person seeking restitution proves they are actually the notes in question.

3. Goods in deposit

Under Article 636, it is permissible to obtain restitution of goods present in the possession of the bankrupt as a deposit, or for the purpose of their sale on behalf of their owner, or for the purpose of delivering them to the owner, on condition that they are present in the estate in bankruptcy.

If the bankrupt has already deposited the goods with a third party, restitution may be obtained from the third party.  If the bankrupt borrows and mortgages the goods by way of security for borrowing, and the lender was at the time of charging unaware that the bankrupt did not have title to the goods, there may be no restitution until the debt secured by the mortgage has been discharged.

4. Spouse’s assets

Either spouse may, whatever the financial regime followed in the marriage, obtain restitution from the other’s estate in bankruptcy of movable and immovable assets if title can be proven and the property will remain encumbered by rights lawfully acquired in respect thereof by third parties.

Assets which are purchased by the spouse of a bankrupt or which are purchased for the account of such spouse or for the account of infants comprised within the guardianship of the bankrupt from the date they took up trade will be considered to have been bought with the monies of the bankrupt, and will come into the assets of the estate in bankruptcy unless the contrary is proved.

Neither spouse may claim from the other spouse’s estate in bankruptcy gifts which the bankrupt spouse makes to such spouse during marriage by transaction inter vivos or with posthumous effect.
Similarly, the group of creditors may not claim from either spouse gifts which the bankrupt spouse makes to such spouse during marriage.

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Saturday, September 1, 2018

United States Issues Executive Order Imposing Sanctions against Iran as Part of Withdrawal from Nuclear Deal and EU Response

On 8 May 2018, the United States withdrew from the Joint Comprehensive Plan of Action (“JCPOA”), as discussed in our May 2018 Client Alert.  On 6 August 2018, President Trump issued a new Executive Order (the “New Iran E.O.”) that re-imposed certain sanctions with respect to Iran as part of the United States’ withdrawal from the JCPOA.[1]   While most of the sanctions had been in place prior to the United States’ implementation of the JCPOA, the New Iran E.O. expands certain sanctions and allows for penalties that were not previously authorised.[2]   Most of the provisions of the New Iran E.O. became effective on 7 August 2018; the remaining provisions will become effective on 5 November 2018, at the end of a 180-day wind-down period that began on 8 May 2018.
The European signatories have been vocal supporters of the JCPOA deal and vocal critics of the threats to re-impose U.S. sanctions.

The New Iran E.O.[3]

Provisions re-imposed by the New Iran E.O.

The majority of the sanctions that the New Iran E.O. imposes were in place prior to the implementation of the JCPOA.  For those unfamiliar with the Iranian sanctions regime in place prior to 2016, what follows is a brief description of the sanctions restored under the New Iran E.O.

Section 1 of the New Iran E.O. authorises blocking sanctions against non-U.S. parties, both Iranian and non-Iranian (Specially Designated Nationals or “SDN”).  The United States may block the property of any person that is part of the energy, shipping, or shipbuilding sector of Iran, as well as any person that operates a port in Iran.[4]   A non-U.S. person that provides material support to, or goods or services in support of, any such person may also be sanctioned.[5]   A non-U.S. person may also be sanctioned for providing material support for, or goods or services in support of, an acquisition of U.S. bank notes or precious metals by the government of Iran.[6]

Section 2 authorises the Secretary of the Treasury to prohibit Foreign Financial Institutions (“FFIs”) from establishing or maintaining a “correspondent account or payable-through account” in the United States if they are found to have conducted or facilitated certain transactions.  These include transactions “for the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran.”[7]   Section 2 also authorises additional sanctions against FFIs that will come into effect after the end of the 180-day wind-down period on 5 November 2018.  These include sanctions for the facilitation of transactions on behalf of or in connection with SDNs, the National Iranian Oil Company (“NIOC”) or the Naftiran Intertrade Company (“NICO”), as well as transactions involving petroleum, petroleum products, or petrochemical products from Iran.[8]

The New Iran E.O. also authorises “menu-based” sanctions, which the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) utilises in various sanctions programs.  As an example of how menu-based sanctions typically operate, the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”) requires the President to impose five or more of the sanctions listed in the Iran Sanctions Act of 1996 (“ISA”) if it is determined that a person has engaged in certain sanctionable activities.[9]

Section 3 of the New Iran E.O., by contrast, authorises but does not require the United States government to impose any of the fourteen possible sanctions listed in Sections 4 and 5, which include measures as severe as blocking sanctions.[10]

Under Section 3, as of 7 August 2018, a person may be penalised under these menu-based sanctions for knowingly engaging in a significant transaction in connection with the automotive sector of Iran.[11]   Additionally, after 5 November 2018, a person may be sanctioned for knowingly purchasing petroleum, petroleum products, or petrochemical products from Iran.[12]   These sanctions also extend to affiliates of a sanctioned entity, including an entity that (i) is the successor to a sanctioned entity, (ii) owns or controls such an entity, or (iii) is owned or controlled by such an entity.[13]

Section 6 includes sanctions against FFIs engaging in transactions denominated in the Iranian rial or maintaining funds denominated in Iranian rials.

Section 7 authorises blocking sanctions against persons determined to have either (i) diverted goods intended for the people of Iran — including food, medicine, and medical devices — or (ii) transferred goods or technology to Iran “that are likely to be used by the” government of Iran to commit “serious human rights abuses.”[14]   These sanctions are also extended to persons owned or controlled by any person blocked under this section.[15]

Finally, Section 8 prohibits foreign subsidiaries of a U.S. person from engaging in transactions with the government of Iran or with any person subject to the jurisdiction of Iran. General License H (“GL H”) had authorised foreign subsidiaries of U.S. companies to engage in certain activities with the government of Iran or Iranian companies.  To the extent transactions had been authorised by GL H, they have been provided a 180-day wind-down period under section 560.537 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITSR”), which expires after 4 November 2018.

The Significant Reduction Exemption

Under the New Iran E.O., sanctions against purchasers of petroleum and petroleum products, as well as sanctions against FFIs engaging in significant financial transactions related thereto, will only apply if the President makes two determinations.[16]   First, that “there is a sufficient supply of petroleum and petroleum products produced from countries other than Iran to permit a significant reduction in the volume” of these products from Iran.[17]   Second, that the purchaser or FFI in question is a national of a country that has not been granted a Significant Reduction Exemption.  Notably, President Trump has already made the first determination:  on 14 May 2018, the Trump administration sent a memo to the State Department confirming that global supply was sufficient.[18]

Historically, the Significant Reduction Exemption, set forth in Sec. 1245 of the NDAA, allowed the President to lift sanctions on FFIs if the U.S. government determined that “the country with primary jurisdiction” over the FFI had “significantly reduced its purchases of Iranian crude oil during a specific time period.”[19]   OFAC did not define “significantly reduced,” but noted that any “determinations will be preceded by aprocess of rigorous due diligence.”[20]

Functionally, this meant that if the United States government determined that a country had met this objective, FFIs in that country could facilitate purchases of petroleum and petroleum products from Iran.  More than a dozen countries received an exemption under this rule, including Japan, France, Germany, Italy, China, South Korea, Singapore, and South Africa.[21]   As the provisions of the NDAA were waived during the implementation of the JCPOA, these exemptions expired.  Countries will have to requalify for the exemption once Sec. 1245 goes back into effect after 4 November 2018.[22]   FFIs will be prohibited from facilitating purchases of petroleum and petroleum products from Iran unless and until the appropriate exemption has been issued.

The 8 May 2018 announcement made no reference to the Significant Reduction Exemption.  It remains to be seen which countries, if any, will be granted this exemption by the Trump administration.

The New Iran E.O. expands the scope of the sanctions

The New Iran E.O. not only re-imposes sanctions that were in effect prior to 16 January 2016, but also broadens the scope of the sanctions against Iran.

Section 1 authorises blocking sanctions against any person that provides material support, goods or services to someone that has been blocked under Section 1.  For example, if a person is blocked under Section 1 for providing material support to the NIOC or NICO, and a non-U.S. person provides material support, or goods or services, to that blocked person, the non-U.S. person may also be blocked.[23]   FFIs that provide material support or services to a blocked person may also be penalised under the newly expanded sanctions.[24]

The menu of sanctions has been expanded for persons who have knowingly engaged in certain significant transactions relating to petroleum, petroleum products, or petrochemicals.[25]   The U.S. government may deny visas to corporate officers, principals, or controlling shareholders of a sanctioned person.[26]   All U.S. persons may be prohibited from investing in or “purchasing significant amounts” of debt or equity issued by a sanctioned entity.[27]   Finally, any or all of the sanctions available in Sections 4 and 5 may be applied directly to the “principal executive officer or person performing similar functions and with similar authorities, of a sanctioned person.”[28]

The New Iran E.O. also expands sanctions on U.S.-owned or -controlled foreign entities by prohibiting transactions with persons blocked for:  (1) providing material support for, or goods and services in support of, Iranian persons on the SDN list; (2) being part of the energy, shipping, or shipbuilding sector of Iran, or a port operator in Iran; or (3) knowingly providing significant support to certain other persons blocked under IFCA or to an Iranian person on the SDN list.[29]

Payments after wind-down periods end

OFAC has advised that non-U.S., non-Iranian persons may receive payment after the end of the applicable wind-down period for “goods or services fully provided or delivered” beforehand.[30]   These payments must be based on written contracts entered into prior to 8 May 2018.[31]   So long as the agreement under which the payment arises existed prior to that date, if moneys are owed for goods or services provided before the end of the wind-down period, non-U.S., non-Iranian persons will be permitted to receive payment after the wind-down period according to the terms of the agreement.[32]

The payment must not involve any “U.S. persons or the U.S. financial system” unless specifically exempted.[33]

On the other hand, U.S. persons and U.S.-owned or -controlled persons may not receive such payments after the end of the wind-down period.[34]   Such payments are only authorised through the wind-down period.  A U.S. person seeking to receive payment for delivered goods or services must receive a specific licence from OFAC.[35]

Application of the New Iran E.O. to Iranian sectors

Iran’s automotive sector

Beginning 7 August 2018, the New Iran E.O. authorises menu-based sanctions on persons determined to have knowingly engaged “in a significant transaction for the sale, supply, or transfer to Iran of significant goods or services used in connection with Iran’s automotive sector.”[36]   Iran’s automotive sector constitutes “the manufacturing or assembling in Iran of light and heavy vehicles including passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles, as well as original equipment manufacturing and after-market parts manufacturing relating to such vehicles.”[37]

OFAC anticipates that forthcoming regulations will define “goods or services used in connection with the automotive sector of Iran” to include goods or services that contribute to “(i) Iran’s ability to research, develop, manufacture, and assemble light and heavy vehicles, and (ii) the manufacturing or assembling of original equipment and after-market parts used in Iran’s automotive industry.”[38]   Finished vehicles exported to Iran that do not require further assembly or manufacturing,[39]  or goods or services for the maintenance of finished vehicles exported to Iran, would generally not fall under this definition.[40]   However, OFAC has indicated that the export, sale or distribution of goods, such as auto parts and accessories, or services that contribute to Iran’s ability to manufacture or assemble vehicles, or manufacture original equipment and after-market parts in Iran, could result in sanctions.[41]   Exporting “auto kits” to Iran for assembly in Iran would also be sanctionable if the transaction is deemed to be significant.[42]

Additionally, the New Iran E.O. authorises correspondent and payable-through account sanctions[43]  for FFIs that have “knowingly conducted or facilitated any significant financial transaction” for “the sale, supply, or transfer to Iran of significant goods used in connection with Iran’s automobile sector.”[44]

Iran’s energy, petroleum, and petrochemical sectors

Beginning 5 November 2018, the New Iran E.O. will re-impose “Executive Orders 13622, 13628, and 13645 with respect to the Iranian energy, petroleum, and petrochemical sectors.”[45]   The New Iran E.O. authorises blocking sanctions and correspondent and payable-through account sanctions on persons providing material support for, or goods and services to, NIOC and NICO.[46]   Additionally, persons that “sell, supply or transfer to or from Iran significant goods or services used in connection with Iran’s energy sector are exposed to menu-based sanctions” under the IFCA and the New Iran E.O.[47]   However, as noted earlier, “countries that are determined by the Secretary of State to have significantly reduced their purchases of Iranian crude oil will be excepted from these measures” under the Significant Reduction Exemption.[48]

EU response to revived U.S. sanctions against Iran

In response to the New Iran E.O., the EU expanded the scope of its 1996 “blocking regulation.”  The blocking regulation had prohibited compliance with certain U.S. sanctions then in force against Cuba, Libya and Iran (EU regulation 2271/1996), but under EU Regulation 2018/1100 the list of U.S. laws now covered by the blocking regulation are:

  • National Defense Authorization Act for Fiscal Year 1993, Title XVII Cuban Democracy Act 1992, sections 1704 and 1706
  • Cuban Liberty and Democratic Solidarity Act of 1996
  • Iran Sanctions Act of 1996
  • Iran Freedom and Counter-Proliferation Act of 2012
  • National Defense Authorization Act for Fiscal Year 2012
  • Iran Threat Reduction and Syria Human Rights Act of 2012
  • Iranian Transactions and Sanctions Regulations

Subject to some narrow exceptions, it is now prohibited for those subject to EU regulations (i.e., EU nationals, EU companies, EU-flagged aircraft and ships, and the EU operations of non-EU companies) to comply with the revived U.S. sanctions.

The EU, however, does not have the power to create or impose penalties outside the area of competition law, so it has been delegated to the individual member states to determine the penalty for non-compliance with this prohibition.

There are two other aspects of the blocking regulation which have received less attention than the prohibition.  The first is the ability of the European Commission to authorise an EU company to comply with the listed U.S. sanctions where non-compliance would jeopardise the interests of either the EU or the company.  The mechanics of making such application have now, for the first time, been published through EU Regulation 2018/1101 on 3 August 2018.  The second additional aspect of the blocking regulation is the ability it creates, under article 6, for a company or person to recover damages.

Conclusion

The New Iran E.O. goes beyond reinstating sanctions that pre-date the JCPOA.  The European signatories have been vocal supporters of the JCPOA deal and vocal critics of the threats to re-impose U.S. sanctions.  Non-U.S. companies engaged in (or planning to engage in) business with Iran or Iranian companies must understand the risks of continuing or entering into such activities.

Endnotes

[1]See Executive Order (E.O.) of 6 August 2018, Reimposing Certain Sanctions With Respect to Iran (the “New Iran E.O.”), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf; Iran Sanctions, DEP’T OF TREASURY (6 Aug. 2018), https://www.treasury.gov/resource-center/sanctions/Programs/Pages/iran.aspx; Press Release, WHITE HOUSE, Statement from the President on the Reimposition of United States Sanctions with Respect to Iran (6 Aug. 2018), https://www.whitehouse.gov/briefings-statements/statement-president-reimposition-united- states-sanctions-respect-iran/.

[2]See infra pp. 4-5.

[3]This Client Alert neither summarises the entire scope of U.S. sanctions against Iran, nor addresses each of the regulations that authorises such sanctions.  For a more complete discussion of the United States’ withdrawal from the JCPOA, see the May 2018 Curtis Client Alert.

[4]New Iran E.O., Sec. 1(a)(iv)(A)-(B).

[5]See id., Sec. 1(a)(iv)(C).

[6]See id., Sec. 1(a)(i).  Additional blocking sanctions are authorised in connection with providing support for the National Iranian Oil Company (“NIOC”) and the Naftiran Intertrade Company (“NICO”); New Iran E.O., Sec. 1(a)(ii).

[7]New Iran E.O., Sec. 2(a)(i).  For a more complete discussion of sanctions related to the Iranian automotive industry, see infra pp. 5-6.

[8]New Iran E.O., Sec. 2(a)(ii)-(v).

[9]See, e.g., IFCA Sec. 1245(a)(1).

[10]See id., Sec. 5(a)(iv).  The menu of sanctions also includes prohibitions against:  extending credit from the U.S. Export-Import Bank, granting specific licences to re-export goods, designating the sanctioned person a primary dealer in U.S. government debt, serving as a repository for U.S. government funds, entering into procurement contracts with the United States, and foreign exchange transactions subject to U.S. jurisdiction.  See id., Secs. 4(a)-(d), Sec. 5(a)(ii).

[11]New Iran E.O., Sec. 3(a)(i).

[12]See id., Sec. 3(a)(ii)-(iii).

[13]See id., Sec. 3(a)(iv)-(vi).

[14]Id., Sec. 7(a).

[15]See id., Sec. 7(a)(vii).

[16]See id., Secs. 2(c), 3(b).

[17]Id., Sec. 2(c)(i); see National Defense Authorization Act for Fiscal Year 2012 (“NDAA”), Sec. 1245(d)(4)(B).

[18]See REUTERS, Global oil supplies robust enough to cut Iran’s exports: Trump memo (May 14,
2018), available at https://www.reuters.com/article/us-iran-usa-oil/global-oil-supplies-robust-enough-to-cut-irans-exports-trump-memo-idUSKCN1IF2HS.

[19]New Iran E.O. FAQs, at FAQ 254.
  
[20]Frequently Asked Questions on the Implementation of Section 504 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the TRA), DEP’T OF TREASURY, at FAQ 174, available at https://www.treasury.gov/resource- center/faqs/Sanctions/Pages/faq_iran.aspx#eo_reimposing (“The Secretary of State intends to consider relevant evidence in assessing each country’s efforts to reduce the volume of crude oil imported from Iran, including the quantity and percentage of the reduction in purchases of Iranian crude oil over the relevant period, termination of contracts for future delivery of Iranian crude oil, and other actions that demonstrate a commitment to substantially decrease such purchases.”).
  
 
[22]Iran Sanctions, CONGRESSIONAL RESEARCH SERVICE, at 21 (29 Jun. 2018), available at https://www.everycrsreport.com/files/20180629_RS20871_58278a0b1746567ef7e7f128086fe7 64f9145b21.pdf.

[23]See New Iran E.O. FAQs, at FAQ 601 (citing New Iran E.O., Sec. 1(a)(iii)(B)).

[24]See id. (citing New Iran E.O., Sec. 2(a)(ii)).

[25]See, e.g., id.

[26]New Iran E.O., Sec. 4(a)-(d); New Iran E.O. FAQs, at FAQ 601.

[27]New Iran E.O., Sec. 5(a)(v).

[28]Id., Sec. 4(f); Sec. 5(a)(vii).

[29]See id., Sec. 8.; New Iran E.O. FAQs, at FAQ 601.

[30]See JCPOA Wind-Down FAQ, at FAQ 2.4.

[31]See id.

[32]See id., at FAQs 2.1, 2.4.

[33] See id., at FAQ 2.4.

[34]See id., at FAQ 2.5.

[35]See id.

[36]New Iran E.O. FAQs, at FAQ 614.

[37]New Iran E.O., Sec. 16(a); see also E.O. 13645, Sec. 14(a).

[38]New Iran E.O. FAQs, at FAQ 611.

[39]See id., at FAQ 612.

[40]See id., at FAQ 613.

[41]Id.

[42]See id., at FAQ 612.

[43]“[T]he Secretary of the Treasury may prohibit the opening, and prohibit or impose strict conditions on the maintaining, in the United States of a correspondent account or a payable-through account by such foreign financial institution.”  New Iran E.O., Sec. 2(b).

[44] Id., Sec. 2(i); New Iran E.O. FAQs, at FAQs 598, 606, 609.
  
[45]New Iran E.O. FAQs, at FAQs 607, 614.
  
[46] See id., at FAQ 614.
  
[47] New Iran E.O., Sec. 5; New Iran E.O. FAQs, at FAQ 614.
  
[48] New Iran E.O. FAQs, FAQ 614; see supra pp. 3-4.

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Monday, August 20, 2018

Anti-Money Laundering Laws in Oman - Know your Client

To adequately safeguard your business against any potential risks of money laundering and terrorism financing, it is important to know what these offences are and what steps should be taken when establishing new client relationships and managing existing ones.

Existing anti-money laundering legislation in Oman

Oman’s anti-money laundering and terrorism financing regime is largely governed by (i) the Law on Combating Money Laundering and Terrorism Financing promulgated by Sultani Decree No. 30/2016 (the “AML Law”) which repealed Sultani Decree No. 79/2010; and (ii) the executive regulations issued under Oman’s anti-money laundering law implemented in 2004 by Oman Sultani Decree No. 72/2004 (the “Executive Regulations”).  The Executive Regulations shall continue to apply to the extent that it does not conflict with the AML Law, and until such time as new executive regulations under the AML Law have been issued.

Money laundering offence

The AML Law describes a money laundering offence as having occurred if any person who knew or should have known or suspected that funds are the proceeds of a crime intentionally committed any of the following acts:

  • Converts or transfers such funds with the purpose of disguising or concealing the illegal nature or source of such proceeds or of assisting any person who committed the predicate offense to evade punishment for their acts;
  • Disguise or conceal the true nature, source, location, method of disposal, movement, or ownership of the funds and their related rights; or
  • Acquiring, possessing, or using such funds upon receipt.

Terrorism financing offence

Pursuant to the AML Law, a terrorism financing offence occurs if any person willingly collects or provides funds, directly or indirectly and by any means, with the knowledge that such funds will be used in full or in part to carry out a terrorist act, or by a terrorist individual or a terrorist organisation.

Scope of the AML Law and Executive Regulations

The AML Law applies to financial institutions, non-financial businesses, professions and non-profit associations and bodies (collectively hereinafter referred to as “Relevant Entities”).  This has been broadly defined in the AML Law and includes, among other things:

  • persons licensed to practice banking, financial or commercial activities (e.g., banks; exchange companies; investment companies; investment and credit funds; insurance companies);
  • companies and professionals who provide financial services;
  • traders in precious metals and stones;
  • notaries public;
  • law firms and accounting firms;
  • businesses involved in the management of bank accounts;
  • entities involved in establishment, operation and/or management of companies;
  • any other arrangements or professions as determined by the National Committee for Combating Money Laundering and Terrorism Financing; and
  • any charities or religious not-for-profit organisations.
In addition to the above, the Central Bank of Oman and the Capital Market Authority have issued a number of Circulars (secondary legislation) that apply to licensed banks and companies listed on the Muscat Securities Market.

Internal steps to be taken by a Relevant Entity

A Relevant Entity should assess the money laundering and terrorism financing risks it faces and, if applicable, establish electronic data monitoring systems for monitoring all electronic banking transactions.  By carrying out a risk assessment, this should assist a Relevant Entity in classifying clients and services according to the degree of risk of money laundering and terrorism financing and to determine whether enhanced due diligence should be applied to a particular client.

What client due diligence checks should a Relevant Entity be carrying out? 

The AML Law and Executive Regulations specifically set out a number of obligations regarding checks a Relevant Entity is required to undertake, namely:

  • correctly identifying the relevant counterparties, clients and beneficiaries to a transaction;
  • determining whether a client or beneficial owner is a politically exposed person (“PEP”) and carrying out further due diligence for PEPs; and
  • undertaking further due diligence in respect of any party for whom it opens a bank account.

A Relevant Entity is not permitted to open anonymous accounts or accounts under assumed or fictitious names or numbers or codes, and shall not provide any services to such accounts.

All documents and records collated by a Relevant Entity that relates to the identity of clients and beneficiaries and their activities must be stored for a period of 10 years.

Who is a PEP?

For the purposes of the AML Law, a PEP is any natural person currently or formerly appointed to (i) a prominent position in the Sultanate of Oman or a foreign country or (ii) an international organisation. Family members and close associates of any of those persons in (i) or (ii) are also considered to be PEPs.
A Relevant Entity should have appropriate risk management systems in place to determine if a potential client is a PEP.  Enhanced due diligence measures must be applied when dealing with a PEP.  In addition, senior management approval must be obtained to continue the relationship and steps must be taken to determine the source of the PEP’s funds.

When should a Relevant Entity carry out AML checks? 

A Relevant Entity must apply due diligence measures to identify their clients, using reliable and independent sources, documents, data and information in the following cases:

  • before establishing a business relationship;
  • before carrying out a transaction for a customer with whom the Relevant Entity does not have an established business relationship, the value of which is equal to or greater than a threshold applied by the applicable supervisory authority;
  • before executing a wire transfer for a customer with whom the Relevant Entity does not have an established business relationship with, the value of which is equal to or greater than a threshold applied by the applicable supervisory authority;
  • when there is suspicion of a crime of money laundering or terrorism financing; and
  • when there are doubts concerning the accuracy or adequacy of information and/or documentation received from the potential and/or existing customer. 

It is also important to monitor all existing relationships and client transactions on an ongoing basis to ensure that information regarding such relationships is consistent with the client due diligence information held on file for that client.

Conclusion 

Client due diligence is necessary to assess the extent to which a client may expose your business to money laundering and terrorist financing risks.  At the onset of a business relationship you must take appropriate steps to identify and verify the identity of your client or any person acting on behalf of a client, as well as a client’s beneficial owners.  Understanding who your client is and the purpose of the business relationship is key to guarding against potential fraud and staying compliant with the AML Law and Executive Regulations.

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