By Daniel B. Pickard, Randolph J. Stayin, Amanda L. Wetzel
Following Russia’s invasion of Ukraine in 2022, the United States and many of its allies imposed wide ranging sanctions on Russia that include not only the selective targeting of individuals and entities but also geographic sanctions, import restrictions, export restrictions, transport restrictions, investment prohibitions, and service restrictions. U.S. companies seeking to do Russia related business must be aware of these sanctions and have strong compliance programs. The current sanctions enforcement climate is active and, as our January 2024 article indicated, there is an enforcement focus in the United States on the oil price cap that the G7 plus the European Union and Australia (the “Price Cap Coalition”) has placed on Russian crude oil and Russian petroleum products.
The oil price cap is more complex than its name implies and provides an exception to a U.S. ban on services that otherwise covers the maritime transport of crude oil and petroleum products of the Russian Federation when the price of the Russian oil or petroleum at issue does not exceed a fixed price cap. The services that would otherwise be prohibited services may be provided by a U.S. person when the Russian oil or petroleum products involved are sold at or below the price cap. For example, a transaction such as the purchase of insurance directly or indirectly, from the United States or a United States person, which would otherwise be prohibited, would be allowed under the oil price cap if the Russian oil or petroleum at issue was sold at or below the price cap. Other services covered by the price cap exception include commodities brokering, financing, shipping, flagging, and customs brokering.[i]
In February 2024, the U.S. Department of the Treasury issued a statement on “Phase Two of the Price Cap on Russian Oil,” which included an assessment of the efficacy of the price cap, indicating that, in the first nine months of 2023, Kremlin oil tax revenue was down 40 percent compared to one year earlier, and that global energy supplies were stable.[ii] The second phase of enforcement of the price cap was launched in October 2023 and was described as a two-prong approach including tightening enforcement of the price cap and increasing the costs to the Kremlin of selling oil via an alternative shipping system.[iii] That alternative shipping system has been described as a Russian “shadow fleet” or an infrastructure of very old ships that operate outside the legal regulations of the industry and without proper insurance.
Also in February 2024, the Price Cap Coalition released a Compliance and Enforcement Alert, indicating that other means of evasion include the following: irregular routes; falsified documentation and attestations, opaque shipping and ancillary costs; third country supply chain intermediaries and complex and irregular corporate structures; and flagging.[iv] This article provides a summary of the Price Cap Coalition’s Compliance and Enforcement Alert, which provides guidance to mitigate the risks of these evasion techniques.
The Shadow Fleet
Perhaps the most widely discussed oil cap evasion method is the “shadow fleet” or the “ghost fleet,” which includes old vessels that are anonymously owned or have opaque corporate structures and are used to ship sanctioned oil and oil products. These ships may also rely on insufficient, unknown or fraudulent insurance.
The Price Cap Coalition urges its members to monitor the sale of vessels that could be used in the shadow fleet, and industry stakeholders are also encouraged to monitor such sales. Industry stakeholders are also urged to ensure that vessels maintain appropriate insurance.
Voyage Irregularities
Ship voyages should normally be known and traceable from the port of loading to the final destination. Illicit actors may attempt to disguise the ultimate destination, origin, cargo or recipients through indirect routing, which can include spoofing to turn off Automatic Identification Systems (AIS systems) to evade threats.
The Compliance and Enforcement Alert suggests that industry stakeholders should scrutinize AIS manipulation and spoofing, illicit shit-to-ship (STS) transfers, reasons for apparent voyage irregularities, and routes and destinations that deviate from routine business practices for unknown reasons, including transit and transshipment of cargo through third countries. In particular, port authorities have a role in investigating AIS histories and prohibiting vessels that have sanctioned or illicit underlying activities from entering ports.
Falsified documents, opaque shipping and ancillary costs, third country supply chain intermediaries and complex and irregular corporate structures
Falsified documents can be used to obscure the origin of a vessel, its goods, the destination and the legitimacy of the vessel itself. In addition, the failure to itemize costs could result in Russian oil and oil products being purchased above the price cap. The Compliance and Enforcement Alert indicates that a Price Cap Coalition statement as of December 20, 2023 requires coalition service providers to receive attestations from their counterparties each time they lift or load Russian oil or oil products. In addition, supply chain participants with access to itemized ancillary costs (including, for example, insurance costs or freight costs) may be required to share these upon request throughout the supply chain.
A focus on the risks posed by third party intermediaries is prevalent as a general matter in U.S. sanctions enforcement, and the need for monitoring and enforcement with respect to third country supply chain intermediaries is present in the use of complex and irregular corporate structures to trade Russian oil and oil products. Areas of concern include the use of shell companies, multiple levels of ownership and management to disguise the ultimate beneficial owner of Russian oil and oil products, and frequent changes in the ownership and management of companies and vessels involved. An example of a situation that would raise a red flag would be if a recently formed company bought several vessels to trade in Russian oil and oil products.
Industry stakeholders are recommended to mitigate these risks through appropriate due diligence of customers and counterparties across the supply chain. Service should be declined where business intelligence, information or market assessments indicate that Russian oil or oil product prices exceed the price cap. Appropriate know your customer procedures are recommended and industry stakeholders are recommended to risk assess documents that appear to be incomplete, inconsistent, or contradictory to previously shared information. Risk profiles should be built in relation to companies that engage in the trade of Russian oil and oil products.
Flagging
Another indication of evasion activities is the flagging and re-flagging of a vessel, which may be an attempt to hide its true ownership or affiliation with Russia.
Flagging registries can play a key role through marine notices of sanctionable or illicit conduct that could be the cause for removal of registration. Another best practice is for flagging registries to share evasion information with competent enforcement authorities, including the names and International Maritime Organization (IMO) numbers of vessels that have been denied registration or de-registered.
Special Compliance Features and Potential Penalties for Evasion
While the Compliance and Enforcement Alert shares recommendations that are typically seen in sanctions compliance programs, such as the need to monitor supply chains, some of its recommendations are understandably very specific to the oil and petroleum shipping industry and illustrate the enforcement challenges associated with the oil price cap. Unique compliance steps are available to the maritime industry that are not usually seen in sanctions enforcement with one example being that vessels with voyage irregularities, signs of AIS manipulation, and with routes and destinations that deviate from normal business practices can be refused entry at ports of call.
The oil price cap is just one part of the significant sanctions that the United States and its allies have imposed on Russia, and U.S. sanctions against Russia are being aggressively enforced. Implementation of the recommendations of the Price Cap Coalition that are contained in its Compliance and Enforcement Alert will help the United States and its allies in their efforts to identify and prosecute evasion of this aspect of Russia sanctions. Notably, evasion of the oil price cap can result in significant civil and/or criminal penalties for U.S. persons.
[i] Executive Order No. 14071, Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression, 87 Fed. Reg. 20,999 (2022); U.S. Department of the Treasury, Determination Pursuant to Section 1(a)(ii) of Executive Order 14071: Prohibitions on Certain Services as They Relate to the Maritime Transport of Petroleum Products of the Russian Federation, effective February 5, 2023; U.S. Department of the Treasury, Determination Pursuant to Section 1(a)(ii) of Executive Order 14071: Prohibition on Certain Services as They Relate to the Maritime Transport of Crude Oil of Russian Federation Origin, effective December 5, 2022.
[ii] U.S. Department of the Treasury, Press Release: Phase Two of the Price Cap on Russian Oil: Two Years After Putin’s Invasion (Feb. 23, 2024), https://home.treasury.gov/news/featured-stories/phase-two-of-the-price-cap-on-russian-oil-two-years-after-putins-invasion.
[iii] Id.
[iv] Price Cap Coalition, Oil Price Cap and Enforcement Alert (Feb. 1, 2024). Available at: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://ofac.treasury.gov/media/932571/download?inline.
Energy Workforce Member Buchanan, Ingersoll & Rooney provides insights on international trade issues specific to energy services and technology companies. Daniel Pickard is Chair, International Trade & National Security Practice Group, and Jacob A. Garten is Section Specialist, International Trade & National Security Practice Group.
