On November 10, 2023, the Office of Foreign Assets Control (“OFAC”) sent notices to ship management companies in nearly 30 countries inquiring about the operations of 100 vessels suspected of facilitating operations in violations of U.S. sanctions related to Russian oil. While OFAC refused to “confirm or comment on investigations or enforcement actions” an OFAC spokesperson reiterated the agency’s commitment “to enforcing the price cap and reducing Russia’s resources for its war against Ukraine.”
These notices stem from growing concerns surrounding a fleet of decommissioned and aging vessels, coined the “Ghost Fleet,” rumored to be involved in transporting Russian oil in violation of international sanctions. These Ghost Fleet vessels are typically older, decommissioned ships that may be more vulnerable to leaks and oil spills. The G7, the European Union and Australia imposed a $60 per barrel cap last December on seaborne exports of Russian crude oil which involve “maritime services” provided by U.S. or other G7 persons. We previously discussed the price cap on October 16, 2023 and January 11, 2023.
The operations of the “Ghost Fleet,” which generally involves ships which claim to be free of G7 financing, insurance or other services, have created a “two-tiered” market for oil, one of which is controlled by the mainstream vessels and companies in compliance with sanctions under the current price cap and the other involving the (often clandestine) sale and transportation of sanctioned oil above the price caps.
The current action builds on sanctions imposed on two owners of tankers carrying Russian oil above the $60 cap last month. The entities, Turkey-based Ice Pearl Navigation and UAE-based Lumber Marine SA were found to be carrying oil priced at $80 and $75 a barrel respectively, both over the set cap. Both tankers, which conducted port calls in Russia, were using U.S. based service providers, a clear U.S. nexus, while transporting the Russian origin crude. The resulting sanctions identify and block access to all property and interests owned by the companies in the U.S.
As global prices for oil continue to trend over the $60 price cap, the impact of the Ghost Fleet on the effectiveness of the cap may only grow. Treasury Secretary Janet Yellen, on October 11, 2023, stated that the current cap sharply reduced Russian revenues over the past year, and that the cap is critical to keep imposing severe and increasing costs on Russia to deter their invasion of Ukraine. As the current administration appears ready to prioritize enforcement of this cap it is crucial that consumers of maritime services are aware of potential sanctions risks.
We recommend that companies continue to stay vigilant by paying close attention to whether they are engaging with ship management companies at risk of sanctions liability. We also recommend that companies in the maritime industry confirm whether transactions will involve a U.S. nexus, and if, conduct heightened due-diligence to avoid potential U.S. sanctions risks.
We will continue to monitor developments in this area and encourage you to subscribe to be kept informed of latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.