News

[Column] Anti-Russian Sanctions: an overview

20 December 2024









Royston Deitch

Solicitor, ACII

Executive Representative, Head of IG Matters/General Manager of Reinsurance and Regulatory Affairs Dept.



Introduction

The word “sanction” comes from the Latin word sānctiō, meaning “a law or decree that is sacred or inviolable.” It is also one of the few words in the English language which has two contradictory meanings: it can mean both “to allow” and “to punish so as to deter”. Sanctions connected with the shipping industry imposed in the wake of Russia’s invasion of Ukraine in February 2022 are definitely in the latter category.


The Oil Price Cap

On 5 December 2022 it became prohibited to import Russian crude oil into either the UK or the EU, or to provide ancillary services such as insurance for the import. This did not mean, however, that the carriage of all Russian oil was prohibited, as the G7 (a group of nations including Japan, the UK, and the US) and the EU introduced on the same date the Oil Price Cap (OPC) exception. As explained by UK Government guidance, the exception allows “the supply or delivery of Russian oil and oil products by ship, as well as provision of associated services” where and only where the oil or oil product has been purchased or sold at or below a set price, or “cap”. The maximum price that Russian crude oil can be shipped at without breaching sanctions is USD 60 per barrel.


OPC Goals

The purpose of the Oil Price Cap exception was set out on 16 October 2023 by the US Dept. of the Treasury’s Acting Assistant Secretary for Economic Policy, Eric Van Nostrand. Mr. Van Nostrand explained that the goal was to keep global energy markets well-supplied and so avoid a price shock which would hurt the global economy, while at the same time limiting “the Kremlin’s ability to fund its illegal war in Ukraine”.


As the war has gone on, increased demands have been made on shipowners and others to comply with sanctions.


General Trade Licence changes

For example, the General Trade Licence (GTL) issued by the UK Government in March 2022 allowed UK insurers to provide insurance for vessels calling at Russian ports or transiting Russian territorial waters provided they kept records. However, on 4 December 2022, a further General Licence was issued (INT/2022/2469656), which widened the information to be provided. Now, the vessel need not have called at a Russian port or transited Russian waters. Instead, UK insurers were required also to keep a record of any maritime transportation of Russian origin crude oil or petroleum products from Russia to a third country, or from a non-Russian port or via ship-to-ship (STS) transfer operations.


Attestations

Information required was to be provided in the form of “attestations”, initially on an annual basis. However, by way of the “Coalition Statement on Price Cap Rule Update” of 20 December 2023, it was decreed that from February 2024, attestations would have to be provided on a per-voyage basis, ie each time that a ship loaded Russian oil. Oil transferred from one vessel to another vessel via STS constitutes a new voyage requiring further attestations.


“Tiers”

Under the EU’s guidance of 26 January 2024, P&I Clubs and other insurers “are Tier 3A actors… [which] do not regularly have direct access to price information”. They must obtain attestations within 30 days of each loading of Russian oil or petroleum products. Shipowners are also Tier 3 actors, whereas traders and charters, with direct price information, are in Tiers 1 or 2.


Actors with direct information must provide to shipowners and P&I Clubs on request itemised price information for ancillary costs. Shipowners must ensure they have a right to ancillary costs information within 30 days.


Ancillary Cost Information

Ancillary costs can differ, but the guidance sets out that the following items should be included for the most common Cost, Insurance, and Freight (CIF) and Free on Board (FOB) contracts:


For CIF contracts:

  • Costs include export licences, inspection of products, fees for shipping and loading the goods, and other costs such as for packaging, customs, duty and taxes, compensation for damage to the goods, and various charges at the load / export port.
  • Insurance: cost of insuring the shipment until delivery at the port of destination.
  • Freight: cost of shipping from the seller’s port to the buyer’s port of destination.
  • Any other costs demonstrating compliance and providing assurance that the transaction is legal, including costs related to auxiliary services for STS transfers.

For FOB contracts:

  • Including packaging, loading, and delivery charges, export taxes, and customs duties.

Due Diligence

Shipowners should not take attestation information at face value. As the EU’s guidance of 26 January 2024 said, “shipowners are required to do the necessary due diligence such that it would be reasonable to rely on the attestation” they are provided with.


EU regulations provide that operators must carry out due diligence appropriate to the specificities of their business and risk exposure. If a Tier 2 or 3 actor without direct access to price information carries out appropriate due diligence and reasonably relies on an attestation that Russian oil was transported within price cap rules, but then finds out the attestation was wrong, the actor will not be considered in breach of price cap rules so long as they acted in good faith.


Appropriate Due Diligence

The UK Government’s Compliance and Enforcement Alert of 1 February 2024 discusses “appropriate and enhanced due diligence”. For “appropriate” due diligence, “industry stakeholders” must look out for “OPC evasion red flags”, so that “where business intelligence, information, or market assessments” indicate above cap prices for Russian oil or oil products, stakeholders should not provide the service but notify the authorities instead.


Possible Evasion Measures

OPC evasion methods covered by the Alert include falsified documentation and attestations, opaque shipping and ancillary costs, complex and irregular corporate structures of customers, flagging changes, and the “shadow” fleet. Voyage irregularities, such a ship’s AIS being turned off, are also considered, although there can be legitimate reasons for this.


Appropriate due diligence for industry stakeholders also includes “effective sanctions compliance programmes and monitoring” for “evasion red flags”. Effective Know Your Customer (KYC) and Know Your Customer’s Customer (KYCC) procedures are necessary. KYCC procedures should allow the identification of a ship’s ultimate beneficial ownership, including links to Russian entities. In addition, industry stakeholders must carry out risk assessments on documents which appear “incomplete, inconsistent, or contradictory to previously shared or publicly available information, as this may suggest illicit activity”. Invoices and contracts must be retained as evidence that Russian oil was purchased at or below the price cap. Other documentation should also be used to corroborate information provided, for example, ship registration documents should match insurance documents.


Enhanced Due Diligence

“Enhanced” due diligence, meaning additional scrutiny, is for ships which have been sold or re-flagged on a regular basis, or with complex and irregular ownership structures, and for when dealing with companies which conceal their beneficial ownership or otherwise engage in “unusually opaque practices”.


OPC Breach Penalties

There can be very severe penalties for breaching OPC rules. These are set out in the February 2024 Industry Guidelines issued by the UK’s Office of Financial Sanctions Implementation (OFSI), part of the UK’s HM Treasury.


The penalties range from warnings, via fines, to criminal proceedings and imprisonment.


It should also be noted that in seeking enforcement of sanctions, OFSI does not have to establish beyond reasonable doubt, the criminal burden of proof, that a breach has occurred. Instead, OFSI only needs to demonstrate a breach on the balance of probabilities.


Where it is possible to estimate the value of the breach, the maximum penalty for OFSI is the greater of £1,000,000 or 50% of the estimated value. Otherwise, the maximum is £1,000,000. As for the US, penalties for breach of OPC sanctions include the blocking of access to all property and interests owned by the companies in the US.


The US Position

It is important to consider the US situation given that many insurers, reinsurers, and banks are domiciled within its jurisdiction or have financial arrangements subject to US law.


Examples of US OPC-related law include the Determinations pursuant to section 1(a)(ii) of Executive Order 14071 issued by the Dept. of the Treasury on 21 November 2022 and 3 February 2023. The first Determination prohibited services such as shipping and insurance, including reinsurance and P&I, so far as they related to the maritime transport of Crude Oil of Russian origin. The second concerned the maritime transport of Russian-origin petroleum products.


Also on 3 February 2023, the Department of the Treasury / OFAC published General Licence 57A. GL 57A authorised all transactions prohibited by the 14071 Determinations, so long as these were necessary to deal with “vessel emergencies related to the health or safety of the crew or environmental protection...”.


The Licence was clear, however, that it did not authorise any transactions related to the sale of Russian crude oil or petroleum products.


Sanctions Clauses for Charter Parties

BIMCO has a drafting body made up of representatives from shipowners, P&I Clubs, law firms, and charterers, and has issued a range of Oil Price Cap and other sanctions-related clauses.


OPC Clause

The 2024 OPC clause sets out rights and obligations for owners and charterers, covering compliance with attestations, ancillary cost and price information requirements, and non-compliance. For example, charterers warrant that the employment of the vessel under the charter party shall at all times comply with OPC restrictions. In the event of a breach, or if owners have reasonable grounds to suspect a breach, owners have the right to terminate the Charter Party.


Time and Voyage Charter Party Sanctions Clauses

There are also BIMCO sanctions clauses for Voyage, Time, and other charters, including for Container Vessel Time Charters. Under these various clauses, both owners and charterers warrant that throughout the duration of the charter they are not sanctioned parties. If a breach occurs, the party not in breach may terminate the charter and/or claim damages.


As with all charter party contracts, the rights and obligations of the parties will depend on the specific contract and clauses therein.


Commercial Loan Agreements

Anti-Russia sanctions issued by the EU, UK, and US since February 2022 have had significant effects on commercial loan agreements.


The sanctions appear in regulations such as the UK’s Russia (Sanctions) (EU Exit) (Amendment) (No. 17) Regulations 2022, of 16 December 2022; the EU’s Council Regulation (EU) 2023/2878 of 18 December 2023; and, in the US, under the very wide Executive Order 14024 with amendments. Also, CAATSA (Countering America’s Adversaries Through Sanctions Act) Section 228, can impose secondary sanctions on non-Americans who facilitate significant transactions for sanctioned Russian entities. The idea is to further restrict the ability of Russian borrowers to access international finance.


All the regulations restrict or prohibit transactions with certain Russian banks, companies, and individuals. This makes it difficult or impossible to make or receive payments involving sanctioned parties.


Sanctions clauses in loan agreements may allow the lender to terminate the agreement or demand early repayment if the borrower becomes subject to sanctions. Since lenders face increased legal and compliance risks, including significant penalties for violating sanctions, they must carry out enhanced due diligence to ensure they are not inadvertently dealing with sanctioned entities. This includes thorough checks on the ownership and control structures of borrowers and related parties.


Each sanctions-issuing body, whether in the EU, UK, or US (Office of Foreign Assets Control, or OFAC) provides detailed compliance guidelines.


EU packages

On 16 December 2024 the EU announced its 15th package of sanctions against Russia arising out of its invasion of Ukraine. The EU’s aim is “to address the circumvention of EU sanctions” by targeting the Russian shadow fleet. There are 84 listings in the new measures. 54 of these are persons, including the Minister of Defence of the Democratic People's Republic of Korea. The remaining 30 are entities such as Russian shipping companies responsible for the transportation of crude oil and oil products. 52 vessels were also added to a list of ships subject to bans on port access and provision of services related to maritime transport.


Nothing in the new measures appears to reduce any of the OPC-related restrictions discussed elsewhere in this article.


Conclusion

Aside from possible criminal penalties, Club members are reminded that any trade involving Russia is likely subject to significant legal restrictions, and that cover is not available for any trade that breaches sanctions. Members are therefore advised to conduct thorough due diligence on the parties, cargoes, vessels, and other service providers before they engage in any trade with a sanctions risk. Finally, Members are reminded to keep records of their due diligence investigations.


We wish members safe and successful trading with all their voyages, and would ask members to contact us with any questions they have about sanctions.