On May 21, 2024, the UK Department for Business & Trade's Export Control Joint Unit (ECJU) published notice to exporters 2024/11 regarding its new guidance on the sale of oil tankers to countries other than the United Kingdom, Isle of Man, or Russia (Third Countries) under the Russia (Sanctions) (EU Exit) Regulations 2019 (the "Russia Regulations") (the "ECJU Guidance"). The purpose of the ECJU Guidance is to provide information and tools to the maritime sector that will assist in the prevention of sanctions evasion in relation to the sale and brokering of second-hand vessels to Third Countries. The ECJU Guidance underscores the continued efforts of UK sanctions agencies to clamp down on evasion of the UK's Russia sanctions, as well the UK government's recognition of the need to collaborate with the private sector to succeed in those efforts.
The Context Underpinning the ECJU Guidance
According to the ECJU Guidance, direct trade between the United Kingdom and Russia has reduced significantly as a result on the imposition of an unprecedented package of UK sanctions following Russia's invasion of Ukraine in February 2022. However, Russia has persisted in seeking access to sanctioned goods and services through indirect routes and the use of complex supply chains. For example, intermediaries in Third Countries purchasing sanctioned goods for onward sale to Russia, or the acquisition of such goods by front companies with disguised or opaque links to a person connected with Russia.
A particular focus of these efforts has been in relation to oil, due to its significance as a revenue generator for the Russian government. Following the imposition of oil price cap sanctions in relation to certain oil and oil products by the G7+ Coalition, Russia has actively sought to curb the impact of these measures. In particular, Russia has sought to assemble and deploy a "shadow fleet" of vessels to service its exports of oil outside the ambit of the sanctions imposed by the G7+ Coalition.
The ECJU Guidance notes that some of the tankers targeted for inclusion within the Russian shadow fleet can, despite being in excess of 15 years old, command premium sale prices significantly above historic market prices for equivalent tankers due to Russia's need for vessels. Given those economics, the ECJU Guidance states that "this market is likely to remain lucrative to prospective sellers."
The ECJU Guidance seeks to raise the awareness of maritime industry actors to this context, as well as encourage them to include an assessment of attendant sanctions risks within their due diligence processes to mitigate the risk of second-hand vessel sales and, in particular, tanker sales, contributing to the growth of Russia's shadow fleet.
Regulatory Framework
In pertinent part, Regulations 24, 25, and 29 of the Russia Regulations prohibit persons subject to UK sanctions jurisdiction that are selling vessels or involved in vessel brokerage (absent an available exception or license) from directly or indirectly:
- supplying or delivering "restricted goods" from a Third Country to a place in Russia;
- making "restricted goods" available to a person connected with Russia (i.e., an entity incorporated or domiciled in Russia, or an individual ordinarily resident or located in Russia) or for use in Russia; and
- providing brokering services in relation to an arrangement with the object or effect of supplying, delivering, or making available "restricted goods" from a third country to a place in Russia or a person connected with Russia.
For the purpose of these restrictions, "restricted goods" are defined as including the "critical-industry goods" described in Schedule 2A of the Russia Regulations. Part 7 of Schedule 2A includes the following broad definition of "[v]essels (surface or underwater), including inflatable boats, and specially designed components therefor" within the scope of these sanctions.
Importance of Robust Due Diligence
The ECJU Guidance emphasizes the importance of those involved in the sale of second-hand vessels to third counties conducting risk-based "know your customer" ("KYC") and counterparty due diligence that:
- identifies the ultimate beneficial owner ("UBO") of the proposed buyer of the second-hand vessel, as well as the true intended end-user of the vessel; and
- confirms that none of the proposed buyer, UBO of the proposed buyer, or true intended end-user are persons connected with Russia.
Specifically, the ECJU Guidance states that UBOs of potential purchasers of second-hand vessels intended to be used to get around the UK's sanctions against Russia are unlikely to approach sellers directly or to be identified in paperwork pertaining to the proposed purchaser or transaction. It also is common for such UBOs to employ complex ownership structures consisting of many layers of intermediary entities to conceal their involvement with the transaction.
The ECJU Guidance states that "closer scrutiny of intermediary companies and apparent end-users can uncover discrepancies" that may indicate the involvement of the UBO and recommends that consideration is given to obtaining copies of identification documentation for the owner(s) and UBO(s) of the purchaser, as well as contact details and information and evidence of their source of funds. This information could also be checked against third party databases, media, and market intelligence to verify that the persons identified would be the true end-users or UBOs of the vessel if the transaction completes.
The ECJU Guidance also notes that due diligence information on established counterparties should periodically be reviewed on a risk sensitive basis, as well as in response to a change in the counterparty's owners, directors, or vessel trading patterns.
Key Risk Indicators
The ECJU Guidance specifically recommends that ship brokers should, to the extent they have not already done so, implement a system of "red flags" in their due diligence processes that identify and appropriately escalate consideration of factors that may indicate particular business partners and/or transactions pose an elevated sanctions risk.
To assist with the calibration of these controls, the ECJU Guidance identifies a number of key risk indicators relating to transactions, buyers, and jurisdictions that may assist maritime industry participants involved in the sale of second-hand vessels to Third Countries to spot behaviors known to be used to facilitate circumvention of UK trade sanctions against Russia. It should be borne in mind that these risk factors are indicative, not comprehensive, and it is imperative that industry participants remain vigilant for other red flags potentially indicating that a transaction involves activity posing a heightened sanctions risk that requires enhanced due diligence and scrutiny before proceeding.
In particular, the ECJU recommends the performance of enhanced due diligence in any of the following circumstances:
- Transaction Indicators –
- the transaction concerns a vessel that is over 15 years old;
- the purchase price of the vessel is significantly above market price, or otherwise is inconsistent with the quality and age of the vessel;
- the descriptions of the vessel and related terms and conditions on trade finance documentation is non-specific or misleading;
- the transaction is inconsistent with normal pre-February 2022 trade patterns (e.g., the country of incorporation of the special purpose vehicle that would buy the vessel is not in line with industry norms);
- the legal ownership of the vessel appears to have been deliberately obscured; and/or
- there is evidence, or a suspicion, that documentation or significant details included therein are fraudulent.
- Buyer Indicators –
- they are, directly or indirectly, involved in the supply, sale, delivery, or purchase of restricted or high-risk goods, particularly to high-risk destinations;
- they are located in a country where the market for second-hand vessels has increased significantly since sanctions on Russia were introduced;
- they have connections with Russia or previously had dealings with individuals or entities that are now designated;
- they have entered into a joint venture or cooperation agreement with one or more designated persons;
- there is a use of complex structures to hide involvement (e.g., layered letters of credit, front companies, intermediaries, previously unknown brokers, or brokers/intermediaries associated with prohibited activities);
- their details match, or are suspiciously similar to, details found within sanctions lists;
- there is use of non-transparent payment methods or unusual payment terms;
- there is a lack of transparency regarding source of funds, end-user and/or end use; and/or
- they provide incomplete information and resist responding to additional information requests.
- Jurisdictional Indicators –
- the transaction involves countries actively trading with sanctioned countries;
- the shipment routes are inconsistent with typical trade patterns or the buyer's expected business activity;
- payments or transfers are made to importers, exporters, agents, or brokers that export to countries and ports proximate to borders with sanctioned countries; and/or
- there is involvement of entities in countries with weak export control laws or lax enforcement of such laws.
Conclusion
The ECJU Guidance advises maritime industry participants involved in the second-hand sale of vessels to Third Countries to only conclude these deals when they are confident that their typical due diligence processes have been satisfied, there has been thorough cross-checking of these risk indicators and, when necessary, enhanced due diligence has been performed to assess potential red flags and proportionate controls have been put in place that satisfactorily mitigate any identified risks. In addition to providing advice on the implementation of appropriate controls, the ECJU Guidance emphasizes that non-compliance with UK sanctions is a serious matter that can result in significant financial penalties or criminal prosecution.
Companies active in the maritime sector that are involved in second-hand vessel sales should review the ECJU Guidance and, if necessary, take steps to enhance their existing compliance controls and due diligence processes to ensure that they are appropriately calibrated to respond to the risks associated with this activity and the increased risk of scrutiny and enforcement highlighted in the ECJU Guidance. For more information on these developments, contact the authors of this post, Alexandra Melia or Elliot Letts, in Steptoe's Economic Sanctions team in London.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.