On February 5, 2023, the UK ban imposed by Part 5, Chapter 4IA of The Russia (Sanctions) (EU Exit) Regulations 2019, as amended (“Russia Regulations”), on the maritime transportation of certain Russian oil products and related services came into effect. Ahead of the measure coming into force, on February 4, 2023, HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) published an updated version of its guidance on the UK Maritime Services Prohibition and Oil Price Cap (“OFSI Guidance”), which outlines how the oil products price cap will be implemented, OFSI’s approach to enforcement, and the requirements on involved persons. OFSI also issued two new General Licences that establish the level of the oil products price cap and establish a wind-down period with respect to certain Russian oil products.
The Oil Products Price Caps
The oil products falling within the scope of the ban are those goods falling within Harmonised System (“HS”) code 2710. This code aligns with the goods falling within the scope of the comparable EU and US measures. A price cap exception has been provided for the maritime transport of Russian oil products and associated services when the pertinent oil products have been purchased or sold at or below the price cap and is set out in General Licence INT/2022/2469656 (“Price Cap GL”).
There are, in fact, two oil products price caps. The price cap applicable to individual oil products is determined based on their HS sub-heading and whether they are classified as “premium to crude” (i.e., gasoline, motor spirits, aviation spirits, motor fuel blend stocks, gasoil and diesel fuel, kerosene, kerosene-type jet fuel, and vacuum gas oil) or “discount to crude” (i.e., all other 2710 HS sub-headings). Premium to crude products are subject to a price cap of USD 100 per barrel, while the price cap for discount to crude products has been set at USD 45 per barrel.
The OFSI Guidance clarifies that the oil products price caps will only cover the price of the oil product. Any ancillary costs such as transportation and legal fees will not fall within the scope of the price caps.
The price caps 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 processed in line with non-preferential Rules of Origin (e.g., blending operations involving refined oil products when the blending results in a difference between the HS codes of any of the input refined oil products and the output refined oil product at the 8-digit level). If the Russian oil products pass customs in a Third Country and then re-enter trade by maritime transportation without being substantially processed, the pertinent oil products price caps will still apply.
Russian oil products will be considered to be at or below the pertinent price cap when the unit price (i.e., the price per barrel or per tonne of the 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 product first being loaded onto the ship and the 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 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
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 Regulations. The attestation process for oil products mirrors the guidance previously issued by OFSI with respect to Russian oil. For more information on the attestation process, see our previous blog post (here).
The OFSI Guidance also clarifies that, when Tier 2 actors (e.g., financial institutions providing transaction-based trade finance, customs brokers, ship agents, and vessel charterers) are transacting with other Tier 2 or Tier 3 (e.g., cargo/P&I insurers, insurance brokers, re-insurers, ship management companies, ship owners, and financial institutions’ general financing facilities) actors, they must: (1) request and retain price information and/or a signed attestation from their counterparty; (2) share the price information/attestation onward in the chain with any counterparty that requests it; and (3) conduct sufficient due diligence to establish the reliability and accuracy of the information provided in response to the request for price information/attestation.
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 40 days of the date of entry into a trade (an increase on the previous 30 day time limit for reporting). 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, provided that OFSI is notified of all activities within the consolidated report within 40 days of each transaction. The OFSI Guidance also clarifies that the reporting requirement relates solely to transactions that the Tier 1 entity is a party to.
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 on a quarterly basis for Tier 2, and periodically for Tier 3, actors. If the Tier 2 or 3 actor does not receive this confirmation, they are required to inform OFSI of this and withdraw their services as soon as reasonably practicable.
A Tier 2 or 3 actor does not need to receive this confirmation when a Tier 1 actor is not required to make a report to OFSI because it is not a UK person, however, the Tier 2 or 3 actor must inform OFSI of this situation within 60 days. Subsequent reporting to OFSI is required on a quarterly basis for Tier 2 actors and, for Tier 3 actors, when periodically reviewing service agreements with Tier 1 actors.
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. For more details on the record keeping requirements, see our previous blog post (here).
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 on Russian oil products. An “involved person” for this purpose is a person that is involved in either (1) the supply and delivery of oil products or (2) the provision of financial services, funds, or brokering services relating to the supply/delivery of oil products covered by the UK ban. For more details on the responsibilities of involved persons, see our previous blog post (here).
Circumstances in Which the Ban Will Not Apply
The OFSI Guidance clarifies circumstances in which the ban will not apply. In addition to the circumstances set out in our previous blog post (here), a wind-down period for refined oil products also has been introduced pursuant to General Licence INT/2023/2660772 (“Wind-Down GL”).
The Wind-Down GL permits the supply or delivery of Russian oil products traded at a price above the applicable oil products price cap (and related services), provided that the products were loaded on ships before 5:01am GMT on February 5, 2023, and are delivered and clear customs in a Third Country before 5:01am GMT on April 1, 2023.
Implementation and Enforcement of the Ban
OFSI 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 option.” 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.