In a recent sanctions briefing to the business sector, the UK Government provided further details on anticipated measures to implement the ban on maritime services and Russian oil price cap announced by G7 Ministers earlier this month.
In brief
- The UK Government has provided details of a ban on services (including shipping, financial, technical and brokering services) related to maritime transport of Russian oil and oil products from Russia to and between third countries, with the regime set to be introduced in October 2022.
- An exemption will apply by way of a General Licence where the oil is purchased for below an agreed price cap (which will align with the G7 oil price cap). Reliance on the licence will be underpinned by a tiered attestation system based on the proximity of the service provider to the Russian source.
- The UK Government has indicated it will coordinate the model and enforcement approach to maximise alignment with other G7 nations, and the Government has promised detailed guidance to assist industry to comply with the regime. Further guidance will be provided at the point at which the regime is introduced.
G7 announces Russian oil price cap
On 2 September 2022, G7 Finance Ministers announced they would be implementing a comprehensive ban on services related to the maritime transport of Russian oil and petroleum products, with the provision of such services only permitted where the oil or oil product in question is purchased below an agreed price cap.
The measures are designed to restrict Russian access to revenue derived from energy exports and undermine the ability of Russia to affect global energy prices. They form the latest among the unprecedented global coordinated effort to exact a toll on Russia in response to its invasion of Ukraine.
The maritime services prohibition will build on the existing UK Government commitment to phase out the import of Russian oil and petroleum products, announced in March 2022.
The UK Measures
During a UK Sanctions Briefing led by the sanctions unit of the Foreign, Commonwealth and Development Office on Wednesday, 21 September 2022, representatives of the UK Government revealed further details of the changes and indicated that the statutory instruments implementing the measures are anticipated to be introduced towards the end of October.
As noted above, the UK Government indicated the measures will take the form of a comprehensive ban on the provision of services related to the maritime transport of Russian oil and oil products from Russia to and between third countries. Technical assistance, brokering and financial services (including insurance) will all fall within the ban, as well as shipping by UK ships. It is anticipated that a General Licence will be issued which permits the provision of such services where the Russian oil or oil product in question is purchased at or below an agreed price point (yet to be determined).
Where traders and other service providers seek to rely on the terms of the General Licence, they will need to comply with a three-tiered attestation model. Higher levels of probity will be required, based on the level of access the service provider has to price information. Details of the tier model released to date indicate:
- Tier 1 Actors will be those service providers who regularly have direct access to price information in the ordinary course of business, including commodities brokers and refiners. These persons will need to retain documents that show that the seaborne Russian oil was purchased at or below the price cap, with these documents to be shared with UK regulators, as needed. Examples given of suitable documentation include - invoices, contracts, or receipts / proof of accounts payable.
- Tier 2 Actors will be those service providers who are sometimes able to request and receive price information from their customers in the ordinary course of business, including financial institutions. Where practicable, these persons will need to request, retain and share as necessary, the kind of substantiating documents noted above. Where it is not practicable to request or receive the necessary supporting documentation, Tier 2 Actors will need to obtain and retain customer attestations in which the relevant customer commits to not purchase and/or that they have not purchased seaborne Russian oil above the price cap.
- Tier 3 Actors will be those service providers who do not regularly have access to price information in the ordinary course of business. Examples provided include insurers and protection and indemnity clubs. These persons should obtain and retain customer attestations as described above. The Government indicated that it would be permissible for insurers within this tier to request attestations from customers for the entire period of their policy (including through contract), rather than obtaining separate attestations for each shipment.
OFAC releases preliminary guidance on the US measures
The UK Government has indicated it will issue detailed guidance alongside the General Licence to assist industry to comply with the regime. For instance, we might expect it would provide further guidance on what is considered “practicable” for the purposes of Tier 2 Actors’ requirement to obtain substantiating documents.
In response to questions raised by industry during the briefing, the Government indicated it is working closely with representatives of the insurance industry to ensure the implementation of the measures adequately reflect market conditions in insurance and re-insurance markets, and so as not to impose exceptional due diligence requirements on insurers.
Meanwhile, the US sanctions regulator - the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury, has released its own preliminary guidance on the measures. Given the level of cooperation with US and EU counterparts signalled by the UK Government during the industry briefing noted above – the OFAC guidance may provide some useful insight on the likely shape the UK guidance will take.
Interestingly, the OFAC preliminary guidance indicates the US ban on the maritime transportation of Russian crude oil and petroleum products will not take effect until 5 December 2022 with respect to maritime transportation of crude oil and on 5 February 2023 with respect to maritime transportation of petroleum products. In brief, the guidance indicates that:
- The US model will take a similar form to that of the UK, with an exception to the ban on services related to Russian oil and oil product exports supported by “safe harbour” record keeping and attestation requirements the same as those announced by the UK Government and noted above.
- OFAC has indicated that it will issue further guidance on how the price cap will be set and updated by participating countries, and on the maritime services subject to the policy.
- OFAC has indicated that provided that the required documents or attestations are provided to and retained by service providers, neither the provider nor the purchaser shall face sanctions enforcement action. Further, should a service provider inadvertently deal in the purchase of seaborne Russian oil which is above the price cap due to falsified records provided by those who act in bad faith, the service provider should not find itself liable.
- There will be a broad obligation on US persons not to participate in any transactions which breach the ban and to report infringing transactions to OFAC.
- OFAC has recommended that service providers review information available to them for possible red flags of individuals seeking to evade the price cap, including:
- Evidence of deceptive shipping practices (with particular focus on North Korea, Iran, and Syria) which might also demonstrate circumvention.
- Refusal or reluctance to provide requested price information. Requests for exceptions to established practices may also be red flags such as: unusually favourable payment terms, inflated costs, or insistence on using circuitous or opaque payment mechanisms.
- Indications of manipulated shipping documentation, such as discrepancies of cargo type, voyage numbers, weights or quantities, serial numbers, shipment dates, etc.
- Newly formed companies or intermediaries, especially if registered in high-risk jurisdictions.
- Abnormal shipping routes.
- OFAC is yet to announce what sanctions will apply to those found to be acting in breach of the ban.
Getting ready for the changes
- It may be of some comfort to operators that both the UK Government (during the industry briefing) and the OFAC preliminary guidance have signalled that the measures are not intended to impose a burden on market operators to “look behind” attestations given in bad faith, beyond regular due diligence. However, we expect that service providers will need to exercise due care and carefully consider any red flags which might signal attempts to evade the ban.
- While further guidance and the UK implementing legislation are yet to be released, we would expect companies with touchpoints to maritime shipping of Russian oil and oil products would begin reviewing their compliance and probity processes to ensure they are prepared for the changes. This might include ensuring service providers have an understanding of the likely Tier(s) classification(s) applicable to their business, and the corresponding attestation documentation required to be obtained and retained from both new and existing counterparties. Depending on their Tier classification - providers may wish to update template documents such as terms and conditions, invoices and bills of lading to incorporate attestation elements, and/or issue additional training and guidance to staff.