On February 1, 2024, the United States Department of Treasury’s Office of Foreign Assets Control (“OFAC”) published a Price Cap Coalition Compliance and Enforcement Alert (the “Alert”). Per the Alert, the “Price Cap Coalition,” which consists of the G7, the European Union, and Australia, has two key objectives: (1) constraining Russian revenues that could otherwise be used to fund Russia’s war against Ukraine, while (2) maintaining global oil flows and protecting energy security. The Alert contains an overview of key oil price cap (“OPC”) evasion methods and recommendations for identifying such methods and mitigating their risks and negative impacts as well as information of how to report OPC suspected breaches across the Price Cap Coalition. The Alert also noted that it builds on multiple previous alerts issued by the Price Cap Coalition.
Per OFAC, the Alert should be considered in full by any industry stakeholder involved in the trade of Russian oil and oil product and should adopt the recommendations included in the Alert along with those included in previous guidance documents. OFAC also notes that the guidance can help governments and industry stakeholders improve their compliance with the OPC and reduce their exposure to possible risks associated with circumvention and evasion of the measure.
OPC Evasion Methods and Recommendations
In the Alert, OFAC highlights the following common evasion methods of the OPC:
- Falsified documents and attestations
Falsified documentation can be used to disguise the true price paid for Russian oil and oil products and obscure the origin of a vessel, its goods, destination, and even the legitimacy of the vessel itself. This could lead to Coalition services inadvertently being used to support non-price cap compliant transactions.
- Opaque shipping and ancillary costs
Manipulation of shipping and ancillary costs (including shipping, freight, customs, and insurance costs), the bundling of such costs, and failure to itemize these costs could be used to obfuscate Russian oil and oil products being purchased above the price cap. These costs should be at commercially reasonable rates, in line with industry standards, including any geopolitical risk premiums.
- Third country supply chain intermediaries and complex and irregular corporate structures
Entities attempting to evade the OPC are increasingly looking to third country supply chain intermediaries and the use of complex and irregular corporate structures to trade Russian oil and oil products. Many of these enablers and facilitators are legitimate entities but some are deliberately trying to evade the OPC while using Coalition services.
To combat these evasion methods, OFAC recommends that industry stakeholders conduce appropriate due diligence of customers and counterparties across the supply chain that they engage with in the trade of Russian oil and oil products. This due diligence should be calibrated according to the specificities of their business and related risk exposure and should include the assessment of documents that appear incomplete, inconsistent, or contradictory to previously shared or publicly available information. Enhanced due diligence may also be appropriate for ships that have undergone numerous administrative changes, when they involve complex and irregular corporate structures, and when dealing with intermediary companies that conceal their beneficial ownership or otherwise engage in unusually opaque practices. Industry stakeholders can then use these due diligence assessments to build risk profiles of particular companies and vessels.
Certain flagging and reflagging activities may indicate that a vessel is attempting to obfuscate its true ownership and/or affiliation with Russia and should be considered high-risk and warrant enhanced compliance and KYC checks.
To combat flagging abuse, OFAC recommends that flagging registries should inform registrants and owners of vessels through marine notices that sanctionable or illicit conduct would be the cause for immediate removal of registration. Industry stakeholders may benefit from consulting available industry resources such as the International Chamber of Shipping’s Flag State Performance Table where “potentially negative performance” indicators may be useful.
- “Shadow” fleet
The “shadow” fleet (also referred to as the “ghost,” “dark,” or “parallel” fleet) generally refers to older vessels that are anonymously owned and/or have opaque corporate structures that are solely deployed in the trade of sanctioned oil or oil products and engage in various deceptive shipping practices. There is ample evidence that Russia has utilized these vessels to transport its oil and oil products.
To combat the shadow fleet, OFAC recommends that industry stakeholders should undertake enhanced due diligence of vessels which fit the shadow fleet description and are used to transport Russian oil and oil products. OFAC also recommends carrying sufficient maritime insurance coverage for the entirety of their voyages, and to ensure that counterparties receive classification from the International Association of Classification Societies member classification societies to ensure vessels are fit for the service intended.
- Voyage irregularities
Voyage details should normally be known and traceable, from the port of loading to the final destination. While there may be legitimate reasons for possible changes to this, illicit actors may attempt to disguise the ultimate destination, origin of cargo, or recipients by using indirect routing, unscheduled detours, or transit or trans-shipment of cargo through third countries. There are legitimate reasons for Automatic Identification System (AIS) to be turned off or “go dark” (e.g., passage through waters at high-risk of piracy or due to other security considerations). In such situations, it is advisable for ships to turn off their AIS to evade threats, and thus should not be considered a red flag for illicit activity. However, AIS manipulation and spoofing could be used to evade the OPC (e.g., to disguise which ports particular vessels have visited and their whereabouts for the purpose of evading detection when conducting illicit trade). Repeated, prolonged, and unexplained gaps in AIS, particularly in sensitive locations as well as unusual transmissions, should be cause for further investigation.
To combat voyage irregularities, OFAC recommends that relevant industry stakeholders be able to explain voyage and shipment details. Industry stakeholders should also conduct enhanced monitoring of vessels and regions which display evidence of voyage irregularities, AIS manipulation, and illicit STS transfers. They should also scrutinize routes and destinations that deviate from normal business practices for unknown reasons, including routine transit and trans-shipment. Industry stakeholders are also encouraged to investigate signs and reports of AID manipulation before entering into new contracts or when engaging in ongoing business.
Finally, the Alert also contains a chart containing information on how industry stakeholders can report suspected breaches in each coalition country.
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