On October 12, 2023, OFAC released an Advisory for the Maritime Oil Industry and Related Sectors: Best Practices in Response to Recent Developments in the Maritime Oil Trade on behalf of the G7, European Union and Australia (the “Price Cap Coalition”), in order to highlight specific best practices and recommendations to government and private sector stakeholders involved in the maritime trade of crude oil and other petroleum products. The recommendations contained in OFAC’s advisory are detailed below.

In addition, as noted in its accompanying press release, OFAC also imposed sanctions on two vessels and their registered owners – the SCF Primorye (IMO 9421960) and its registered owner, UAE-based Lumber Marine SA; and the Yasa Golden Bosphorus (IMO 9334038) and its registered owner, the Turkiye-based Ice Pearl Navigation Corp., for carriage of crude oil priced above the applicable cap – noting that both of these vessels had used U.S.-based service providers while transporting the Russian origin oil out of compliance with the price cap policy.

This advisory follows on prior guidance issued by OFAC and outlined in our previous price-cap related alerts – including OFAC’s preliminary guidance issued in September 2022, the implementation of the crude oil price cap in December 2022, the expansion of the price cap policy to additional Russian petroleum products in February 2023, and OFAC’s warnings to the market about possible price cap evasion activity in the market and recommended measures to the market to ensure price cap compliance in April 2023.

While the recommendations do not have the force of law, the best practices contained in OFAC’s advisory will help industry stakeholders reduce their exposure to risks associated with the maritime oil trade, including potential civil and regulatory consequences that may result from failure to comply with price cap policies applicable to Russian crude oil and other petroleum products.

OFAC’s advisory and the sanctions imposed reflect that OFAC continues to police the maritime oil trade in order to ensure compliance with the Russian oil price cap. All providers of covered services subject to U.S. jurisdiction should evaluate their compliance and due diligence processes to ensure that they are adequately mitigating these risks.

Recommended Actions:

• Recommendation 1 – Require appropriately capitalized P&I insurance
   
  • Vessels should have continuous and appropriate maritime insurance coverage for the entirety of their voyages.
  • Vessels should be insured by legitimate insurance providers with sufficient coverage for International Convention on Civil Liability for Oil Pollution Damage (CLC) liabilities.
  • Where industry participants are engaging with ships not insured by a legitimate insurance provider, they should conduct sufficient due diligence to ensure that the insurer can cover all relevant risks.
     
    • Such due diligence can include, as feasible, a review of an insurer’s financial soundness, track record, regulatory record, and/or ownership structure.
• Recommendation 2 – Receive classification from an International Association of Classification Societies (IACS) member society:
   
  • Ensure counterparties receive classification from IACS member classification societies to ensure vessels are fit for the service intended.
  • IACS member societies include:
     
    • American Bureau of Shipping (ABS)
    • Bureau Veritas (BV)
    • China Classification Society (CCS)
    • Croatian Register of Shipping (CRS)
    • DNV
    • Indian Register of Shipping (IRS)
    • Korean Register (KR)
    • Lloyd’s Register (LR)
    • Nippon Kaiji Kyokai (NK)
    • Polish Register of Shipping (PRS)
    • RINA Services S.p.A. (RINA)
• Recommendation 3 – Best-practice use of Automatic Identification Systems (“AIS”)
  • Promote the continuous broadcasting of AIS throughout a vessel’s voyage.
  • Document circumstances of any AIS disruptions (e.g., in response to legitimate safety concerns)
  • Monitor irregular AIS patterns or data inconsistent with actual ship locations.
  • Combine AIS monitoring with Long-Range Identification and Tracking (“LRIT”) if available.
  • Stakeholders such as flagging registries should use LRIT to track the true location of vessels including those leased to third parties.
• Recommendation 4 – Monitor High Risk Ship-to-Ship Transfers
  • Activities to monitor include:
    • STS transfers of crude oil or petroleum products outside of safe and sheltered waters, which entail heightened environmental and safety risks.
    • STS transfers in areas of higher risk for illicit trading activity or AIS manipulation.
  • Where such enhanced risks are present, conduct enhanced due diligence including the notification of STS oil cargo transfers as required by Annex I of the International Convention for the Prevention of Pollution from Ships (“MARPOL“) and verifying oil record logs.
• Recommendation 5 – Request Associated Shipping and Ancillary Costs
  • Artificially inflated shipping and ancillary costs (such as freight, customs and insurance), or the failure to itemize such charges, may be used to conceal a purchase of Russian Federation origin oil made out of compliance with the price cap.
  • Commercially unreasonable or opaque shipping and ancillary costs may be a sign of price cap evasion, and “Cost, Insurance, Freight” contracts should be itemized.
  • This may require changes to invoicing models or templates and updates to applicable contractual terms and conditions, so that industry actors may obtain clarity on the price paid for Russian oil or other petroleum products, and the accompanying benefit of OFAC’s safe harbor.
• Recommendation 6 – Undertake Appropriate Due Diligence
  • Heightened diligence may be appropriate for ships that have undergone numerous administrative changes, such as re-flagging.
  • Heightened diligence may also be appropriate when dealing with intermediary companies (such as management companies, traders, brokerages, etc.) that conceal their beneficial ownership or otherwise engage in unusually opaque practices.
  • Heightened diligence is especially important where market assessments suggest that Russian oil prices exceed the price cap, and Coalition services are being used or sought.
• Recommendation 7 – Report Ships that Trigger Concerns
  • Industry participants are encouraged to report potentially illicit or unsafe maritime oil trade practices, including suspected breaches of the oil price cap, to relevant authorities.

We will continue to closely monitor developments in this space.