US to ban maritime services for Russian petroleum above price cap

On September 9, 2022, the US Department of Treasury, Office of Foreign Asset Control (OFAC) issued preliminary guidance regarding how the US will implement the proposed price cap on Russian oil announced by the G7 countries in early September.

As detailed below, US persons will be prohibited from providing any services related to the maritime transportation of Russian-origin crude oil or petroleum products, but only if such products are purchased at a price that exceeds the price cap set by the countries participating in the cap. Significantly, in a novel approach, OFAC will create a safe harbor whereby US persons will be exempt from potential penalties under these prohibitions so long as they conduct certain specified due diligence and maintain relevant records establishing, to the best of their ability, that the Russian-origin petroleum was acquired at a price below the cap. US persons will, however, remain prohibited from importing Russian-origin crude oil or petroleum products into the US.

The prohibitions with respect to services related to the maritime transport of Russian-origin crude oil will be effective on December 5, 2022 and those related to Russian-origin petroleum products will be effective on February 5, 2023.

More specifically, OFAC announced that it intends to issue a determination under Executive Order 14071 ("Prohibiting New Investment In and Certain Services to the Russian Federation") that will effectively prohibit the exportation, reexportation, sale, or supply, directly or indirectly, from the US, or by a US person, wherever located, of "services" related to the maritime transportation of seaborne Russian crude oil or petroleum products if the seaborne Russian oil is purchased at or below the then existing price cap. The price cap, which has not yet been agreed to, will be set by the G7 and other participating countries and published by OFAC when established.

The exact services that will be included within the scope of the prohibition will be announced by OFAC at a later date but the guidance suggests they will, at a minimum, apply to:

• Commodities brokers and refiners
• Shippers
• Traders
• Importers
• Financial institutions
• Insurers and protection and indemnity (P&I) clubs

The prohibitions will not apply, however, in instances where the Russian-origin petroleum was purchased at or below the established price cap. OFAC, recognizing the challenges certain service providers will have in definitively determining the price of the Russian-origin petroleum, will create an explicit safe harbor whereby US person service providers will be exempt from any potential penalties under these prohibitions so long as they conduct certain specified due diligence and maintain related records. The creation of a safe harbor is a novel approach and represents a material departure from OFAC's typical practice of subjecting parties to strict liability for any violations of its regulations.

OFAC intends to establish a three tiered system that delineates the amount of due diligence and recordkeeping service providers are expected to conduct in order to fall within the safe harbor from potential penalties. The three tiers will be predicated on the amount of access each tier has to actual price information related to the Russian-origin petroleum:

• Tier one actors: Actors who regularly have direct access to price information in the ordinary course of business, such as commodities brokers and refiners, should retain and share, as needed, documents that show that seaborne Russian oil was purchased at or below the price cap. Such documentation may include invoices, contracts or receipts/proof of accounts payable.
• Tier two actors: Actors who are sometimes able to request and receive price information from their customers in the ordinary course of business, such as financial institutions, should, when practicable, request, retain and share, as needed, documents that show that seaborne Russian oil was purchased at or below the price cap. When not practicable to request and receive such information, tier two actors should request customer attestations in which the customer commits to not purchase seaborne Russian oil above the price cap.
• Tier three actors: Actors who do not regularly have direct access to price information in the ordinary course of business, such as insurers and protection and indemnity (P&I) clubs, should obtain and retain customer attestations in which the customer commits to not purchase seaborne Russian oil above the price cap, for example as part of their annual insurance policy renewal process or updates to their insurance policy to comply with the price cap. Insurers may request attestations from customers that cover the entire period a policy is in place, for example for the entire length of an annual policy, rather than request separate attestations for each shipment.

OFAC issued the following chart showing how the recordkeeping and attestation process is intended to work:

Service providers will be expected to continue to review transactions for potential red flags that would suggest efforts have been made to manipulate the price of the Russian-origin crude to make it appear to be under the established price cap. All required records will be subject to a five year retention requirement.

As described by OFAC, the recordkeeping and attestation process is intended to create a "safe harbor" from liability for service providers for violations of the maritime services policy in cases where service providers inadvertently deal in oil purchased above the price cap due to falsified records provided by illicit actors. For example, where a service provider without direct access to price information reasonably relies on a customer attestation, OFAC states that the service provider will not be held liable for potential sanctions breaches.

On the other hand, persons that make significant purchases of oil above the price cap, knowingly rely on service providers subject to the maritime services policy or persons that knowingly provide false information, documentation or attestations to such a service provider, will be considered to have violated the maritime services prohibitions and may be a target for a sanctions enforcement action.

US person service providers to the maritime transportation of Russian-origin crude oil or petroleum products should begin reviewing their due diligence and recordkeeping practices and, as needed, supplement those procedures to ensure they are consistent with the recommended requirements to fall within OFAC's intended safe harbor.

OFAC will be issuing additional guidance and regulations relating to these prohibitions and our team will publish additional updates as appropriate.

Special thanks to Claire Huitt (Washington, DC) for her contributions to this briefing.