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China hits Iran snag in spill compensation

The reluctance of foreign banks to deal with Iran could complicate any compensation payments resulting from the recent collision of an Iranian oil tanker and a Chinese cargo ship, sources say.

The tanker Sanchi, carrying 136,000 tonnes of highly flammable condensate oil, collided with the Chinese dry cargo vessel CF Crystal on January 6 in the East China Sea, causing an oil spill and a blaze that was still raging four days later.

Liability has yet to be established but lawyers and insurers say that wherever the fault lies compensation payments risk getting bogged down or even blocked because the tanker and most of its crew were from Iran.

The potential hitches stem from US restrictions on financial transactions with Iran still in place despite the lifting of international sanctions against the country in 2016 following its nuclear deal with world powers, lawyers say.

The Sanchi's $US60 million ($A76 million) cargo of ultra-light crude oil spilled into the ocean and caught fire after the collision in international waters some 160 nautical miles (300 km) off China.

While the CF Crystal has returned safely to port with its crew, dozens of rescue boats from China and South Korea have been battling strong winds, high waves and poisonous fumes to try to find 31 sailors from the Sanchi and tame the fire.

Rahul Khanna, global head of marine risk consulting with German insurer Allianz, says losses from the collision could be in the hundreds of millions of dollars.

"The value of the cargo and the value of the hull itself would be one major impact, but I think the oil pollution liability aspects are probably the largest element," he said.

He said the environmental impact would be less severe than for a heavy crude spill, however, as condensate evaporates quickly and would not cause a major oil slick.

Some lawyers said there would be payment problems whether Iranian parties were the beneficiaries of any compensation, or if they were found liable.

Nigel Kushner, chief executive of law firm W Legal and an Iran specialist, said any compensation process would be complex as there were four different insurance issues at play: the ship itself, or the hull, the cargo, pollution and the deceased.

Thirty of the Sanchi's crew are from Iran and two are from Bangladesh. One body has been recovered from the sea but the rest are missing. The vessel is run by Iran's top oil shipping operator, NITC.

"It will probably be perfectly legal for insurers to pay, but in practice near impossible," Kushner said.

"Numerous insurers will be involved requiring multiple payments," he said. "I have seen lengthy and frustrating delays for clients previously with respect to insurance payments coming out of the Lloyd's (insurance) market when payments are delayed or blocked."

Under US sanctions, US financial institutions and are prohibited from any trade with Iran, despite the nuclear deal struck in 2015, known as the JCPOA.

While non-US banks can do business with Iran, lawyers say transactions involving US dollars can be problematic as they must not involve the US financial system in any way and that can be difficult in practice.

Banks and individuals are still restricted from trade with individuals or entities that remain on a US blacklist, adding to further caution over any business with Iran.

Transactions in other currencies are allowed, but lawyers say large Western banks, for example, are wary of dealing with Iran in case they fall foul of existing US sanctions.

"As a general matter, despite the sanctions relief contained within the JCPOA, there is still great difficulty in Western banks processing payments to Iranian counterparties, no matter the currency," said Matthew Oresman, a partner with Pillsbury Winthrop Shaw Pittman, who advises companies on Iran compliance.

"For this specific incident, depending on the source of the insurance funds and the process by which it is to be delivered to Iranian recipients, there could be difficulties for the policy holders or other beneficiaries," he said.