New Oil Service Restrictions Could Spike Sanctions Evasion Efforts, Former OFAC Official Says

The maritime industry should see an increase in Russian sanctions evasion tactics as the U.S., the EU and others prepare to set a price cap on Russian oil, said David Tannenbaum, a former sanctions compliance specialist at the Office of Foreign Assets Control. Logistics companies and others should be on the lookout for a rise in deceptive maritime practices, which could call for more compliance work and recordkeeping to avoid running afoul of U.S. sanctions, said Marco Crusafio, an international shipping lawyer with Squire Patton.

OFAC last week outlined a set of prohibitions on certain shipping services related to Russian oil to go along with a price cap, which hasn’t yet been set (see 2211230047). The agency also issued guidance detailing how it plans to implement the price cap -- including compliance requirements for U.S. service providers -- and three related general licenses.

Shippers haven’t seen a “huge amount” of Russian oil-related sanctions evasion tactics “up until now,” partly because many of those transactions have been “permissible,” Tannenbaum said during a Nov. 30 webinar hosted by the Association of Certified Sanctions Specialists. But now that OFAC and others have defined a range of “covered services” that will be subject to sanctions, “we do expect that there will be some form of increase in these deceptive maritime practices by the Russian oil industry,” said Tannenbaum, director of Blackstone Compliance.

This may include increases in ships turning off their Automatic Identification System (AIS) before arriving at a Russian terminal, Tannenbaum said, or illegal ship-to-ship transfers of Russian oil. Shipping companies may see new firms “pop up” that “no one's ever heard of and that are clearly an outfit on behalf of potentially a Russian oil seller hoping to sell their goods at a higher price than the cap.”

Crusafio said ships may be more vigilant of other ships that turn their AIS off, which could be a “clear indication of something dodgy going on.” For companies that are complying with the prohibitions but their AIS system simply malfunctions, they should make sure to document the accident or risk running into compliance and business problems, Crusafio said.

“The AIS system might break down, and if that happens, then there will have to be clear evidence to show that,” he said. “It’s not just OFAC” that may require that documentation, Crusafio said, but counterparties may wish to see proof before proceeding with a transaction. “It goes to the increased compliance, increased level of documentation and work behind the scenes that needs to be done in order to be compliant.”

Companies shipping oil across international waters may also run into issues trying to comply with differing service restrictions administered by multiple countries, Tannenbaum said. He said OFAC’s guidance and prohibitions differ slightly from the restrictions outlined by the U.K.’s Office of Financial Sanctions Implementation (see 2211150013), which has a “more expansive definition of what a financial service” is. Conversely, OFAC considers flag registration and flag registries to be a covered service, he said, while that “isn't specifically called out in OFSI’s guidance.”

Tannenbaum expects OFAC to release a set of frequently asked questions or new general licenses in an effort to clear up confusion about complying with multiple countries’ service restrictions. The agency could release that guidance as soon as next week, he said, just to “make sure that everyone's on the same page.” An OFAC spokesperson didn't comment.

Tannenbaum also said the U.S. and its allies “are not fully aligned on” other issues surrounding the price cap and the service restrictions. But those shouldn’t cause major compliance problems, Tannenbaum said, particularly for discrepancies between the U.S. and the U.K. “There are slight differences, but overall, I think they're mostly similar,” he said. “It comes down to buying, selling, ensuring, financing and shipping Russian crude oil.”