OFAC Issues Preliminary Guidance on a Price Cap for Russian Oil

What Happened:

On September 9, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced that it anticipates issuing a determination pursuant to Executive Order 14071, which will: (i) permit the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a US person, wherever located, of services related to the maritime transportation of Russian-origin oil, only if the Russian-origin oil is purchased at or below the price cap; and (ii) prohibit such services if the Russian-origin oil is purchased above the price cap (“Russian Oil Price Cap Determination”).¹  The ban is scheduled to go into effect on December 5, 2022, with respect to the maritime transport of crude oil, and on February 5, 2023, with respect to the maritime transport of petroleum products.

The Bottom Line

OFAC’s announcement previews the impact of its forthcoming Russian Oil Price Cap Determination and how the price cap will be implemented.  The announcement provides initial guidance to businesses engaged in or providing services related to the shipping of Russian-origin oil on how they can comply with the forthcoming price cap on Russian oil, use best practices to obtain safe harbor from sanctions liability, and effectively update existing sanctions compliance programs and customer due diligence processes.  While imports of Russian oil into the United States will continue to be prohibited, the forthcoming Russian Oil Price Cap Determination will allow US-based insurers, brokers, etc., to continue to facilitate exports of Russian-origin oil to other countries at or below the price cap.

The Full Story

On September 2, 2022, finance ministers from the Group of Seven (“G7”) (Canada, France, Germany, Italy, Japan, the United Kingdom, the United States and the European Union) issued a statement confirming their joint intention to implement a price cap with respect to Russian-origin crude oil and petroleum products.²  According to the G7’s statement, “[t]he price cap is specifically designed to reduce Russian revenues and Russia’s ability to fund its war of aggression whilst limiting the impact of Russia’s war on global energy prices, particularly for low and middle-income countries.” As described in the G7 statement, the G7 countries, along with other allies and partners, also plan to adopt policies prohibiting the provision of services that enable maritime transportation of such Russian-origin oil and products unless such oil is priced at or below a price cap determined by the coalition of countries imposing the price cap.

Since Russia’s invasion of Ukraine in February 2022, the United States and its allies have imposed sweeping sanctions across Russia’s economy.  Our earlier coverage of the US sanctions imposed in response to the invasion is available here: February 21, 2022, February 24, 2022, February 28, 2022, March 8, 2022, and March 14, 2022.  The US Treasury Department has noted that while these sanctions have had a substantial and detrimental impact on the Russian economy, the Russian oil sector has prospered and elevated energy prices worldwide would make an outright ban on Russian oil infeasible.  The intent behind the price cap and maritime services policy is to put downward pressure on global energy costs by allowing Russian oil to continue to flow onto the global market while reducing Russia’s oil revenue.³ While imports of Russian oil into the United States (and other G7 countries) will continue to be prohibited, the price cap and maritime services policy will allow US-based insurers, brokers, etc., to continue to facilitate exports of Russian-origin oil to other non-G7 countries at or below the price cap.

OFAC’s announcement on September 9, 2022 provides guidance on how the United States will implement the price cap on Russian oil and offers further clarity on the G7 commitment. 

Setting the Price Cap

OFAC’s guidance clarifies that, under the G7 proposal, countries that agree to implement G7’s proposed policy for services with respect to seaborne Russian oil and commit to implementing a price cap on imports will be able to participate directly in the coalition’s consultative process that sets the price cap.  OFAC’s announcement indicates that this coalition of countries is expected to conduct a technical exercise to consider a range of factors related to the price cap and, aided by a rotating lead coordinator, reach consensus on the level at which the price cap is set.  OFAC announced that it will issue additional guidance on how the level of the price cap will be published and updated.

Prohibition on the Provision of Services related to Russian-origin Oil

Although the importation of Russian oil into the United States has been prohibited pursuant to Executive Order 14066 since March 8, 2022,⁴ and will continue to be prohibited even after issuance of the forthcoming Russian Oil Price Cap Determination, OFAC’s announcement indicates that the new determination will also prohibit US persons from participating in any other transaction involving the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a US person, wherever located, of services related to the maritime transportation of seaborne Russian-origin oil, if the Russian oil is being sold above the established price cap.  OFAC’s guidance clarifies that service providers that are US persons will not face an enforcement action from OFAC as long as the service provider can produce certain documentation or attestations demonstrating that the purchase price of the oil is at or below the price cap, as further described below.

OFAC’s guidance also indicates that US persons will be required to reject participation in any transaction to evade the price cap and report the transaction to OFAC.  The coalition of countries participating in the price cap on Russian-origin oil are expected to mutually assist in the enforcement of the price cap and share information related to enforcement.

“Safe Harbor” for Service Providers with Adequate Documentation

OFAC’s preliminary guidance describes a “safe harbor” for US persons that engage in certain record keeping and attestation processes, in addition to the due diligence processes that a service provider may already have in place to identify potential sanctions risks.  Although US sanctions are generally administered on a strict liability basis (with no safe harbor from inadvertent violations), OFAC’s preliminary guidance indicates a significant exception to this strict liability rule in US sanctions law: service providers that follow appropriate record-keeping practices and inadvertently violate the price cap due to falsified records provided by bad faith actors seeking to cause a violation of or evade the price cap will not be subject to a sanctions enforcement action by OFAC.

OFAC’s guidance sets forth a tiered approach to the safe harbor recordkeeping practices:

• Tier 1 Actors: Persons who regularly have direct access to price information in the ordinary course of business (e., commodities brokers and refiners).  OFAC advises that Tier 1 Actors should retain and share as needed invoices, contracts, receipts/proof of accounts payable and similar documentation demonstrating the Russian-origin oil was purchased at or below the price cap.
• Tier 2 Actors: Persons who are sometimes able to request and receive price information from their customers in the ordinary course of business.  OFAC advises that Tier 2 Actors should request, retain, and share as needed documentation demonstrating the Russian-origin oil was purchased at or below the price cap.
• Tier 3 Actors: Persons who do not regularly have direct access to price information in the ordinary course of business, such as insurers and protection and indemnity clubs.  OFAC advises that Tier 3 Actors should obtain and retain customer attestations in which the customer commits to not purchase Russian-origin 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 addition, OFAC advises that insurers may request attestations from customers that cover the entire period a policy is in place rather than for each shipment.

OFAC’s initial guidance is that actors in all three Tiers should keep records for five years.

Red Flags for Price Cap Evasion

OFAC also announced that it anticipates publishing information describing possible red flags for evasion of the price cap, similar to the advisories OFAC has previously issued to alert the maritime industry to deceptive shipping practices used to evade sanctions and best practices to consider adopting to mitigate exposure to sanctions risk. The red flag guidance published by OFAC serves as a guidepost for OFAC’s expectations of due diligence carried out by service providers.  OFAC has initially identified the following indicia of price cap evasion as red flags that should prompt further diligence on the part of service providers:

• Evidence of deceptive shipping practices. Consistent with OFAC’s prior guidance on deceptive shipping practices, OFAC advises that tactics used to facilitate sanctionable or illicit maritime trade include disabling or manipulating the automatic identification system (“AIS”) on vessels, physically altering vessel identification, falsifying cargo and vessel documents, ship-to-ship (“STS”) transfers, voyage irregularities, false flags and flag hopping, and complex ownership or management.
• Refusal or reluctance to provide requested price information. OFAC advises that a customer’s refusal, reluctance, or hesitation to provide the necessary documentation or attestation may indicate they have purchased seaborne Russian oil above the price cap. Requests for exceptions to established practice may also be red flags.
• Unusually favorable payment terms, inflated costs, or insistence on using circuitous or opaque payment mechanisms. OFAC advises that seaborne Russian-origin oil purchased so far below the price cap as to be economically non-viable for the Russian exporter may be an indication that the purchaser has made a back-end arrangement to evade the price cap.  Similarly, excessively high service costs may be an indication that a service provider has made a back-end arrangement to evade the price cap.  Attempts to use opaque payment mechanisms may indicate the customer or counterparty is avoiding creating documentation around payment.
• Indications of manipulated shipping documentation, such as discrepancies of cargo type, voyage numbers, weights or quantities, serial numbers, shipment dates, etc. OFAC advises that any indication of manipulated shipping documentation may be a red flag for potential illicit activity and should be investigated fully prior to providing services.
• Newly formed companies or intermediaries, especially if registered in high-risk jurisdictions. OFAC advises that firms should exercise the appropriate due diligence when providing services to new customers or counterparties, particularly if these entities were recently formed or registered in high-risk jurisdictions and do not have a demonstrated history of legitimate business.  OFAC has previously identified “high-risk jurisdictions” as those currently subject to a sanctions program or with close relationships to jurisdictions subject to sanctions programs.
• Abnormal shipping routes. OFAC advises that the use of shipping routes or transshipment points that are abnormal for shipping seaborne Russian-origin oil to the intended destination, as determined by past practice or historic AIS data, a lack of historic AIS data for a particular tanker or fleet of tankers owned by a particular shipper, transshipment through one or more jurisdictions for no apparent economic reason, and sudden unexplained changes in route may indicate attempts at concealing the true history of an oil shipment in violation of the price cap.

Consistent with its past guidance to address shipping and evasion practices,⁵ OFAC recommends that service providers address the foregoing red flags by institutionalizing sanctions compliance programs consistent with OFAC’s previously issued framework on sanctions compliance commitments, establishing AIS best practices and contractual requirements, monitoring ships throughout their entire transactions lifecycle, adopting Know Your Customer (“KYC”) and counterparty practices, exercising supply chain due diligence; incorporating best practices into contractual language, and fostering information sharing within the industry.

Further Guidance is Forthcoming

OFAC’s announcement previews the impact of its forthcoming Russian Oil Price Cap Determination and provides initial guidance on how the price cap will be implemented, as well as how businesses engaged in or providing services related to the shipping of Russian-origin oil can comply with the forthcoming price cap on Russian oil and use best practices to obtain safe harbor from sanctions liability.  Companies engaged in or providing services to the maritime shipping industry should use the announcement to carefully consider how and what impacts the Russian Oil Price Cap Determination will have on existing sanctions compliance programs and customer due diligence processes.

Hunton Andrews Kurth LLP will continue to monitor closely the development of this and other US sanctions matters. Please contact us if you have any questions or would like further information regarding these new developments or other questions related to US sanctions programs.

 

¹ OFAC, Preliminary Guidance on the Implementation of a Maritime Services Policy and Related Price Exception for Seaborne Russian Oil (Sept.09, 2022), https://home.treasury.gov/system/files/126/cap_guidance_20220909.pdf.

² G7 Germany 2022, G7 Finance Ministers’ Statement on the United Response to Russia’s War of Aggression Against Ukraine (Sept. 2, 2022), https://www.bundesfinanzministerium.de/Content/EN/Downloads/G7-G20/2022-09-02-g7-ministers-statement.pdf.

³ OFAC, Remarks by Deputy Secretary of the Treasury Wally Adeyemo at the Brookings Institution (Sept. 9, 2022), https://home.treasury.gov/news/press-releases/jy0943.

⁴ See Hunton Andrews Kurth LLP, US Sanctions Target Russia’s Energy Sector and Ban Imports of Russian Oil, LNG, and Coal as Enforcement Efforts Increase and Agencies Consider Cryptocurrency and Other Digital Assets (Mar. 9, 2022), /en/insights/us-sanctions-target-russias-energy-sector-and-ban-imports-of-russian-oil-lng-and-coal-as-enforcement-efforts-increase.html.

⁵ OFAC, Guidance to Address Illicit Shipping and Sanctions Evasion Practices (May 14, 2020), https://home.treasury.gov/system/files/126/05142020_global_advisory_v1.pdf.