Trade Compliance Flash: Price Cap Coalition Zeroes in on Key Sanctions Evasion Methods
On February 1, 2024, a coalition comprising of the Group of 7 (G7) and Australia that collectively imposed a price cap (the Price Cap Coalition) on Russian-origin crude oil (oil price cap or OPC) in December 2022 – issued a "Compliance and Enforcement Alert" (the Alert). The Alert outlines six "key OPC evasion methods" and provides recommendations for industry stakeholders to better identify them.
The Coalition's focus on evasion and reporting underscores the high-risk nature of the maritime shipping industry, given the manifold ways in which actors have evaded sanctions such as the OPC. The evasion methods covered by the Alert will not be a surprise to those who have been monitoring recent U.S. government guidance for the industry. Such tactics include:
- Falsifying documentation, particularly OPC attestations, to disguise the true price of Russian oil products or obscure information about a vessel
- Using opaque shipping and other costs to obfuscate the actual price of Russian oil products (e.g., bundling shipping, freight, customs, and insurance costs)
- Using third-country supply chain intermediaries and complex corporate structures to evade detection as an owner or trader of Russian oil products that are not in compliance with the OPC
- Engaging in deceptive flagging activities, including using deregistered flags and changing flags on multiple occasions (i.e., "flag hopping")
- Relying on a "shadow" or "dark" fleet to trade products sold above the OPC, often involving using older vessels that are anonymously owned or have opaque ownership structures
- Making untraceable and irregular voyages or engaging in automatic identification system (AIS) manipulation, spoofing, and ship-to-ship transfers without any rational or legitimate explanation
- While the Alert's focus is the enforcement of and compliance with the OPC, given the increased sanctions enforcement actions by the U.S. government involving the maritime sector, the sanctions evasion typologies in the Alert can be understood to apply broadly. A day after the Alert was published, the U.S. Department of Justice (DOJ) announced the unsealing of three criminal cases brought in connection with illicit shipments of Iranian oil, citing many of the same evasion tactics highlighted in the Alert.
- Like the evasion methods themselves, the recommendations in the Alert will likely be familiar to industry stakeholders. They center on the importance of enhanced compliance protocols, Know-Your-Customer (KYC) procedures, and using vessel tracking tools. Most notably, the Coalition emphasizes merging rigorous compliance programs with broader market knowledge and industry resources. For instance, it recommends that industry stakeholders take extra care in their due diligence of customers and counterparties when market assessments suggest that Russian-origin oil likely exceeds the price cap. Additionally, the Alert references industry resources including the International Chamber of Shipping's (ICS) Flag State Performance Table and the International Convention for the Safety of Life at Sea (SOLAS) as important resources for identifying potential issues with flagging and irregular voyages.
- The Alert highlights the significance of a "shadow" fleet in facilitating breaches of the OPC, stating that "[t]here is ample evidence that Russia has utilised these vessels to transport its oil and oil products…[and] these vessels have given Russia an outlet for its oil exports and a means to circumvent sanctions in a more unfettered way…" The shadow fleet poses particular problems for the industry as shadow vessels often have access to legitimate maritime and insurance services. The Coalition and other government agencies, including the Department of the Treasury's Office of Foreign Assets Control (OFAC), are paying increased attention to the shadow fleet and encouraging stakeholders to monitor and investigate AIS manipulation through a client's lifecycle. In the meantime, companies should not solely rely on a customer's demonstration of reputable insurance and classification certificates as a proxy for sanctions compliance.
- The inclusion of contact information for the purpose of reporting suspected breaches of the OPC is another indication that sanctions enforcement agencies in the U.S. and elsewhere are focused on raising compliance expectations for the maritime shipping industry.
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