On November 3, 2022, a sixteenth amendment to the UK’s Russia sanctions regime was laid before parliament. The Russia (Sanctions) (EU Exit) (Amendment) (No. 16) Regulations 2022 (“Amendment 16”) introduces a ban on UK ships and services such as insurance, brokerage and shipping facilitating the maritime transport of Russian crude oil from December 5, 2022. A General Licence is expected to be published shortly that lays the basis for an oil price cap exception, which will allow continued access to services provided that Russian crude oil is purchased at or below the price cap. The level of the price cap will be set by the price cap coalition of the G7 and Australia in due course. Amendment 16 brings forward the implementation date for the import bans relating to Russian oil and oil products discussed in our previous blog post (here) from December 31, 2022 to December 5. Amendment 16 also introduces a comparable ban on refined oil products, which will come into effect on February 5, 2023.
Ban on the Maritime Transportation of Russian Oil and Oil Products
Amendment 16 prohibits persons subject to UK sanctions jurisdiction, absent an available exception or licence, on or after December 5, 2022 from directly or indirectly supplying or delivering by ship oil and oil products falling within commodity code 2709 (i.e., petroleum oils and oils obtained from bituminous minerals, crude) that originate in, or are consigned from, Russia:
- from a place in Russia to any country other than the UK, Isle of Man or Russia (“Third Country”); or
- from one Third Country to another Third Country.
Amendment 16 also prohibits persons subject to UK sanctions jurisdiction, absent an available exception or licence, on or after February 5, 2023, from directly or indirectly supplying or delivering by ship oil and oil products falling within commodity code 2710 (i.e., petroleum oils and oils obtained from bituminous minerals, other than crude; preparations not elsewhere specified or included, containing by weight 70% or more of petroleum oils or of oils obtained from bituminous minerals, these oils being the basic constituents of the preparations; waste oils) that originate in, or are consigned from, Russia:
- from a place in Russia to a Third Country; or
- from one Third Country to another Third Country.
For the purpose of these prohibitions, a ship is defined broadly as including “every description of vessel (including a hovercraft) used in navigation, except the naval, military or air-force ships of any country” and “supply or delivery by ship” includes any transfer of the pertinent goods between ships on which those goods are being supplied or delivered as prohibited by the ban.
Amendment 16 defines a person supplying or delivering the pertinent goods by ship to include a person who owns, controls, charters or operates a ship on which those goods are being carried or from or to which those goods are being transferred. A person will be considered to:
- own a ship if (i) the legal title to the ship, or to any share in the ship, is vested in the person, or in a person who is more than 50% owned or controlled, directly or indirectly, by that person, or (ii) a person who is more than 50% owned or controlled, directly or indirectly, by that person has a beneficial interest in the ship or in any share in the ship. This test is very broad in scope and would appear to catch within the prohibition ships that have any legal or beneficial ownership held by a person subject to UK sanctions jurisdiction. This may create complex compliance challenges when a person subject to UK sanctions jurisdiction has a minority shareholding in a ship and lacks the power necessary to require the ship to comply with the prohibition;
- control a ship if the person is able to take decisions about the ship’s operation, including (but not limited to) decisions about the route the ship may take and the appointment of master or crew; and
- have chartered a ship if it is chartered on bareboat charter terms within the meaning given by section 17(11) of the Merchant Shipping Act 1995.
A defence is available to the foregoing offences if the person charged with the violation can show that they did not know, and had no reasonable cause to suspect, that the supply or delivery in question related to oil and oil products (i) falling within commodity code 2709 or 2710, as applicable, or (ii) that originated, or were consigned, in Russia. However, as discussed further below, in practice this defence will not be available in relation to the civil enforcement of these prohibitions by His Majesty’s Treasury’s Office of Financial Sanctions Implementation (“OFSI”).
Ban on Services Relating to the Maritime Transportation of Russian Oil and Oil Products
Amendment 16 prohibits persons subject to UK sanctions jurisdiction, absent an available exception or licence, from directly or indirectly providing financial services or funds in pursuance of, or in connection with, an arrangement with the object or effect of supplying or delivering by ship:
- oil and oil products falling within commodity code 2709 from a place in Russia to a Third Country or from one Third Country to another Third Country on or after December 5, 2022; or
- oil and oil products falling within commodity code 2710 from a place in Russia to a Third Country or from one Third Country to another Third Country on or after February 5, 2023.
For the purpose of this prohibition, “financial services” are defined broadly by Section 61(1) of the Sanctions and Anti-Money Laundering Act 2018, as amended, as any services of a financial nature, including (but not limited to) (i) insurance, reinsurance and retrocession; (ii) insurance intermediation such as brokerage and agency; (iii) services auxiliary to insurance such as consultancy, actuarial, risk assessment and claim settlement services; and (iv) banking and other financial services, including accepting deposits and other repayable funds, lending, financial leasing, payment and money transmission services, providing guarantees or commitments, financial trading, participating in issues of any kind of securities and providing services related to such issues, money brokering, asset management, settlement and clearing services for financial assets, the provision by suppliers of other financial services of the transfer of financial information, and financial data processing or related software, and the provision of advisory and other auxiliary financial services in respect of any of the foregoing activities. In a press release announcing the legislation, His Majesty’s Treasury (“HM Treasury”) identified the insurance sector as being impacted by the services ban, stating that “[i]nsurance is one of the key services that enables the movement of oil by sea, particularly protection and indemnity (P&I) insurance which relates to third-party liability claims – the UK is a global leader in the provision of P&I cover, writing 60% of global cover.”
Amendment 16 also prohibits persons subject to UK sanctions jurisdiction, absent an available exception or licence, from directly or indirectly providing brokering services in relation to any of the foregoing arrangements. The definition of “brokering services” is also cast widely as any service to secure, or otherwise in relation to, an arrangement, including (but not limited to): (i) the selection or introduction of persons as parties or potential parties to the arrangement; (ii) the negotiation of the arrangement; (iii) the facilitation of anything that enables the arrangement to be entered into; and (iv) the provision of any assistance that in any way promotes or facilitates the arrangement. In its press release announcing the legislation, HM Treasury specifically identified the brokerage and shipping sectors as being impacted by the services ban.
A defence is available to the foregoing offences if the person charged with the violation can show that they did not know, and had no reasonable cause to suspect, that the financial services, funds or brokering services, as relevant, were provided in pursuance of or in connection with the supply or delivery of oil and oil products (i) falling within commodity code 2709 or 2710, as applicable, or (ii) that originated, or were consigned, in Russia. As already noted above, and as discussed further below, in practice this defence will not be available in relation to the civil enforcement of these prohibitions by OFSI.
Available Exceptions and Licensing Ground in Relation to the New Bans
Amendment 16 creates two exceptions to the new bans in relation to certain oil and oil products, as follows:
- an exception in relation to any oil and oil products falling within commodity codes 2709 or 2710 that (i) originate in a country that is not Russia; (ii) are not owned by a person connected with Russia (i.e., an individual ordinarily resident, or located, in Russia or an entity incorporated, constituted or domiciled in Russia); and (iii) are only being loaded in, departing from or transiting through, Russia; and
- an exception for any act done by a person if the person provides justification to HM Treasury that the act was an act dealing with an emergency within a period of five working days beginning on the day that the act was done.
Amendment 16 also creates one specific licensing ground to enable anything to be done that otherwise would contravene the new bans in relation to oil and oil products to deal with an extraordinary situation. OFSI previously has stated that the bar for reliance on this particular licensing ground is incredibly high and that licences will only be granted under this ground in truly exceptional, unforeseeable situations. Amendment 16 also has provided OFSI with the power to request (i) from a licence holder information about any matter to which the licence relates and (ii) information for the purpose of monitoring compliance with, or detecting evasion of, the new bans.
HM Treasury’s press release announcing the legislation also stated that a General Licence is expected to be published shortly that will lay the basis for an oil price cap exception, which will allow continued access to services provided that Russian crude oil is purchased at or below the price cap. The explanatory memorandum published alongside the legislation also states that further licences will be introduced in certain circumstances to permit supply or delivery by ship of 2709 and 2710 oil and oil products and related services in respect of specific activities critical to energy security.
New and Expanded Mandatory Reporting Obligations
Amendment 16 expands the mandatory reporting obligation applying to relevant firms (as defined in Regulation 71 of The Russia (Sanctions) (EU Exit) Regulations 2019, as amended (“Russia Regulations”)). The amendment to Regulation 70 of the Russia Regulations requires relevant firms to inform OFSI as soon as practicable is they know, or have reasonable cause to suspect, that a person has violated the ban on maritime transportation of oil and oil products (or the ban on providing related services) when the information, or basis for knowledge or cause for suspicion, came to them in the course of carrying on their business.
Amendment 16 also introduces a new mandatory reporting obligation, which requires a person who is involved in the supply or delivery of oil and oil products, or the provision of related financial services, funds or brokering services to inform OFSI as soon as practicable if they know or have reasonable cause to suspect that a person has (i) violated the ban on maritime transportation of oil and oil products (or the ban on providing related services) or (ii) knowingly, or recklessly, provided materially false information or provided a document that is not what it purports to be for the purpose of obtaining an OFSI licence in relation to the ban on maritime transportation of oil and oil products (or the ban on providing related services) when the information, or basis for knowledge or cause for suspicion, came to them in the course of carrying on their business. As part of the report, such person also must provide OFSI with the nature, amount, value, or quantity of any goods or services related to the suspected violation at the time when they first acquired the requisite knowledge or suspicion.
OFSI’s Enforcement Powers
Amendment 16 grants OFSI the power to impose civil monetary penalties if it can prove on the balance of probabilities that a violation has occurred of the: (i) ban on maritime transportation of oil and oil products (or the ban on providing related services); (ii) anti-circumvention prohibition that applies to the prohibitions under the Russia Regulations, including the new bans; or (iii) licensing, reporting or information requirements in relation to the new bans.
The civil monetary penalty regime enables OFSI to impose the greater of £1,000,000 or 50% of the estimated value of each breach where it is possible to estimate the value of the breach and a maximum penalty of £1,000,000 per breach in any other case.
In keeping with the introduction of a strict liability standard for the imposition of civil monetary penalties in June 2022, Amendment 16 states that the defence to these offences that a person did not know and had no reasonable cause to suspect that an offence had been committed “is to be ignored.” The defence remains available in relation to criminal prosecutions for breaches of UK trade sanctions under the new bans. For more information on how these developments could impact your organization, contact the author of this post, Alexandra Melia, in Steptoe’s Economic Sanctions team in London.
