The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) on Oct. 12, 2023, designated two tank vessels and their registered owners as Specially Designated Nationals (SDNs) for allegedly transporting Russian crude oil sold above the $60 per barrel cap.¹ Then on Nov. 16 OFAC imposed new sanctions on three additional tank vessels and their registered owners.

Why Were These Vessels Targeted for Sanctions?

According to OFAC, although the vessels and their respective owners are not based in the Price Cap Coalition countries (i.e., the G7, European Union and Australia), the vessels used or may have used "covered services" provided by U.S. persons. These were Liberian and Marshall Islands registry vessels, and both registries have operations in the United States. Given that "registry services" are a covered service, this may have been the jurisdictional nexus OFAC used for designation. However, two shipowners were designated under Executive Order 14024 for "operating or having operated in the marine sector of the Russian Federation economy," and non-U.S. persons could potentially be sanctioned if they were determined to be providing "material" assistance or support to sanctioned entities or engaging in deceptive or structured transactions to evade U.S. sanctions, regardless of a U.S. nexus.

These sanctions actions appear to be a "shot across the bow" to industry, in that OFAC targeted only the vessel and its registered owner and not the beneficial owners, charters or other parties to the transactions. Shipowners are "Tier-3" actors under the prior Price Cap Coalition Guidance. (See Holland & Knight's previous alerts, "OFAC Publishes New Guidance on Russian Oil Price Cap with Impact on Maritime Services," Nov. 30, 2022, and "OFAC Updates U.S. Oil Price Cap Policy Against Russia," Feb. 7, 2023). Under that guidance, OFAC acknowledged that a Tier-3 actor, who would not necessarily have access to detailed price information, could rely on certifications from counterparties in many circumstances. However, targeting the vessels will serve as a major deterrent and increase diligence by shipowners and operators.

We Will Likely See More Enforcement Actions By OFAC

The latest sanctions actions underscore the U.S. government's commitment to upholding the price cap policy and closing perceived loopholes. These actions make clear that the shipping sector remains squarely within OFAC's sights. Indeed, Deputy Treasury Secretary Wally Adeyemo recently commented that "[s]hipping companies and vessels participating in the Russian oil trade while using Price Cap Coalition service providers should fully understand that we will hold them accountable for compliance." The full reach of the impact of this aggressive enforcement posture remains to be seen but it remains worth monitoring as the price cap policy was developed as a mechanism to carefully maintain market stability while limiting Russian profits from their invasion of Ukraine. And the safe harbor provisions for certain actors were designed to avoid the type of wide-ranging de-risking by insurers and financial institutions that might otherwise stifle trading within the parameters of the price cap.

The Price Cap Coalition Advisory

In parallel with OFAC's sanctions actions issued in October, the Price Cap Coalition also published a "Coalition Advisory for the Maritime Oil Industry and Related Sectors" (the Advisory). The Advisory provides best practices that industry stakeholders can adopt to detect and address deceptive and illicit shipping practices, including "shadow" trade involving actors and cargo affiliated with countries or persons subject to sanctions, while continuing to engage in the maritime trade in crude oil and petroleum products. The Advisory is directed to both government and private industry stakeholders involved in the maritime trade of crude oil and refined petroleum products, including shipowners, flag registries, Protection and Indemnity (P&I) clubs, and insurers (all considered Tier-3 entities under the original Price Cap Guidance), and offers the following recommendations as best practices for industry stakeholders to adopt, as appropriate:

• Require appropriately capitalized P&I insurance. The shadow trade involves ships that may rely on unknown, untested, sporadic or fraudulent insurance. A vessel not insured by such a legitimate insurance provider warrants further due diligence.
• Receive classification from an International Association of Classification Societies (IACS) member society. Ships involved in the shadow trade have shifted away from industry standard classification societies and instead use societies that are not a part of, or have been removed from, the IACS. As such, counterparties without classification from IACS member classification societies is a red flag.
• Best practice use of Automatic Identification Systems (AIS). Industry stakeholders should also vigilantly monitor irregular AIS patterns or data that are inconsistent with actual ship locations. By requiring that ships with which they engage use AIS in accordance with the International Convention for the Safety of Life at Sea (SOLAS), industry stakeholders will improve their understanding of vessels' activities and reduce their exposure to criminal actors and associated risks. 
• Monitor high-risk ship-to-ship (STS) transfers. Industry stakeholders should recognize STS transfers (the transfer of cargo between ships at sea) may have been conducted to conceal the origin or destination of cargo in circumvention of sanctions or other regulations. Enhanced due diligence should be conducted in the context of STS transfers. It is also recommended to verify oil record logs to hold accountable record of cargo movements aboard vessels.
• Request associated shipping and ancillary costs. The inflation of shipping and ancillary costs (e.g., freight, customs, insurance) 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 commercially reasonable rates. Industry stakeholders involved in the Russian oil trade that use "Cost, Insurance, Freight" contracts or whose counterparts use such agreements should require an itemized breakdown of all costs to determine the price paid for oil or petroleum products. This may require that industry stakeholders update contractual terms and conditions with sellers or counterparts or adjust invoicing models to show the price of the oil until the port of loading and the price for transportation and other services separately.
• Undertake appropriate due diligence. Heightened diligence may be appropriate for ships that have undergone numerous administrative changes (e.g., re-flagging). Industry stakeholders may also wish to conduct increased diligence when dealing with intermediary companies (e.g., management companies, traders, brokerages, etc.) that conceal their beneficial ownership or otherwise engage in unusually opaque practices. Industry stakeholders' due diligence should be calibrated according to the specificities of their business and the related risk exposure. Due diligence is especially important where market assessments indicate that Russian oil prices exceed the price cap and Price Cap Coalition services are being used or sought.
• 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 relevant authorities.

Conclusion and Takeaways

OFAC has signaled that it will undertake continued vigilance in monitoring compliance with the price cap policy and that it will continue to take enforcement action to uphold the price cap and support compliance. The Advisory, combined with the recent OFAC designations, makes it uncertain whether Tier-2 and Tier-3 actors can still rely on certifications as set forth in the prior Price Cap Coalition Guidance. Industry stakeholders should thus continue to undertake heightened due diligence measures to assess their risk in respective transactions, contemplate whether charterparties have incorporated recommended clauses when necessary and continue to ensure that attestations related to Russian-origin oil are duly developed.

For additional information or questions regarding OFAC's sanctions actions, review or assistance on assessing sanction compliance risks or any other trade-related matters, please contact the authors or another member of Holland & Knight's International Trade Group.

Notes

¹ In December 2022, the Price Cap Coalition agreed to set the price cap for Russian crude oil at $60 per barrel.