On November 14, 2022, HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) published detailed guidance on the recently published ban on the provision of maritime transportation of Russian oil and oil products and related services (“OFSI Guidance”). The OFSI Guidance sets out additional details regarding how the oil price cap exception will operate as well as the attestation process and reporting obligations with which all parties involved in the maritime supply chain will need to comply. The OFSI Guidance also addresses OFSI’s proposed approach to enforcement of the new ban. For more information on the ban on the maritime transportation of Russian oil and oil products and related services, see our previous blog post (here).
The Oil Price Cap
The oil and oil products falling within the scope of the ban are those goods falling within Harmonised System (“HS”) codes 2709 and 2710. These codes align with the goods falling within the scope of the comparable EU and US measures. To encourage the continued flow of oil onto the global market, a price cap exception will be provided for the maritime transportation of Russian oil and oil products and associated services when the pertinent oil or oil products have been purchased or sold at or below the price cap.
In a blog post published on November 14, 2022, OFSI stated that the General Licence creating the price cap (“Price Cap GL”) will be published before the ban with respect to Russian oil comes into effect on December 5, 2022. The OFSI Guidance also clarifies that the oil price cap will only cover the price of the oil or oil product. Any ancillary costs such as transportation and legal fees will not fall within the scope of the price cap.
The price cap will apply from receipt of cargo on a ship until the cargo is delivered and passes through customs controls in a country other than the UK, Isle of Man, or Russia (“Third Country”), or is substantially transformed into a different good in line with non-preferential Rules of Origin (i.e., the product then comes under a different HS code). Russian oil and oil products will be considered to be at or below the price cap when the unit price (i.e., the price per barrel of the oil or oil product) is at or below the price cap at the date of the most recent transaction in the period of time between the oil or oil product first being loaded onto the ship and the oil or oil product passing through customs control in the Third Country.
According to the OFSI Guidance, the price cap exception will not apply to the import of Russian oil or oil products into the UK. Moreover, it will not overrule any prohibitions enacted by other countries on the import of Russian oil or oil products into their own jurisdictions.
The Attestation Process
Once the ban comes into effect, all parties involved in the maritime supply chain, including ship owners and insurers, will need to retain and share price information and/or attestations. The provision of false or misleading information during the attestation process will be considered a licensing offence under Regulation 67 of the Russia (Sanctions) (EU Exit) Regulations 2019, as amended.
The attestation process divides the market into three tiers and is designed to impose differing levels of obligation onto the various actors in the oil/oil products supply chain, depending on whether they routinely know the price paid for oil or oil products in their ordinary course of business and how often they transact. The following chart provides an overview of the three tiers.
Attestations should set out:
- the name, address and details of both parties involved in the transaction for which the attestation is required;
- the signature of representatives of both parties;
- details of the person providing the attestation based on their knowledge of the price information; and
- any associated documentation, even if this person is not directly involved in the transaction proposed.
The OFSI Guidance provides a sample form of attestation. The attestation must be retained for a period of four years beyond the end of the calendar year in which the attestation was created if the parties are relying on the Price Cap GL.
The OFSI Guidance states that the due diligence required of a Tier 2 actor to establish the reliability and accuracy of the information provided by a Tier 1 actor “might reasonably include considering the international scope of their activities, assessing their own exposure, considering their own risk appetite, seeking legal advice as appropriate, and implementing appropriate due diligence measures to identify and mitigate potential risks of breaching trade sanctions.” While OFSI does not specify the exact measures to be taken, the OFSI Guidance notes that entities subject to existing due diligence requirements (e.g., Customer Due Diligence through their regulatory supervision) should apply the same standards when operating under the price cap regime and be able to evidence the measures that have been taken.
Tier 1 actors are required to report to OFSI each time they undertake activity under the auspices of the Price Cap GL, including when several activities are covered under a single contract. These activities must be notified to OFSI within 30 days of each transaction. Reports should be submitted by email to email@example.com and made using the OPC standardised reporting form, which OFSI will publish on its website in due course. When multiple reports are required from the same entity (e.g., on more than 10 occasions in a 30 day period), the entity may provide a single consolidated report.
Tier 2 and 3 actors that seek attestations from Tier 1 actors are required to request and receive confirmation that the Tier 1 actor has made the foregoing reports to OFSI. If the Tier 2 or 3 actor does not receive this confirmation, the Tier 2 or 3 actor must inform OFSI of this within 30 days and withdraw its services as soon as reasonably practicable.
Parties relying on the Price Cap GL also must maintain accurate, complete and readable records in English that demonstrate adherence to the conditions and obligations of the Price Cap GL. The OFSI Guidance states that the records must detail:
- a description of the activity taking place under the Price Cap GL;
- a description of the nature of any goods, services or funds to which the activity relates;
- the date of the activity (or the dates between which the activity took place);
- the value and/or quantity of any goods, services or funds to which the activity relates;
- the person’s name and address;
- the name and address of any consignee of goods to which the activity relates or any recipient of services or funds to which the activity relates;
- in so far as it is known to the person, the name and address of the end-user of the goods, services or funds to which the activity relates;
- if different from the person, the name and address of the supplier of any goods to which the activity relates; and
- when relevant, copies of any attestation produced or supplied.
Who Is an Involved Person and What Must They Do?
“Involved persons” have certain roles and responsibilities in connection with the maritime transportation (and associated services) ban. An “involved person” for this purpose is a person that is involved in either (1) the supply and delivery of oil or oil products or (2) the provision of financial services, funds, or brokering services relating to the supply/delivery of oil and oil products covered by the UK ban (“Covered Transactions”).
Involved persons must:
- ensure from December 5, 2022, that the Russian oil involved in all Covered Transactions is sold at or below the price cap;
- ensure from February 5, 2023, that the Russian oil products involved in all Covered Transactions are sold at or below the price cap;
- comply with the attestation process and recordkeeping requirements set out in the Price Cap GL; and
- report to OFSI as soon as practicable if, in the course of carrying on their business, they know or have reasonable cause to suspect a person is a designated person or has committed a sanctions offence. For example, awareness of a transaction for shipping or associated services in which prices deviate significantly from the standard prices available in the market at that point in time may suggest that the costs of the services relevant to the transit of the oil or oil products are being used as a means of circumventing the price cap.
Reports to OFSI should be made using OFSI’s compliance reporting form, which should be submitted by email (along with any supporting documents) to firstname.lastname@example.org. The information an involved person making a report to OFSI is required to provide, includes:
- information or details of any other matter on which the knowledge or suspicion is based (e.g., a business partner’s refusal or reluctance to provide requested price information);
- any information held by which the person or designated person can be identified;
- any related information held about the supply or delivery by ship or the related services or funds provided; and
- when possible, the nature, amount, value, or quantity of any goods or services related to the suspected offence at the time when the involved person first developed knowledge or suspicion.
Circumstances in Which the Ban Will Not Apply
OFSI’s Guidance clarifies certain circumstances in which the ban will not apply.
First, when a container that is not located in Russia previously has been used to transport or store Russian oil or oil products, an unpumpable quantity of substance known as “tank heel” may remain at the base of the container (i.e., a substance which could not be removed from the container without causing damage to the container). If non-Russian oil is added to the container, it would co-mingle with the Russian tank heel. The non-Russian products held in the tank can still be transported from a place in Russia to a Third Country or between one third country and another third country, without implicating the ban.
Second, oil and oil products of non-Russian origin will be permitted if they transit through or depart from Russia, with minimal Russian oil residue. Consequently, the ban will not apply when Russia is identified as the state of export in the customs declarations if the country of origin for the oil or oil products is identified in those declarations as a Third Country and the goods are not owned by a person connected with Russia. The OFSI Guidance provides the specific example of the Caspian Pipeline Consortium pipeline that transports Kazakh oil through Russia. Because the mixed oil is majority Kazakhstan oil with some unavoidable Russian residue, the UK Government’s intention is that this oil can be transported, and the ban will not apply, because the oil is of Kazakh origin.
Implementation and Enforcement of the Ban
HM Treasury has created a new unit that will sit within OFSI to lead the UK government’s work on the licensing system for the oil price cap. The unit also will be responsible for engaging with industry to ensure readiness for the price cap’s introduction and monitoring the level and impact of the price cap.
OFSI also will be responsible for enforcement of the ban. The OFSI Guidance states that “there will be a robust enforcement regime backed up by a criminal prosecution.” As with other sanctions breaches for which OFSI has enforcement responsibility, OFSI will have a range of enforcement tools at its disposal, including warning notices, referrals to professionals bodies or regulators, “naming and shaming” those that breach the ban, civil monetary penalties, and criminal prosecution. More than one of these tools may be used in any particular case.
OFSI can impose civil monetary penalties for breaches of the ban on a strict liability basis. Consequently, OFSI does not have to consider whether the offender knew or had reasonable cause to suspect the relevant conduct amounted to a breach of sanctions if it can demonstrate on the balance of probabilities (i.e., based on the evidence the breach was more likely than not) that a breach has occurred. When it is possible to estimate the value of a breach of the ban, the permitted maximum penalty is the greater of £1,000,000 or 50% of the estimated value of each breach. In any other case, the permitted maximum is £1,000,000 per breach.
Provided that a person can demonstrate to OFSI that they have fully met the requirements of the attestation process in a timely manner, and have undertaken appropriate due diligence, the OFSI Guidance states that OFSI “does not anticipate taking enforcement action” against such a person, including in cases of suspected breaches involving a counterparty that has falsified an attestation. The approach outlined in the OFSI Guidance would not, however, preclude enforcement actions in relation to breaches involving broader sanctions compliance processes unrelated to the attestation process or in extraordinary circumstances. For more information on how these developments could impact your organization, contact the author of this post, Alexandra Melia, in Steptoe’s Economic Sanctions team in London.