The United States Office of Foreign Assets Control (“OFAC”) issued an Alert on April 17, 2023, warning U.S. persons about the possible evasion of the price cap imposed by the Department of Treasury on Russian oil. Pursuant to Executive Order 14071, which was issued by President Biden in April 2022, the Department of Treasury published a Determination on December 5, 2022, that capped the price of Russia-origin crude oil at $60 USD per barrel. In addition, a price cap for Russian petroleum products was also implemented on February 2, 2023.¹

The price caps and related sanctions prohibit the provision of certain maritime services related to the transport of Russian oil or petroleum products if the products are not purchased at or below the price points listed in the Treasury Determinations. The prohibited services include trading/commodities brokering, financing, shipping, providing insurance, flagging, and customs brokering (the “covered services”). However, OFAC does have a safe harbor process that allows businesses to provide these covered services and avoid penalties for inadvertent violations, if the service providers act in good faith to comply with the process. As safe harbor can only be claimed if providers are acting in good faith, so it is important to understand prior OFAC guidance on what this good faith requirement entails. In addition, the April 17^th Alert puts service providers on notice of possible sanctions evasion risks and red flags that providers will need to consider when conducting good faith due diligence. As such, this article will provide a brief overview of prior OFAC Guidance to service providers, including ship owners, commodities brokers, and protection and indemnity clubs, as well as unpack OFAC’s most recent Alert.

OFAC Guidance on the Implementation of the Price Cap Policy for Crude Oil and Petroleum Products of Russian Federal Origin (February 3, 2023)

OFAC’s February 3^rd Guidance established a safe harbor from OFAC enforcement for service providers acting in good faith. According to the Guidance, good faith requires that service providers comply with a recordkeeping and attestation process that “allows each party in the supply chain of Russian oil or Russian petroleum products shipped via maritime transport to demonstrate or confirm that the Russian oil or Russian petroleum products have been purchased at or below the price cap.” Importantly, compliance requirements are broken into three tiers based on service provider type.

• Tier 1 includes providers who in their ordinary course of business have access to information on the price of oil or petroleum products. The Guidance states that commodities brokers or oil traders are examples of providers that fall under Tier 1. To be afforded safe harbor, these providers must retain documentation proving that Russian oil or petroleum products were purchased in compliance with the price cap. This documentation may include invoices, contracts, and/or receipts.

• Tier 2 covers providers such as customs brokers, vessel agents, and financial institutions that are “sometimes” able to receive price information from customers in the ordinary course of business. These providers are required to request and retain documentation as proof that relevant purchases were made in accordance with the price cap. However, if it is not practicable to request this documentation, the providers may instead obtain attestations from their customers stating that the price cap is or will be complied with.

• Tier 3 providers are those that do not have regular direct access to price information and can include shipowners, flagging registries, and insurers. Tier 3 providers must obtain and retain customer attestations as part of their annual insurance policy renewal or policy updates to show that their customers have committed to complying with the price cap.

For each tier of service providers, due diligence must be exercised regarding their customers for the safe harbor to apply. In addition, the Guidance states that a customer’s refusal or reluctance to provide requested documentation or information necessary for recordkeeping and attestation purposes should be regarded as a compliance red flag.

OFAC Alert on the Possible Evasion of the Russian Oil Price Cap (April 17, 2023)

The Alert issued by OFAC on April 17^th outlines red flags and specific considerations that service providers need to consider when conducting due diligence and operating in good faith. As discussed above, it is essential that service providers comply with the price cap to the best of their ability to avoid potential penalties imposed by OFAC.

The Alert states that there is a particular concern that the price cap on Russian oil and petroleum products is being diverted via exports through the Eastern Siberia Pacific Ocean (“ESPO”) pipeline and ports on the Eastern coast of Russia. It flags two specific evasion tactics/concerns for service providers to be on the lookout for.

First, the Alert states that tankers may be participating in “spoofing,” a practice that includes the manipulation of vessel tracking data to hide information that would show that a vessel had called at a port located along Russia’s Eastern coast. In addition, this practice also includes masking certain transfers of oil between ships to avoid disclosing the origin of the Russian oil.

Second, the Alert points out that the practice of not including shipping, freight, customs, or insurance as itemized costs on documentation is also a red flag. Parties seeking to evade the price cap may attempt to hide costs associated with purchasing oil above the price cap in these ancillary costs that are not included in the price caps. As such, the refusal of a party to provide documentation proving its compliance with the price caps and the failure to itemize shipping, freight, customs, and insurance costs should be considered red flags by service providers.

To address these evasion concerns, the Alert states that ship owners, protection and indemnity clubs, and flagging registries should be “mindful” of evasion risks and disseminate the OFAC alert to customers as well as use maritime intelligence services to detect Automated Identification System (“AIS”) manipulation by counterparties. In addition, Tier 1 providers (customs brokers and oil traders) must obtain invoices, contracts, and proof of payments from their customers that verify that the price caps have been complied with. Furthermore, the alert directs that shipping, freight, customs, and insurance costs should be invoiced separately from the purchase price of Russian oil or petroleum products.

The safe harbor process identified in the OFAC Guidance provides a helpful protection against penalties to good-faith actors that inadvertently violate the oil price caps. On the other hand, the Alert published by OFAC serves as an indicator of where OFAC’s enforcement focus will be in the coming months. As such, service providers should carefully consider the OFAC Alert, maintain robust due diligence procedures, and be extremely wary of customers that implicate the red flags identified in the Alert. Doing so will help to ensure that the provider is acting in good faith and remains eligible for safe harbor status.

1 Executive Order 14066 issued on March 8, 2022, also bans the importation of crude oil, petroleum products, liquified natural gas, and coal products from Russia.