Key Takeaways:

  • OFAC has published a Maritime Oil Advisory, connected to its previously announced Price Cap Policy, in response to a more pronounced shadow trade in Russian oil and petroleum products.
  • The Advisory outlines certain risks created by the shadow trade and contains OFAC's advice for reducing such risks.
  • To demonstrate its commitment to enforcing the Price Cap Policy, OFAC has sanctioned two companies and associated vessels involved in the seaborne trade of Russian oil in violation of the Price Cap Policy.

On October 12, 2023, the Department of the Treasury's Office of Foreign Assets Control ("OFAC") published a Maritime Oil Industry Advisory ("Advisory")—together with the so-called Price Cap Coalition ("Coalition"), consisting of the G7 nations, Australia, and the European Union—in response to a growing "shadow" trade in Russian crude oil and petroleum products in violation of Coalition sanctions. The Advisory builds upon, among other things, a previous OFAC policy regarding the implementation of a price cap on oil and petroleum products of Russian origin ("Price Cap Policy")—covered in our previous alerts and summarized below—with the goal, in part, of enhancing compliance with this policy. To demonstrate its intent to crackdown on bad actors who violate the Price Cap Policy, like those involved in the "shadow fleet" (as addressed in the Advisory), OFAC sanctioned two shipping companies, and their registered vessels.

Advisory

The Advisory is directed to both government and private sector actors participating in the trading of seaborne crude oil and refined petroleum products ("Stakeholders"). It outlines certain risks created by sanctions evasion as well as best practices OFAC recommends Stakeholders adopt to "reduce their exposure to [these] possible risks associated with recent developments in the maritime oil trade."

According to the Advisory, sanctions on Russia have exacerbated what the Advisory refers to as a "shadow" trade involving individuals, entities, and cargo associated with sanctioned countries or persons. In particular, the following heightened risks, which the Advisory breaks down into four categories, have resulted:

  • Maritime Safety and Marine Environment: There are a number of factors that might lead to increased chances of marine casualties.
    • Vessels engaged in the "shadow" trade—sometimes referred to as the "shadow fleet"—usually consist of older ships that are operating beyond their typical lifespans.
    • There are many vessels that are often registered with flag states that have failed to abide by their international commitments.
    • There is a higher risk of falsified registration. Vessels involved in the shadow trade may falsify or ignore the necessary surveys or inspections and do not possess mandated regulatory certificates, contrary to international conventions.
    • A crew employed on a vessel in the shadow fleet may be pressured to ignore relevant shipboard standards, including the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers.
  • Insurance and Economic: Ships participating in the shadow trade might depend on unproven Protection and Indemnity (P&I) insurance providers operating in jurisdictions with "opaque or limited regulation, and insufficient capital, reinsurance arrangements, and/or technical expertise to handle a major claim in the event of a marine casualty." As a result, it is more difficult to hold such ships liable for the large economic costs that might stem from environmental damage.
  • Reputational, Logistical, and Financial: Those engaged in the shadow trade tend to hide where their cargo comes from, as well as their ownership structures. Hiding the ownership structure of shadow fleet tankers may involve complicated corporate structures. Ships may restrict or manipulate their automatic identification systems ("AIS") to conceal illegal activity or other details of their journeys. These deceptive practices can cause Stakeholders to enter transactions that contravene their compliance policies, impact their reputations, and lead to derisking activities by counterparties. Such "de-risking can result in loss of access to reputable service providers, financing, customers, and ports."
  • Legal and Sanctions: Corrupt actors might engage in deceptive practices to obtain or maintain access to services related to the Price Cap Policy, to move Russian oil or petroleum items in order to sell them at prices above the price cap or otherwise participate in related illicit activities.

The Advisory goes on to set out seven best practice recommendations that Stakeholders should adopt, based on their risk, depending on (1) their role; (2) the information they have available at hand; and (3) the kinds of transactions in which they participate. These recommendations are summarized below:

1. Stakeholders should obtain and maintain proper maritime P&I insurance on all their vessels throughout their travels. They should mandate that their ships are insured by legitimate providers and possess enough coverage to account for liability stemming from International Convention on Civil Liability for Oil Pollution Damage violations. Stakeholders dealing with ships that are not insured by legitimate providers, need to perform adequate due diligence to make sure the insurer can cover all relevant risks.

2. Many ships engaged in the shadow trade have begun using classification societies that either have been delisted from, or are not members of, the International Association of Classification Societies ("IACS"). Stakeholders should make sure counterparties to their transactions have received classifications from an IACS member society, to confirm their respective ships are ready for their intended services.

3. In accordance with the International Convention for the Safety of Life at Sea, Stakeholders should encourage that AIS be continuously broadcasted throughout the entirety of their ships' journeys. When a ship must disable its AIS, due to a legitimate safety issue, the vessel should memorialize its reasons for doing so. Stakeholders need to also look out for abnormal AIS data or patterns found to be inconsistent with the actual location of their vessel(s).

a. If possible, Stakeholders should complement AIS by using Long-Range Identification and Tracking ("LRIT"). For those with access, LRIT can help them find the accurate location of their ship(s)—which includes, when applicable, those leased by third parties—and, thus, combining AIS and LRIT is a best practice for lowering risk.

4. Ships sometimes engage in ship-to-ship ("STS") transfers of cargo at sea, which may be used to hide the origin or destination point of the cargo, in contravention of applicable laws and regulations. When such STS transfers are made "outside of safe and sheltered waters, . . . [they] entail heightened environmental and safety risks." Therefore, Stakeholders must understand these increased risks, and contingent on their role, perform better due diligence in this STS transfer setting. This includes providing proper notification about transfers involving oil cargo, as mandated by Annex I of the International Convention for the Prevention of Pollution from Ships. It may also include verifying oil record logs to keep track of the movement of cargo across different ships.

5. Stakeholders "involved in the Russian oil trade that use 'Cost, Insurance, Freight' contracts or whose counterparts use such agreements should require an itemized breakdown of all costs to determine the price paid for oil or petroleum products." For example, Stakeholders may update contracts entered with counterparties or modify their invoicing to account for the price of the oil before it reaches the loading port and then, separately, the cost of moving the oil (and other services). This helps keep bad actors from combining the price of the oil with the service costs, to hide the fact that they purchased Russian oil above the price cap (described below).

6. Appropriate due diligence should be executed by Stakeholders, based on the type of business in which they are engaged and the associated risk exposure. Vessels that have experienced various administrative alterations (e.g., re-flagging) may require increased diligence. And due diligence is particularly critical where the Stakeholder is seeking services from entities or individuals associated with members of the Coalition, and the price of Russian oil exceeds the price cap (addressed below).

7. Stakeholders are encouraged to report ships and/or bad actors engaging in the potentially dangerous or illegal trade of seaborne oil, "including suspected breaches of the oil price cap . . . to relevant authorities."

The recommendations provided in the Advisory tend to align with the diligence and certification safe harbor requirements provided for in the Price Cap Policy. Under the Price Cap Policy, which took effect in December 2022, there is a cap on the maritime transport of Russian oil set at $60 per barrel ("Price Cap"). This Price Cap applies to those engaging in services specified by OFAC, connected to the movement of seaborne Russian oil (priced above the Price Cap), including trading, commodities brokering, shipping, insurance, financing, flagging, and customs brokering ("Covered Services"). Under the Price Cap Policy, OFAC prohibits, "the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any of the Covered Services to any person located in the Russian Federation."

However, the Price Cap Policy also establishes a safe harbor process whereby individuals and entities may provide the Covered Services without facing OFAC sanctions if they comply with certain due diligence, attestation, and recordkeeping procedures set out in Price Cap Policy guidance provided by OFAC in February 2023 ("Guidance"). The Guidance contains a table summarizing the degree of due diligence those providing the Covered Services must perform—contingent on the nature of their business and their access to Russian oil price information—to avoid liability. Although complying with the safe harbor process set forth in the Guidance and abiding by the recommendations in the Advisory require similar diligence efforts, the safe harbor process allows parties who comply with it to avoid liability entirely, while OFAC does not provide the same benefit for those who strictly follow the suggestions in the Advisory.

SDN List Additions

As previewed above, to demonstrate its "'continued commitment to reduc[ing] Russia's resources for its war against Ukraine and to enforce the price cap,'" OFAC added new entities and vessels associated with these entities to its Specially Designated Nationals and Blocked Persons ("SDN") List for violating the Price Cap Policy because their vessels carried crude oil, from a Russian port, at prices that exceeded the Price Cap—"us[ing] U.S.-based service providers while transporting ... Russian origin oil." Specifically, OFAC added Lumber Marine SA and its vessel SCF PRIMORYE, IMO 9421960 as well as Ice Pearl Navigation Corp. and its vessel, YASA GOLDEN BOSPHORUS, IMO 9334038 to the SDN list

However, OFAC also issued General License No. 73 ("GL 73") with respect to these sanctioned entities and vessels. GL 73 authorizes certain transactions ordinarily incident and necessary to: (1) the safe docking and anchoring of any of the blocked vessels in port; (2) the preservation of the health or safety of the crew of any of the blocked vessels; or (3) emergency repairs of any of the blocked vessels or environmental mitigation or protection activities relating to any of the blocked vessels. GL 73 explicitly outlines several transactions that are not authorized by GL 73 irrespective of the other provisions therein. GL 73 expires at 12:01 a.m. eastern standard time on January 8, 2024.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.