Alexander Cotoia, Regulatory Complaince Manager at The Volkov Law Group, re-joins us for a posting on OFAC’s preliminary guidance relating to its price caps for Russian origin oil and petroleum products. Alex can be contacted at [email protected].

On September 9, 2022, the United States Department of the Treasury’s Office of Foreign Asset Control (“OFAC”) released “Preliminary Guidance” concerning a ban on maritime transportation services involving Russian Federation origin crude oil and petroleum products. According to the Guidance, the United States—acting on a multilateral basis with its EU and G7 counterparts—will ban the maritime transportation of crude oil effective December 5, 2022, and petroleum products effective February 5, 2023.

OFAC’s release of Preliminary Guidance comes in the aftermath of the G7’s September 2, 2022, determination to sustain the maritime transportation of seaborne Russian Federation origin oil purchased at or below a price cap to be established by coalition countries as part of a consultative process. While the United States has banned all Russian Federation oil-related imports outright (see Executive Order 14066), an exception for the provision of maritime services by U.S. persons related to oil purchased by its allies at or below a price cap is largely seen as a concession to coalition countries still heavily reliant on the Russian Federation for energy imports. According to one estimate, in the year prior to the Ukraine conflict, nearly 14 percent of the world’s total supply of crude and condensate output originated from the Russian Federation.

OFAC’s Preliminary Guidance contains concrete advice for maritime services providers, commodities brokers, financial institutions, insurance providers, and others in the direct supply chain of seaborne Russian oil for navigating the price exception. According to OFAC, actors with “direct access” to price information in the ordinary course of business—e.g., commodities brokers and refiners—should retain and share documents that show that seaborne Russian oil was purchased at or below the price cap. This documentation would include, but is not limited to, invoices, contracts, or receipts/proof of accounts payable. Actors who are “sometimes” able to request and receive price information from their customers—e.g., financial institutions—should, “when practicable” request and receive such price information. Where impracticable, OFAC advises that such actors are able to rely on customer attestations in which the customer commits not to purchase seaborne Russian oil above the price cap. Finally, actors who lack regular direct access to price information in the ordinary course of business—e.g., insurance providers and protection and indemnity clubs—are advised to obtain customer attestations manifesting a commitment not to purchase oil above the cap on a periodic basis. In this vein, the Preliminary Guidance advises that  insurance companies, for instance, may obtain such customer attestations as part of an annual renewal process or updates to insurance policies.

Significantly, the record-keeping and attestation process creates a regulatory “safe harbor” for service providers from liability for violations of sanctions regulations. Where service providers inadvertently deal in seaborne Russian oil above the price cap—as a consequence, for instance, of reasonably relying on a customer representation that is later deemed fraudulent—the record-keeping requirement will insulate a compliant service provider from being subject to an enforcement action.

As the Preliminary Guidance makes clear, OFAC’s primary focus will be on the enforcement of the regulations as they pertain to potential circumvention and evasion. To that end, OFAC published a list of warning signs that may be indicators of attempts to circumvent the price cap exception. These include: (1) evidence of deceptive shipping practices; (2) refusal or reluctance to provide requested price information; (3) unusually favorable payment terms, inflated costs, or insistence on using indirect or opaque payment mechanisms; (4) indications of manipulated shipping documentation; (5) reliance on newly formed companies and intermediaries—especially if based in “high-risk” jurisdictions; and (6) use of abnormal shipping routes with no discernible economic benefit.

Businesses directly and indirectly involved in the provision of maritime services implicating the price exception are advised to thoroughly read and digest OFAC’s Preliminary Guidance. Intimate familiarity with the Preliminary Guidance and successive regulations is a critical component of navigating the sometimes-treacherous waters—pun intended—of the Russian oil price exception.