Background and Purpose

The Preliminary Guidance relates to the US Government’s implementation of a policy as part of a coalition of countries including the G7 and the EU with respect to a price cap applying to a broad range of services related to the maritime transportation (the “maritime services policy”) of Russian Federation origin crude oil and petroleum products (“seaborne Russian oil”). The ban will take effect on 5 December 2022 with respect to maritime transportation of crude oil and on 5 February 2023 with respect to maritime transportation of petroleum products.

OFAC explains that that the “ban on services will have an important exception: jurisdictions or actors that purchase seaborne Russian oil at or below a price cap to be established by the coalition (the “price exception”) will expressly be able to receive such services.” Further, “[t]his policy is intended to . . . achieve three objectives: (i) maintain a reliable supply of seaborne Russian oil to the global market; (ii) reduce upward pressure on energy prices; and (iii) reduce the revenues the Russian Federation earns from oil after its own war of choice in Ukraine has inflated global energy prices.”

Eligibility under the Price Cap

OFAC states: “Seaborne Russian oil purchased at prices at or below the price cap is eligible for maritime services from firms in coalition countries implementing the price exception.” By virtue of the price cap taking effect, “importers that purchase seaborne Russian oil at or below the price cap can reliably continue to receive maritime services related to that oil, and service providers in countries implementing the maritime services policy can provide those services for shipments of seaborne Russian oil sold at or below the price cap.” We note, however, that the importation of seaborne Russian oil into the United States remains prohibited under E.O. 14066

Setting the Price Cap

The Price Cap applicable to seaborne Russian oil has not yet been set. Doing so will involve a “consultative process” among the countries that agree to implement the price cap. In remarks he delivered on 9 September, Deputy Secretary of the Treasury Wally Adeyemo explained, “We intend to set the price cap above Russia’s marginal cost of production, at a level consistent with prices they have historically accepted.”

Implementing the Price Cap

As a technical matter, OFAC states that it “anticipates issuing a determination pursuant to E.O. 14071 (“Prohibiting New Investment In And Certain Services To The Russian Federation in Response to Continued Russian Federation Aggression”), which will (i) permit the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of services related to the maritime transportation of seaborne Russian oil, if the seaborne Russian oil is purchased at or below the price cap and (ii) prohibit such services if the seaborne Russian oil is purchased above the price cap.”

Recordkeeping and Attestation Process

OFAC explains that the price exception will “rely on a recordkeeping and attestation process that allows each party in the supply chain of seaborne Russian oil to demonstrate or confirm that oil has been purchased at or below the price cap.” And that, “[t]his recordkeeping and attestation process is in addition to standard due diligence a service provider may have in place for sanctions risk, including the risk of violation of the maritime services policy through evasion.”

OFAC explicitly states that the “recordkeeping and attestation process is designed to create a “safe harbor” for service providers from liability for breach of sanctions in cases where service providers inadvertently deal in the purchase of seaborne Russian oil above the price cap due to falsified records provided by those who act in bad faith and make material misrepresentations.” OFAC also addresses the inverse scenario, stating that, “where a service provider without direct access to price information reasonably relies on a customer attestation, that service provider will not be held liable for potential sanctions breaches because of those acting in bad faith who seek to cause a violation of the maritime services policy or evade OFAC sanctions.”

OFAC describes three tiers of actors active in maritime services, including commodities brokers and refiners (Tier 1); financial institutions (Tier 2); and insurers and protection and indemnity clubs (Tier 3) (see pages 5 and 7-8 of the Preliminary Guidance).

• “Tier 1 Actors”: These are actors who “regularly have direct access to price information in the ordinary course of business, such as commodities brokers and refiners.” Tier 1 Actors “should retain and share, as needed, documents that show that seaborne Russian oil was purchased at or below the price cap. Such documentation may include invoices, contracts, or receipts/proof of accounts payable.” OFAC recommends that Tier 1 Actors update: 1) the terms and conditions of contracts, and 2) invoice structures to include the itemized price for oil purchase (excluding shipping, freight, and customs costs).

• “Tier 2 Actors”: These are actors who are “sometimes able to request and receive price information from their customers in the ordinary course of business, such as financial institutions.” Tier 2 Actors “should, when practicable, request, retain, and share, as needed, documents that show that seaborne Russian oil was purchased at or below the price cap. When not practicable to request and receive such information, Tier 2 Actors should request customer attestations in which the customer commits to not purchase seaborne Russian oil above the price cap.” OFAC recommends Tier 2 Actors provide guidance to trade finance department/relationship managers/compliance staff; update requests for information (RFIs) or sanctions questionnaire templates; and update bill of lading templates to include attestations.

• “Tier 3 Actors”: These are actors who “do not regularly have direct access to price information in the ordinary course of business, such as insurers and protection and indemnity (P&I) clubs. Tier 3 Actors “should obtain and retain customer attestations in which the customer commits to not purchase seaborne Russian oil above the price cap, for example as part of their annual insurance policy renewal process or updates to their insurance policy to comply with the price cap.” In particular, “Insurers may request attestations from customers that cover the entire period a policy is in place, for example for the entire length of an annual policy, rather than request separate attestations for each shipment.” OFAC recommends Tier 3 Actors update policies, as well as terms and conditions, and provide guidance to staff.

Consistent with OFAC’s normal recordkeeping requirements, the records described above should be retained for five years.

Recognizing Signs of Price Cap Evasion

OFAC states that it “anticipates publishing information to alert the industry of possible red flags for evasion of the price cap…” In the meantime, service providers must refrain from participating in evasive transactions and those that violate the maritime services policy and price exception and should monitor for “red flags”, which could include the following:

• “Evidence of deceptive shipping practices”;
• “Refusal or reluctance to provide requested price information”;
• “Unusually favorable 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”; and
• “Abnormal shipping routes”

Enforcement of the Price Cap

As a general proposition, OFAC states, “[s]ervice providers for seaborne Russian oil will not face an OFAC sanctions enforcement action, provided that the service provider obtains certain documentation or attestations that the purchase price of the oil is at or below the price cap.” OFAC states that it may bring enforcement actions against persons who make “significant purchases of oil above the price cap and knowingly rely on service providers subject to the maritime services policy, or persons that knowingly provide false information, documentation, or attestations to such a service provider…”

Next steps

Deputy Secretary Treasury Wally Adeyemo has said that OFAC will issue formal guidance in “the coming weeks.” It is important for companies to ensure that their compliance and recordkeeping policies and procedures comply with their obligations as described in the Preliminary Guidance, and prepare to act promptly in connection with the expected formal guidance. 

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