[author: Sam Finkelstein]*
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has renewed its commitment to squeezing Russia’s oil proceeds, releasing updated guidance with enhanced attestation and record-keeping requirements for maritime shipping operators and other industries that participate in the transport of Russian oil. OFAC also announced sanctions against several firms operating in apparent violation of the Price Cap.
The Price Cap Policy is entering its second year of enforcement. In December of 2022, the United States joined an international coalition, including the G7, the European Union, and Australia, in agreeing to enforce a “Price Cap Policy” on crude oil and petroleum products of Russian origin. The Policy aims to maintain stable energy markets globally while restricting Russia’s ability to fund its war against Ukraine through the sale of oil (which it has a great deal of).
In its latest update to the Price Cap guidance, OFAC seeks to increase compliance by requiring greater transparency from maritime shipping operators. Specifically, these changes mandate that maritime service providers obtain attestations affirming compliance with the Price Cap from their counterparties every time they load Russian oil. Additional guidance on how this will be implemented is forthcoming, and OFAC indicated that its Price Cap Coalition partners in the EU and elsewhere will be announcing similar record-keeping requirements in the coming weeks.
To give effect to this change, OFAC also announced that supply chain participants with access to itemized ancillary costs––like insurance and freight––must share this information upon request with entities further down the supply chain. Until now, bad actors have relied on opaque costs to conceal their unlawful transport of Russian oil priced above the Cap. Under the updated guidance, each component of the price must be accounted for. Compliance with the attestation and reporting requirements is a prerequisite to obtain safe harbor from OFAC enforcement, so changes to these provisions directly implicate sanctions exposure and liability for covered entities.
OFAC splits service providers into three tiers, based on their proximity to relevant information:
- Tier 1 Actors are those with direct access to price information, like oil traders and commodities brokers. These parties must retain documents showing directly that any Russian oil or Russian petroleum products that passed through their proverbial hands were purchased below the price cap in order to obtain safe harbor. Acceptable forms of documentation include invoices, receipts/proof of payment, and contracts.
- Tier 2 Actors are those that can sometimes request and receive price information from their customers. This category includes financial institutions, shipping agents, and customers brokers. To obtain safe harbor, these entities must request and retain documents that show Russian oil or Russian petroleum products were purchased below the price cap to the extent practicable. When obtaining this information is impracticable, Tier 2 Actors must instead obtain customer attestations, in which the customer affirms that covered products were purchased in compliance with the Price Cap Policy. Further, Tier 2 actors should obtain such attestations within 30 days of their counterparties’ lifting of Russian oil or petroleum products.
- Tier 3 Actors are those who do not regularly have direct access to price information. This group includes insurers, protection and indemnity clubs, shipowners, and flagging registries. To be afforded safe harbor, Tier 3 actors must obtain customer attestations affirming that, for the service provided, the Russian oil in question was purchased in compliance with the Price Cap Policy.
In addition, Tier 3 Actors are subject to certain “triggers,” which require that they request additional information from their counterparty. Some examples include open-source reporting that suggests possible violations, red flags observed in internal due diligence, or a request from relevant authorities for information about a counterparty’s compliance with the price cap. When a triggering event occurs, Tier 3 Actors must request additional information or risk losing safe harbor from OFAC enforcement.
Interestingly, these changes require that records be kept and produced on demand to counterparties, rather than the coalition partners. This suggests that the Coalition is looking to industry as a partner in enforcing the cap. In turn, this provision also makes it that much harder for service providers to credibly claim ignorance when they are found to have moved Russian oil in violation of the Price Cap Policy; if the information is available upon request, then there is no excuse for failure to request it. And of course, a counterparty’s refusal to turn over relevant records is a major red flag.
On top of its updated guidance, OFAC also announced the imposition of sanctions against several operators suspected of violating the Price Cap Policy. SUN Ship Management D Ltd was designated on the basis that it is owned or controlled, or purported to act for or on behalf of, the Russian government. Several other entities, including Bellatrix Energy Limited and Covart Energy Limited––both based in Hong Kong––were also sanctioned due to suspected violations.
The sanctions against Bellatrix and Covart are noteworthy because OFAC cited their share of Russian oil trading as evidence of apparent violations. Both entities––little-known before the Price Cap Policy took effect––have since risen to trade tens of millions of tons of Russian crude oil––and OFAC does not believe in coincidences. A third entity, UAE-based Voliton DMCC, was also designated based in part on the sudden, dramatic increase in its share of the overall Russian oil trade.
Looking ahead to 2024, firms operating in maritime shipping and insurance, commodities trading, or other relevant industries should expect Russian oil flows to remain under heavy scrutiny from OFAC and its Coalition partners. EU regulators recently announced new reporting requirements for the international sale of tankers, in a bid to further constrain noncompliant operators.
The Price Cap Coalition has made clear that, so long as Russia maintains its war against Ukraine, the Coalition will maintain restrictions on Russian oil prices. Until a peaceful resolution to the conflict is reached, companies with direct or indirect exposure to covered products should anticipate further restrictions, as regulators continue to fine-tune their targeting of the Russian petrostate.
*Associate
