In a previous update posted on our Trade Compliance Resource Hub on 20 December 2023 (Christmas comes early for G7 operators – EU adopts 12th package of sanctions against Russia, changes to the Price Cap Model), we explored the EU’s latest package of sanctions against Russia in general terms.

One of the key novelties in this package, introduced by way of article 3(q) of Council Regulation (EU) 2023/2878 (the “Regulation”), that we want to focus on in this briefing is the introduction of an obligations framework around the sale of tankers, and more specifically “for the transport of crude oil or petroleum products”. The self-declared aim of the Regulation is to introduce “transparency” into the sale of this asset class by implementing both back-looking (for any transfer having occurred between 5 December 2022 and 19 December 2023) and forward-looking notification requirements and, in some cases, a pre-approval requirement.

That tankers have been used in circumventing trade-oriented sanctions is beyond dispute, and the widespread references made to the activities of the “dark fleet” is testimony to that. While the purpose of the policy is well understood, the devil is in the detail and the Regulation raises several issues in relation to its practical application and effectiveness.

The policy purports to apply to any owner of such tanker which is an “EU person” in the usual meaning of the term. The applicability of the Regulation to EU registered corporate ship owners is obvious, and merely theoretical in relation to natural persons. A non-EU corporate body being the registered owner is more frequent in practice and some may be tempted, taking a narrow interpretation of the Regulation, to hide behind the corporate veil to disregard the Regulation completely. Based on the EU’s history of intolerance towards, in the context of other article 3 restrictions, and especially in relation to Russian seaborne oil, arguments that a vessel is not an EU vessel but merely beneficially owned or managed by EU persons, this would probably not be prudent. Also note that the EU has clarified through published FAQs that such restrictions apply to vessels “owned, chartered and/or operated by EU companies or nationals”.

In terms of the transactions encompassed by the Regulation, the first point to note is that there is uncertainty in the semantics, as the concepts of “sale” and “transfer of ownership” are used interchangeably throughout article 3(q) when they actually refer to two distinct stages of a sale and purchase transaction (S&P), the former being the entry into a memorandum of agreement (MOA) and the latter, the delivery of the vessel pursuant to the MOA. Also, while the restrictions obviously apply to a sale contract (on usual BIMCO or Nipponsale forms), a transfer of ownership following the exercise of a purchase option in the context of the tail-end of a financial bareboat chartering would also fall within the scope of article 3(q). Where the bareboat charters do not contain the appropriate forward-looking sanctions wording; the owners could find themselves in a difficult spot.

The Regulation also prohibits sales where the vessel is “for use in Russia”, notwithstanding the nationality of the prospective buyer. This is a more complex issue to address in day-to-day sale and purchase transactions. Pending further clarification from the EU, ship owners should insist on including appropriate buyers’ representations and warranties in their MOAs as to the intended use of the vessel and ideally receive a full indemnity from the buyers in case of breach of the representation. Such wording should be carefully drafted, for example so as to include any new sanctions packages between signing of the MOA and delivery.

Another uncertainty will result from the number of different sanctions monitoring entities involved across the EU. The requirements in article 3(q), resulting from an EU regulation, should be uniform across all EU jurisdictions. However, in practice, we expect there to be potential divergence between jurisdictions on the approach to notification requirements. A good example is the Maltese notification template, which requires the resident entity to complete the information required by article 3(q)(4) specified above. But it also requires a “brief explanation regarding the merits of the case/transfer”, which is not explicitly part of the Regulation. As member states continue to implement new monitoring templates, ship owners may face delays when ensuring compliance – the list of information to provide could differ between flag states. Again, inclusion of an information undertaking, or even a wider assistance one, from buyers to help sellers comply with their obligations under the Regulation should be considered.

Clarifications on the practicalities of the Regulation are awaited and our sanctions team have raised these issues with the relevant actors at the EU level. The deadline set as 20 February 2024 for the “looking back” report period is fast approaching. In the meantime, ship owners looking to dispose of their tankers should take a prudent approach, run enhanced Know Your Client checks (KYCs) and include appropriate wording in any MOA to minimize sanctions-related risks, given these are not covered in the standard BIMCO/Nipponsale forms.