Loophole Or Sovereignty? Judicial Limits On The Extraterritorial Reach Of U.S. Sanctions In Malaysia.

Introduction

In recent years, the issue of sanctions has become highly relevant in shipping and international trade due to geopolitical developments. This article will focus on sanctions implemented by the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury, and the manner in which Malaysian courts engage with U.S. sanctions law.

Ship-to-Ship (“STS”) Transfers for Sanctioned Cargoes

Owing to its geographical position, sheltered offshore waters, and proximity to major international shipping lanes, Sungai Linggi — located along the west coast of Peninsular Malaysia north of Port Klang within the Strait of Malacca — has developed into a significant maritime operating zone for offshore marine activities.¹ In particular, Sungai Linggi has seen an increase in STS operations involving liquid bulk cargoes such as fuel oil and petroleum blends over the past few years.² One reason for the increased popularity of STS operations is that they can be conducted offshore without the need for berthing at a jetty, which in turn allows parties to obscure the provenance of cargoes during such operations.³ The problem, however, arises when some of these cargoes, reportedly of Iranian, Russian, or Venezuelan origin often loaded onto vessels bound primarily for China,⁴ are used to evade sanctions.⁵

In the Malaysian High Court case of Orin Energy v Futura,⁶ the learned YA Ong Chee Kwan (as he then was) considered whether cargo that was arguably subject to U.S. secondary sanctions could be treated as such under Malaysian law even though neither transacting parties was on the OFAC’s ‘Specially Designated Nationals’ (“SDN”) list. From the perspective of U.S. sanctions law, it was argued that if the ‘blocked property’ becomes ‘unblocked’ merely by virtue of being transacted to non-U.S. persons, this could create a perceived ‘loophole’ whereby the cargo is effectively ‘laundered’ of its U.S.-sanctioned status.

Background Facts of Orin Energy v Futura

To understand His Lordship’s judgment and to provide the necessary context, the brief facts of the case are as follows:

1. Orin Energy Investments Ltd (“Orin Energy”), a Labuan incorporated company, entered into a sales contract with Futura Asia Ltd (“Futura”), a Hong Kong incorporated company, for the purchase of approximately 700,000 barrels of fuel oil (“Sales Contract”);

2. The fuel oil originated from Venezuela, and was supplied by PDVSA Petroleo SA (“PdVSA”), a Venezuelan state-owned oil company;

3. It was agreed that the delivery of the fuel oil was to be effected via a STS transfer from the tanker MT Eser K to a vessel chartered by Orin Energy, MT Nordic Sirius (a vessel owned by NAT Bermuda Holdings, a subsidiary of Nordic American Tankers Ltd, a U.S. entity) (“MT Nordic Sirius”), at Sungai Linggi, Malaysia;

4. The STS operation commenced in September 2020, but the Master of the receiving vessel, MT Nordic Sirius, refused to complete the transfer after learning of the fuel oil’s Venezuelan origin, raising claims related to U.S. sanctions risk; and

5. As a result, Orin Energy alleged, among other allegations, that Futura had breached the Sales Contract by supplying fuel oil of Venezuelan origin, which Orin Energy claimed to be ‘blocked property’. Futura, however, countered that neither it nor Orin Energy were U.S. persons nor designated on the SDN list, and as such, the fuel oil is not ‘blocked property’.

Judicial Interpretation of Foreign Law

In reaching his conclusion, His Lordship made the following findings:

1. First, for non-U.S. persons to be caught under the relevant Executive Orders issued by the White House,⁷ there must first be a determination by the U.S. Secretary of the Treasury, in consultation with the Secretary of State, that the non-U.S. person falls within the scope of the sanctions regime, i.e., designated under the SDN list. Once such a determination is made, all property and interests in property of that SDN are treated as ‘blocked’ when they come within the possession or control of a U.S. person. It was undisputed that PdVSA is listed as a SDN. However, its property would constitute ‘blocked property’ only when it comes within the possession or control of a U.S. person. Since neither Orin Energy nor Futura are U.S. persons, therefore, any transactions of the fuel oil are also not ‘blocked’;

2. Second, both Orin Energy and Futura were not, at all material times, determined by the U.S. Secretary of the Treasure, in consultation with the Secretary of State, as SDNs. In addition, His Lordship also held that a single commercial purchase of fuel oil from PdVSA by Futura in itself does not contravene the Executive Orders as it does not amount to having ‘materially assisted, sponsored, or provided financial, material or technological support’ to the Government of Venezuela and it does not suffice to characterise the buyer as operating in the oil sector of Venezuela; and

3. Third, His Lordship emphasised that to treat the fuel oil as ‘blocked property’ solely by reason of its Venezuelan origin would effectively amount to OFAC imposing a total embargo or blanket prohibition on all products originating from Venezuela, thereby preventing all persons worldwide from dealing in such products. Such an outcome, His Lordship observed, would constitute an ‘impermissible exercise by a country of extraterritorial coercive powers’, which would in any event be practically unenforceable.

These findings illustrate that His Lordship did not decline to engage with U.S. sanctions law, but rather exercised the Court’s judicial responsibility to determine the content and scope of foreign law as a matter of fact. In doing so, His Lordship preserved the distinction between recognising foreign sanctions as part of the factual matrix of a dispute and enforcing them as binding rules of law within the Malaysian legal system.

Conclusion: Not a ‘Loophole’ in the context of Malaysian Law

Malaysia is not a unilateral sanctions-imposing state. As such, U.S. sanctions do not have direct legal force in Malaysia.⁸ Importantly, the learned YA Ong Chee Kwan (as he then was) observed that a unilateral enforcement to U.S. sanctions would effectively transform them into a worldwide embargo, extending their reach beyond U.S. jurisdiction and into states that have not enacted corresponding sanctions regimes. His Lordship did not, however, decline to consider U.S. sanctions altogether. Rather, His Lordship undertook a substantive examination of the applicable OFAC regime as a matter of foreign law and determined that the fuel oil did not constitute ‘blocked property’. This judicial approach accords with Malaysia’s position as a sovereign jurisdiction that does not give automatic domestic effect to unilateral sanctions regimes. What may appear, from a U.S. sanctions perspective, to be a regulatory ‘loophole’ is more accurately understood under Malaysian law as an expression of sovereignty.

1. Shipnext, ‘Port of Sungai Linggi’ (Shipnext) <https://shipnext.com/port/603747a660e63cd6c47ebb34> accessed 5 February 2026.
2. Marcus Hand, ‘Dark fleet ship-to-ship transfers off Malaysia more than double’ Seatrade Maritime News (27 January 2026).
3. Anish, ‘What Is Ship-to-Ship Transfer (STS) and Requirements to Carry Out the Same’ (Marine Insight, 6 May 2021) <https://www.marineinsight.com/maritime-law/what-is-ship-to-ship-transfer-sts-and-requirements-to-carry-out-the-same/> accessed 5 February 2026; and Reuters, ‘Malaysia seizes $1.299 million crude oil tankers suspected of illegally transferring’ Reuters (Singapore, 1 February 2026).
4. Marcus Hand, ‘Dark fleet ship-to-ship transfers off Malaysia more than double’ Seatrade Maritime News (27 January 2026).
5. Office of Foreign Assets Control, ‘Sanctions Advisory for the Maritime Petroleum Shipping Community’ (US Department of the Treasury, 2020) <https://ofac.treasury.gov/media/933556/download?inline> accessed 5 February 2026.
6. Orin Energy Investments Ltd v Futura Asia Ltd [2024] MLJU 2347 (unreported).
7. Executive Order 13850 of November 1, 2018, Blocking Property of Additional Persons Contributing to the Situation in Venezuela, Federal Register, Vol. 83, No. 213, 55243 (2 November 2018); and Executive Order No. 13884 of August 5, 2019, Blocking Property of the Government of Venezuela, Federal Register, Vol. 84, No. 152, 38843 (7 August 2019).
8. Bernama, “Malaysia does not recognise unilateral sanctions, remains non-aligned to any sides” New Straits Times (Putrajaya, 8 May 2022).