October 12, 2023, witnessed perhaps one of the most fast-paced days since the introduction of the price cap restrictions on Russian crude oil and petroleum products almost a year ago. Namely, the G7 and Australia (the “Price Cap Coalition”) issued a joint statement, which was followed by the issuance of a maritime advisory and the first sanctions imposed by the Office of Foreign Assets Control (“OFAC”) for breach of the Russian oil price cap. As we are nearing the one-year anniversary of the price cap, this should serve as an important reminder to operators across the industry that enforcement will be coming.
U.S. sanctions designations
The price cap on Russian crude oil took effect in December 2022, with the cap set at $60 per barrel. For the first time since the implementation of the cap, OFAC designated two vessels as SDNs which it determined to have carried oil exceeding this level. Namely, it was determined that the SCF Primorye (IMO 9421960) carried Novy Port crude oil priced above $75 per barrel, while the YasaGolden Bosphorus (IMO 9334038) carried Eastern Siberia Pacific Oil (ESPO) crude oil priced above $80 per barrel.
It was determined that both vessels conducted port calls in the Russian Federation and used U.S.-based service providers while transporting Russian origin oil that was sold above the price cap. This practice is prohibited under the price cap rules.
OFAC also designated the registered owners of the two vessels, the UAE-based Lumber Marine SA and Turkey-based Ice Pearl Navigation Corp respectively, pursuant to Executive Order 14024 for operating or having operated in the “marine sector” of the Russian Federation economy. SCF Primorye and the YasaGolden Bosphorus were identified as property in which Lumber Marine SA and Ice Pearl Navigation Corp, respectively, have an interest and were sanctioned accordingly.
Unless authorized by a license, U.S. persons are prohibited from engaging in virtually any transaction with SDNs, and also U.S. dollars cannot be used when transacting with SDNs. Even when there is no U.S. nexus to the transaction, OFAC may pursue secondary sanctions on a non-U.S. person if it determines that “material support” was provided to an SDN. These blocking sanctions also extend to entities the SDNs own by at least 50%. Accordingly, even non-U.S. operators should proceed with caution when transacting with the newly designated entities above and their affiliates.
This latest set of designations show that operators in the market should be cautious when trading Russian oil and make sure that extensive due diligence procedures are in place.
Maritime Safety Advisory
On the same day, the Price Cap Coalition issued a Maritime Safety Advisory (the “Advisory”) designed in order to reduce the exposure of industry stakeholders to possible risks associated with recent developments in the maritime oil trade. Specifically, the Advisory makes seven recommendations:
Recommendation 1: Require appropriately capitalized P&I insurance. Requiring that vessels have “continuous and appropriate” maritime insurance coverage for the entirety of their voyages. Specifically, the Advisory recommends that industry stakeholders require vessels to be insured by legitimate insurance providers with sufficient coverage for International Convention on Civil Liability for Oil Pollution Damage (CLC) liabilities.
If an industry participant is engaging with a ship that is not insured by such a legitimate insurance provider, the Advisory recommends that the industry participant conduct sufficient due diligence to ensure that the insurer can cover all relevant risks. Such due diligence might include, as is reasonable, a review of the insurer’s financial soundness, track record, regulatory record, and/or ownership structure.
Recommendation 2: Receive classification from an International Association of Classification Societies member society. The Advisory notes the usefulness of the information gathered by classification societies in enabling insurers, port states, and other industry stakeholders to make informed decisions about the seaworthiness of vessels. It is emphasized that some ships involved in the “shadow trade” have shifted away from industry standard classification societies, and instead use societies that are not a part of, or have been removed from, the International Association of Classification Societies. In response to this, the Advisory encourages industry stakeholders to ensure counterparties receive classification from IACS member classification societies to ensure vessels are fit for the service intended.
Recommendation 3: Best-practice use of Automatic Identification Systems (“AIS”). The Advisory recommends that, consistent with the International Convention for the Safety of Life at Sea (“SOLAS”), industry stakeholders promote the continuous broadcasting of AIS throughout the lifetime of a voyage. If a ship needs to disable its AIS in response to a legitimate safety concern, the ship should be able to document the circumstances that necessitated the disablement.
The Advisory also recommends the vigilant monitoring of irregular AIS patterns or data that are inconsistent with actual ship locations, with the goal of improving understanding of vessels’ activities, and reducing exposure to criminal actors and associated risks. It is further noted:
If accessible, complement AIS Tracking with Long-Range Identification and Tracking (“LRIT”). In instances of AIS outages or suspected AIS manipulation, industry stakeholders such as flagging registries that have access to LRIT should use it to determine the true location of vessels, including, where feasible, those leased to third parties. For those industry stakeholders who have access to LRIT, combining AIS and LRIT is a best practice for mitigating risk.”
Recommendation 4: Monitor high-risk ship-to-ship (“STS”) transfers. While recognizing that STS transfers may indeed be conducted for legitimate purposes, the Advisory emphasizes that such transfers can also be used to conceal the origin or destination of cargo in circumvention of sanctions or other regulations. Accordingly, the Advisory encourages the industry stakeholders to recognize enhanced risks and, in a commensurate manner, conduct enhanced due diligence in the context of STS transfers.
This includes the notification of STS oil cargo transfers as required by Annex I of the International Convention for the Prevention of Pollution from Ships (“MARPOL”), especially in areas at higher risk for illicit trading activity or AIS manipulation. The Advisory also recommends that industry stakeholders verify oil record logs to hold accountable record of cargo movements aboard vessels.
Recommendation 5: Request associated shipping and ancillary costs. The Advisory notes that one of the methods of circumventing the price cap is through the inflation of shipping and ancillary costs (e.g. freight, customs, insurance), or the bundling of such costs. Industry participants are accordingly advised to pay special attention to instances of billing of commercially unreasonable or opaque shipping and ancillary costs. Shipping, freight, customs, and insurance costs are not included in the price caps and must be invoiced separately and at commercially reasonable rates.
The Advisory recommends that industry stakeholders using “Cost, Insurance, Freight” contracts or whose counterparts use such agreements request an itemized breakdown of all costs to determine the price paid for the actual oil or petroleum products. It is acknowledged that this might necessitate the updating of inconsistent contractual terms and conditions with sellers or counterparts or adjust invoicing models to show the price of the oil until the port of loading and the price for transportation and other services separately.
Recommendation 6: Undertake appropriate due diligence. The Advisory notes that heightened diligence may be appropriate for ships that have undergone numerous administrative changes (e.g. re-flagging). Potential red flags include intermediary companies (e.g. management companies, traders, brokerages etc.) that conceal their beneficial ownership or otherwise engage in unusually opaque practices. This is because such companies are more likely to engage in deceptive practices and expose counterparties to heightened risks.
As always, a risk-based approach must be attained, and due diligence should especially be robust where market assessments indicate that Russian oil prices exceed the price cap, and services are being used or sought of a Price Cap Coalition country company (as such companies are prohibited providing services to above cap trade).
Recommendation 7: Report ships that trigger concerns. Finally, reporting breaches or suspected breaches is encouraged. The Advisory emphasizes that collective action can help protect the trade from malign activity, while promoting safety and integrity across the market.