On October 21, 2024, the Price Cap Coalition (Coalition), comprised of the Group of Seven (G7) nations, the European Union, Australia, and New Zealand, issued an updated advisory (Advisory) for the maritime oil industry setting out compliance expectations related to the so-called "Russian oil price cap." As we discussed previously, the Coalition imposed the Russian oil price cap in late 2022 in response to Russia's invasion of Ukraine, and restricts the exportation, sale, and supply of certain services, such as financing, insuring, flagging, and customs or commodities brokering in relation to the maritime transport of Russian oil and petroleum products unless the crude oil or other petroleum products are sold at or below the applicable price cap. As the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) explained, "any importer of Russian oil that pays a price above the cap will have to do so using services exclusively from companies outside the Coalition." Building on the previous October 2023 guidance, the Advisory highlights the role of governmental authorities, additional areas warranting due diligence, and the need for training programs to increase awareness of evasion red flags.

The Advisory notes that "recent developments in the maritime oil trade… expose stakeholders to increased safety, environmental, economic, reputational, financial, logistical, and legal risks." In particular, the Advisory highlights the increasing role and risks posed by a "shadow" fleet of vessels operating beyond their traditional lifespan, which are characterized by: 

• Being registered in jurisdictions that do not meet international standards 
• Having questionable or unreliable insurance coverage 
• Engaging high-risk shipping practices

The Advisory adds four new recommendations to its previous guidance: 

• Recommendation 8: Ensure vessels meet international maritime safety and environmental obligations. This recommendation focuses on the role that the governmental authorities of flag states, port authorities, and coastal states have in promoting and complying with various internationally agreed-upon safety and environmental standards that apply to maritime oil shipping, including the international conventions for the Safety of Life at Sea (SOLAS), Prevention of Pollution from Ships (MARPOL), Civil Liability for Oil Pollution Damage, and the International Maritime Organization's Standards of Training and Certification of Watchkeeping (STCW). The Advisory notes that flag states should "ensure vessels are not conducting illegal operations or evading compliance with safety or environmental regulations, and [Port State Controls (PSCs)] and/or other relevant authorities should consider actions to address that behavior, e.g., detaining or preventing those vessels from entering national ports." The recommendation also calls on coastal states to monitor ship-to-ship operations in their territorial waters and exclusive economic zone (EEZ) to ensure compliance with applicable maritime safety and pollution standards. 
• Recommendations 9: Monitor tanker sales. This recommendation calls on those involved in sales and brokering of tankers to "remain vigilant of potential evasive or illicit purchase structures and end uses, especially for aging tankers, including tankers previously designated for recycling." Particularly where a dealing involves new market participants, enhanced due diligence is necessary, including the ultimate beneficial ownership of transaction parties to determine if a buyer or vessel management company has had associations with vessels engaged in sanctions evasion. The Advisory recommends collecting various types of information and checking periodically against third party databases, market intelligence providers, and media. 
• Recommendation 10: Avoid interactions with sanctioned parties. This recommendation encourages constant monitoring of exposure to sanctioned parties and notes that due diligence may require independent investigations to determine a counterparty's sanctions exposure, particularly as owners and operators of sanctioned vessels may engage in deceptive practices such as renaming or reflagging vessels and falsifying documents. The Advisory calls on stakeholders to deny port access to sanctioned vessels and report attempts by sanctioned parties to enter ports, engage in ship-to-ship transfers, or buy and sell tankers. 
• Recommendation 11: Raise the level of awareness and enhance market transparency. This recommendation calls on industry stakeholders to develop targeted training programs for their employees and associated partners that focus on "identifying red flags, understanding the effects of deceptive practices on maritime safety, the environment, and the economy, proper reporting practices, sanctions risks, and the importance of transparency and compliance, among others." 

The seven recommendations included in the previous guidance issued by the G7 remains mostly the same: 

• Recommendation 1 calls on stakeholders to ensure vessels hold appropriately capitalized protection and indemnity (P&I) insurance, emphasizing the need for such insurance to be "legitimate" and provide sufficient coverage. 
• Recommendation 2 states that stakeholders should ensure counterparties receive classification from a member society of the International Association of Classification Societies (IACS).
• Recommendation 3 outlines best practices for using Automatic Identification Systems (AIS) Long-Range Identification and Tracking (LRIT) to identify irregularities that may indicate sanctions evasion.
• Recommendation 4 calls on relevant stakeholders to monitor ship-to-ship transfers, conduct enhanced due diligence, and ensure they are undertaken in compliance with MARPOL convention and national regulations, some of which include certain notification requirements, particularly in regions where AIS manipulation is more common. 
• Recommendation 5 notes the danger of bundling and inflating costs are strategies used to hide the price of Russian oil purchased above the cap, instructing stakeholders to demand itemized cost breakdowns in their contracts. 
• Recommendation 6 affirms the need for due diligence, particularly in connection with on tanker transactions and recommends in some cases conducting heightened due diligence where appropriate including on vessel management companies or other intermediaries (brokers, traders). 
• Recommendation 7 calls on industry stakeholders to report vessels that raise suspicions of illicit or unsafe maritime oil trade and adds that such reporting may be mandatory under national regulations.  

Takeaways

• Companies operating in the maritime oil sector should recognize and incorporate into their owner operations the rising expectations for compliance and awareness of sanctions prohibitions and evasion risks. Furthermore, the Advisory underscores the idea that in many scenarios and under many applicable local laws and multilateral standards, taking action — from undertaking enhanced due diligence or investigations prior to engaging in transactions to proactive reporting of suspicious activity — may be required. 
• While the onus for implementing various measures to ensure compliance is on industry stakeholders generally, the Advisory notably highlights the responsibilities and roles that governments and port authorities have in ensuring accountability and improving Russian oil price cap  compliance. 
• Guidance and commentary in the Advisory reflect an increased acknowledgement by sanctions authorities in Coalition member countries, including OFAC, that sanctions compliance in the maritime shipping space is critical to achieving the goals of sanctions policy. With this in mind, persons operating in maritime shipping outside of the oil industry specifically should also heed these recommendations, as they mirror best practices for general sanctions compliance in the maritime shipping context. Following the publication of the Advisory, OFAC issued additional guidance on October 31, 2024, titled "Sanctions Guidance for the Maritime Shipping Industry" in which it presents, through describing various commonly encountered scenarios, fact patterns indicating sanctions evasion, as well as illustrations of how to address common counterparty due diligence issues and implementing "best practice" sanctions compliance measures. Many of the same themes noted in the Advisory (e.g., the need for enhanced due diligence of vessel ownership, the importance of vessel monitoring) are reflected in this guidance as well. 

For more information, please contact:

Timothy P. O'Toole, totoole@milchev.com, 202-626-5552

Laura Deegan, ldeegan@milchev.com, 202-626-5942

Caroline J. Watson, cwatson@milchev.com, 202-626-6083

Melissa Burgess, mburgess@milchev.com, 202-626-5914

Manuel Levitt, mlevitt@milchev.com, 202-626-5921

Annie Cho, acho@milchev.com, 202-626-1570

Peter Kentz, pkentz@milchev.com, 202-626-5891

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