On October 12, 2023, the Russian oil Price Cap Coalition (consisting of the G7 countries, the European Union, and Australia) issued an advisory (the “Advisory”) for the maritime oil industry and related sectors to provide recommendations concerning specific best practices in the maritime oil industry. The Price Cap Coalition’s members have agreed to restrict a broad range of services related to the maritime transport of crude oil and petroleum products of Russian Federation origin unless that oil is bought and sold at or below the specific price caps established by the Price Cap Coalition.
The Advisory is directed at both government and private sector actors (“Industry Stakeholders”) involved in the maritime trade of crude oil and refined petroleum products, and outlines best practices Industry Stakeholders can adopt to reduce risks while promoting the safe flow of oil on the market. The Advisory builds on previous guidance issued by the Price Cap Coalition, including the May 2020 Sanctions Advisory for the Maritime Industry, the Office of Financial Sanctions Implementation (“OFSI”) December 2020 Maritime Guidance, the Office of Foreign Assets Control (“OFAC”) February 2023 Guidance on Implementation of the Price Cap Policy, OFAC’s April 2023 Alert on Possible Evasion of the Russian Oil Price Cap, OFSI’s UK Maritime Services Ban and Oil Price Cap Industry Guidance, and the European Commission’s Oil Price Cap Guidance.
Increased Risks From Recent Developments in the Maritime Oil Trade
The Advisory notes that as the “shadow” trade of maritime oil has become more pronounced, it often involves actors and cargo affiliated with countries and persons subject to sanctions or associated with other illicit activity. This shadow trade is characterized by irregular and often high-risk shipping practices, including the following heightened risks:
- Legal and Sanctions: A coalition of over thirty countries have adopted a variety of economic measures in response to Russia’s war against Ukraine, including the price cap policy. Engagement with the shadow trade increases the risk of falling victim to deceptive practices used to gain access to Price Cap Coalition services to transport Russian oil or petroleum products to be sold above the price cap or to engage in activity that may otherwise violate the Coalitions sanctions, laws, or regulations.
- Maritime Safety and Marine Environment: The vessels engaged in the shadow trade are typically older ships, many of which are operating past their traditional lifespans. These vessels have an increased risk of falsified registration and may fabricate or neglect the appropriate surveys or inspections and lack regulatory certificates required under international conventions. Crews employed on these ships may also disregard prudent shipboard practices, including factors like inadequate safety and maintenance standards performed by substandard flags or unrecognized organizations, and may increase the likelihood of maritime casualties.
- Insurance and Economic: Ships in the shadow trade may rely on unproven Protection and Indemnity insurance providers that operate in jurisdiction 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.
- Reputational, Logistical, and Financial: The ownership of shadow fleet tankers may be concealed through complex corporate arrangements, with a recent increase of single vessel fleets. These vessels may disable to manipulate automatic identification systems (“AIS”) to conceal illicit activity or other information about their voyages, and Industry Stakeholders may unknowingly engage in transactions that are inconsistent with their compliance policies. This may cause loss of access to reputable service providers, financing, customers, and ports.
The Price Cap Coalition advises that Industry Stakeholders adopt, subject to applicable laws and regulations, the following best practices:
Recommendation One: Require appropriately capitalized Protection and Indemnity insurance. Without legitimate and continuous insurance coverage, shadow trade ships may be unable to pay the costs of accidents in which they are involved. The Price Cap Coalition encourages industry stakeholders to require that vessels have continuous and appropriate maritime insurance coverage for the entirety of their voyage, and further recommends requiring that vessels be insured by legitimate insurance providers with sufficient coverage for CLC liabilities.
Recommendation Two: Receive classification from an International Association of Classification Societies member society. The information gathered by classification societies is useful in enabling insurers, port states, and other industry stakeholders to make informed decisions about the seaworthiness of vessels. Some shadow ships have shifted away from industry standard classification societies, and instead use societies that are not a part of the International Association of Classification Societies.
Recommendation Three: Best-practice use of AIS. Industry Stakeholders should promote the continuous broadcasting of AIS throughout the lifetime of a voyage and document the circumstances that necessitated disablement in response to any legitimate safety concerns. Industry Stakeholders should also vigilantly monitor irregular AIS patterns or data that are inconsistent with actual ship locations. If possible, in instances of AIS outages or suspected manipulation, Industry Stakeholders should use Long-Range Identification and Tracking to determine the true location of vessels.
Recommendation Four: Monitor high-risk ship-to-ship (“STS”) transfers. While STS transfers are often conducted for legitimate reasons, such transfers can also be used to conceal the origin or destination of cargo in circumvention of sanctions or other regulations. Industry Stakeholders should conduct enhanced due diligence in the context of STS transfers, including the notification of STS oil cargo transfers as required by Annex I of the International Convention for the Prevention of Pollution from Ships, especially in areas at higher risk for illicit trading activity or AIS manipulation. Industry Stakeholders should also verify oil logs to hold accountable record of cargo movements aboard vessels.
Recommendation Five: Request associated shopping and ancillary costs. The inflation of shipping and ancillary costs, or the bundling of such costs, are tactics that may be used to conceal that Russian oil was purchased above the price cap. The billing of commercially unreasonable or opaque shipping and ancillary costs should be viewed as a sign of potential price cap evasion. Shipping, freight, customs, and insurance costs are not included in the price caps and must be invoiced separately and at reasonable rates. It is recommended that Industry Stakeholders that use “Cost, Insurance, Freight” contracts require an itemized breakdown of all costs to determine the price paid for oil or petroleum products, and to update contractual terms and conditions with sellers or adjust invoicing models if necessary.
Recommendation Six: Undertake appropriate due diligence. Heightened due diligence may be appropriate for ships that have undergone numerous administrative changes, and Industry Stakeholders may also wish to conduct increased diligence when dealing with intermediary companies that conceal their beneficial ownership or engage in other unusually opaque activities. Due diligence should be calibrated according to the specificities of their business and the related risk exposure, and is especially important where market assessments indicate that Russian oil prices exceed the price cap and Price Cap Coalition services are being used or bought.
Recommendation Seven: Report ships that trigger concerns. If an industry participant is aware of potentially illicit or unsafe maritime oil trade, including suspected breaches of the oil price cap, they should report this to the relevant authorities.
OFAC also announced the designation of two entities and blocked two vessels that used Price Cap Coalition service providers while carrying Russian crude oil above the Price Cap Coalition-agreed price cap. OFAC also noted that it and the Price Cap Coalition will remain vigilant in monitoring the compliance of shipping companies and vessels participating in the Russian oil trade while using the services of Price Cap Coalition service providers.
OFAC identified the SCF Primorye as a ship that carried Novy port crude oil priced at above $75 per barrel from a port in the Russian Federation after the crude oil price cap, which limits Russian crude oil to $60 per barrel, had taken effect. SCF Primoyre and its registered owner, United Arab Emirates-based Lumber Marine SA, were designated as a result of these actions.
OFAC also identified the YasaGolden Bosphorus as having carried Eatern Siberia Pacific Oil crude oil priced above $80 per barrel after the crude oil price cap took effect. Due to this violation, OFAC designated both the YasaGolden Bosphorus and its registered owner, Turkiye-based Ice Pearl Navigation Corp.
As a result of today’s action, all property and interests in property of the persons above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked. All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt. These prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person and the receipt of any contribution or provision of funds, goods, or services from any such person.
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