On 22 November 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) took three actions with respect to the long-awaited “price cap” with respect to services related to the maritime transport of Russian crude oil.

• OFAC published a “Determination pursuant to Executive Order (E.O.) 14071 to implement the price cap policy for crude oil of Russian Federation origin” (the “Determination”) (attached).  The Determination prohibits US persons from engaging in certain services related to the maritime transport of crude oil of Russian Federation origin (“Russian oil”) unless the price of that oil is at or below a price cap (to be set at a later date). The Determination takes effect at 12:01 a.m. eastern standard time (“EST”) on 5 December 2022. We note that, as discussed below, crude oil that is loaded onto a vessel at the port of loading prior to 12:01 a.m. EST on 5 December 2022, and unloaded at the port of destination prior to 12:01 a.m. EST on 19 January 2023 is exempt from the price cap.

• To provide guidance on the implementation of the Determination and Russian crude oil price cap, OFAC also issued “OFAC Guidance on Implementation of the Price Cap Policy for Crude Oil of Russian Federation Origin” (the “Guidance”) (attached). The Guidance defines Russian oil as articles defined by HTSUS subheading 2709.00 but does not include oil originating from a third country that is merely transported through a Russian pipeline.

• OFAC also issued three General Licenses (“GLs”) that provide certain exemptions to the prohibitions of the Determination.

The key elements of the Determination, Guidance, and GLs are summarized below. These measures implement a price cap policy first announced by the G7 on 2 September 2022, and later fleshed out by OFAC in preliminary guidance published on 9 September 2022 (see “Preliminary Guidance on Implementation of a Maritime Services Policy and Related Price Exception for Seaborne Russian Oil”). The United States is implementing this policy as part of a coalition of countries (the “Price Cap Coalition,” which includes the G7, Australia, and the EU) to prohibit US persons from engaging in a broad range of services related to the maritime transportation (the “maritime services policy”) of Russian Federation origin crude oil (“seaborne Russian oil”).  As stated in the Guidance, the purpose of the price cap policy is to “maintain a reliable supply of oil to the global market while reducing the revenues the Russian Federation earns from oil after its own war of choice in Ukraine inflated global energy prices.”

The measures announced on 22 of November only affect services related to the maritime transport of Russian crude oil. OFAC has advised it intends to publish preliminary guidance on implementation of the price cap policy for other petroleum products of Russian Federation origin in the near future. We note that, per the Preliminary Guidance of 9 September 2022, the date upon which the price cap with respect to the maritime transport of other petroleum products takes effect is 5 February 2023.

Determination Pursuant to EO 14071

The Determination applies the prohibitions in section 1(a)(ii) of EO 14071 to the following categories of services as they relate to the maritime transport of crude oil of Russian Federation origin (“Covered Services”). The Covered Services are prohibited when the price of the crude oil to which the Covered Services applies exceeds the price cap. These Covered Services are defined in the Guidance, as explained further below:

• Trading/commodities brokering: Buying, selling, or trading commodities and/or brokering the sale, purchase, or trade of commodities on behalf of other buyers or sellers.
• Financing: A commitment for the provision or disbursement of any debt, equity, funds, or economic resources, including grants, loans, guarantees, suretyships, bonds, letters of credit, supplier credits, buyer credits, and import or export advances. For the purposes of the determination, the term “financing” does not include the processing or clearing of payments by intermediary banks.
• Shipping: Owning or operating a ship for the purpose of carrying or delivering cargo and/or freight transportation; chartering or sub-chartering ships to deliver cargo or transport freight; brokering between shipowners and charterers; and serving as a shipping/vessel agent.
• Insurance, including reinsurance and protection and indemnity: The provision of insurance, reinsurance, or protection and indemnity (“P&I”) services; satisfying claims related to underwriting insurance policies that protect policyholders against losses that may occur as a result of property damage or liability; assuming all or part of the risk associated with existing insurance policies originally underwritten by other insurance carriers, including the reinsurance of a non-U.S. insurance carrier by a U.S. person; and liability insurance for maritime liability risks associated with the operation of a vessel, including cargo, hull, vessel, P&I, and charterer’s liability.
• Flagging: Registering or maintaining the registration of a vessel with a country’s national registry of vessels. This definition does not include the de-flagging of vessels transporting Russian oil sold above the price cap
• Customs brokering: Assisting importers and exporters in meeting requirements governing imports and exports. This definition does not include legal services or assisting importers and exporters in meeting the requirements of U.S. sanctions.

The Determination prohibits the exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any of the Covered Services to any person located in the Russian Federation - unless the price of the crude oil of Russian Federation origin does not exceed the relevant price cap (to be determined by the Secretary of the Treasury, in consultation with the Secretary of State).

The Guidance confirms that the following services are excluded from the scope of Covered Services:

• Medical evacuation or other emergency services for crew members.
  • Health, travel, or liability insurance for crew members.
  • Classification, inspection, bunkering, and pilotage.

The Determination also excludes Covered Services with respect to crude oil of Russian Federation origin when such crude oil is loaded onto a vessel at the port of loading prior to 12:01 a.m. EST on 5 December 2022, and unloaded at the port of destination prior to 12:01 a.m. EST on 19 January 2023. (See also OFAC FAQ 1094). Consequently, U.S. service providers can continue to provide Covered Services with respect to crude oil of Russian Federation origin purchased at any price, provided it complies with these conditions.

Setting the Price Cap

According to the Guidance, the “price cap for Russian oil will be set after a technical exercise conducted by the Price Cap Coalition.” When the price cap is set, the Secretary of the Treasury, with consultation of the Secretary of State, will issue a new determination pursuant to EO 14071, which will replace the previous Determination. If the price cap changes, the Guidance explains that OFAC intends to authorize a period for Covered Services providers to complete the provision of services engaged for the maritime transport of Russian oil purchased in accordance with the previous price cap.

When the Price Cap “Starts” and “Stops”

OFAC explains that the “price cap applies from the embarkment of maritime transport of Russian oil (e.g., when the crude oil is sold by a Russian entity for maritime transport) through the first landed sale in a jurisdiction other than the Russian Federation (through customs clearance).” This means that once Russian oil has “cleared customs in a jurisdiction other than the Russian Federation, the price cap does not apply to any further onshore sale.”

After clearing customs, if Russian oil is taken back on the water using maritime transport without being substantially transformed out the Russian Federation, then the price cap still applies. Covered Services can only be provided by U.S. service providers “if such Russian oil is sold at or below the relevant price cap.” 

Once the crude oil is substantially transformed outside the Russian Federation, the price cap no longer applies. A refiner located in a jurisdiction that has not banned the import of Russian oil can “purchase crude oil at or below the price cap and rely on U.S. service providers for services related to the maritime transport of that crude oil.” The Guidance further elaborates on what would constitute “substantial transformation” and crude oil of Russian Federation origin. The Guidance also states that “[f]or purposes of assessing whether crude oil is of Russian Federation origin, U.S. persons may reasonably rely upon a certificate of origin but should exercise caution if they have reason to believe such certificate has been falsified or is otherwise erroneous.”

Safe Harbor Process

The Guidance “establishes a safe harbor from OFAC enforcement for U.S. service providers that comply in good faith with a recordkeeping and attestation process.” The recordkeeping and attestation process allows parties to demonstrate or confirm “that the Russian oil has been purchased at or below the price cap.” OFAC expects U.S. service providers to continue to “implement and perform the standard due diligence practices that are customary for their industry.”

OFAC explicitly states that the “recordkeeping and attestation process is designed to shield such service providers from strict liability for breach of sanctions in cases where service providers inadvertently deal in the purchase of Russian oil sold above the relevant price cap owing to falsified or erroneous records provided by those who act in bad faith or make material misrepresentations.”  OFAC also addresses the inverse scenario, stating that, “where a service provider without direct access to price information reasonably relies on a customer attestation, and retains the attestation, that service provider will not be held liable for sanctions violations attributable to those acting in bad faith who cause a violation of the [D]etermination or an evasion of OFAC sanctions.” 

By way of setting expectations  for industry stakeholders, OFAC describes three tiers of actors active in maritime services, including commodities brokers and oil traders (Tier 1); financial institutions, ship/vessel agents, and customs brokers (Tier 2); and insurers, protection and indemnity clubs, shipowners, and flagging registries (Tier 3) (see pages 5-6 of the Guidance).

• “Tier 1 Actors”: These are actors who “regularly have direct access to price information in the ordinary course of business, such as commodities brokers and oil traders.” Tier 1 Actors “must retain documents showing that Russian oil was purchased at or below the relevant price cap. Such documentation may include invoices, contracts, or receipts/proof of payment.”  OFAC recommends that Tier 1 Actors: 1) update the terms and conditions of contracts, 2) update invoice structures to include the itemized price for oil purchase (excluding shipping, freight, and customs costs), and 3) provide guidance to staff.

• “Tier 2 Actors”: These are actors who are “sometimes able to request and receive price information from their customers in the ordinary course of business, such as financial institutions, ship/vessel agents, and customs brokers.” Tier 2 Actors “must, to the extent practicable, request and retain documents that show that Russian oil was purchased at or below the relevant price cap. When not practicable to request and receive such information, Tier 2 Actors must obtain and retain customer attestations, in which the customer commits that for the service being provided, the Russian oil was purchased or will be purchased at or below the relevant price cap.” OFAC recommends Tier 2 Actors provide guidance to trade finance department/relationship managers/compliance staff; update requests for information (RFIs) or sanctions questionnaire templates.

• “Tier 3 Actors”: These are actors who “do not regularly have direct access to price information in the ordinary course of business, such as insurers, P&I clubs, shipowners, and flagging registries.” Tier 3 Actors “must obtain and retain customer attestations, in which the customer commits that for the service being provided, the Russian oil was purchased or will be purchased at or below the relevant price cap, for example as part of their annual insurance policy renewal process or updates to their insurance policies. This can be done through a sanctions exclusion clause written into or already included in policies or contracts.” OFAC recommends Tier 3 Actors update policies, as well as terms and conditions, and provide guidance to staff.

Consistent with OFAC’s normal recordkeeping requirements, the records described above should be retained for five years.  Finally, a sample attestation is provided on page 10 of the Guidance and tier-specific guidance is provided on pages 7-8 of the Guidance. 

Recognizing Signs of Price Cap Evasion

OFAC states that “[a]n insurer, reinsurer, or P&I club may in the ordinary course of business, such as a claims investigation, request additional information from customers, including additional attestations or price information. A party’s refusal to provide such information should be considered a red flag for potential sanctions evasion.” Additionally, OFAC notes that for anyone offering a covered service, “a customer’s or counterparty’s refusal or reluctance to provide the necessary documentation or attestation should be considered a red flag that may indicate the entity has purchased Russian oil above the relevant price cap.”

Although shipping and insurance are Covered Services, the Guidance provides that “[s]hipping, freight, customs, and insurance costs are not included in the price cap and must be invoiced separately and at commercially reasonable rates.” Commercially unreasonable rates will be considered by OFAC as attempts to evade the price cap.

Compliance

As a general proposition, OFAC states it “would not pursue a penalty against a U.S. service provider that reasonably relies on the documentation or attestations described above, unless the U.S. provider knew or had reason to know that such documentation was falsified or erroneous or that the Russian oil was purchased above the relevant price cap.” Anyone who “evades, avoids, causes a violation of, or attempts to violate” the Determination could be subject to civil or criminal enforcement action. Although OFAC has “broad authority to take action against actors that evade the price cap,” it intends to “focus its enforcement responses on those” who “willfully violate or evade the price cap.”

OFAC notes that in the event “a U.S. person becomes aware that they are providing a covered service related to Russian oil that was purchased above the relevant price cap, the U.S. person must stop providing the covered service and contact OFAC.

OFAC will consider specific license requests on a case-by-case basis.

Processing, Clearing, or Sending of Payments by Intermediary Banks

The Guidance clarifies that the Determination does not impose any new prohibitions or requirements related to the processing, clearing, or sending of payments by intermediary banks. The Guidance also explains that services with respect to foreign exchange transactions and the clearing of commodities futures contracts are outside the scope of “financing.”

General Licenses

Several general licenses (“GLs”) authorize US persons to provide specific covered services. Those in effect are listed below:

• GL 55 authorizes all transactions prohibited by the Determination that are related to the maritime transport of crude oil originating from the Sakhalin-2 project, provided that the Sakalin-2 byproduct is solely for importation into Japan, through 12:01 a.m. EST 30 September 2023.
• GL 56 authorizes all transactions prohibited by the Determination that are related to the importation of Russian oil into the Republic of Bulgaria, the Republic of Croatia, or landlocked European Union member states as described in Council Regulation (EU) 2022/879 of June 3, 2022. (Czech Republic, Luxembourg, Hungary, Austria, and Slovakia) There is no expiration date for GL 56.
• GL 57 authorizes all transactions prohibited by the [D]etermination that are ordinarily incident and necessary to address vessel emergencies related to the health or safety of the crew or environmental protection, including safe docking or anchoring, emergency repairs, or salvage operations.” This GL does not authorize “any transactions related to the sale of Russian oil in violation of the [D]etermination.” There is no expiration date for GL 57.

Next steps

Please reach out to any member of the HL Team to discuss the Determination, Guidance, and GLs if you have any questions.

Authored by Aleksandar Dukic, Ari Fridman, Julia Diaz, and Cassady Cohick.