Guidance

Russia sanctions: sales of oil tankers to third countries

Published 21 May 2024

Introduction

The UK government is issuing this guidance for those involved in the sale and brokering of second-hand vessels to third countries. It provides further information and tools to counter current and emerging trends related to Russian sanctions evasion.

The Russia sanctions regulations impose financial, trade, aircraft, shipping and immigration sanctions. The purposes of which are to encourage Russia to cease actions which destabilise Ukraine, or undermine or threaten the territorial integrity, sovereignty or independence of Ukraine.

Trade sanctions seek to deny Russia access to the goods, technologies, services, and revenue necessary to pursue its illegal war.

This note reflects the government’s commitment to work with the maritime sector to prevent sanctions evasion in the context of the sale of vessels to third countries. The guidance identifies relevant provisions of UK sanctions prohibitions which capture brokering and other ancillary services related to the sale of oil tankers and other vessels to Russia. It also aims to consolidate industry awareness of potential risks and common deceptive practices which may undermine the objectives of these sanctions.

This aims to support businesses in tailoring due diligence and sanctions compliance policies and procedures.

Context

Direct trade between the UK and Russia has fallen heavily since sanctions were introduced. However, Russia has been seeking to procure restricted goods and services via indirect routes and complex supply chains. This raises circumvention risks.

For example, a buyer in a third country may intentionally purchase a restricted good with a view to selling it on to Russia (effectively acting as an intermediary) or may have disguised or opaque ties to a person connected with Russia (effectively acting as a cover or front company).

In this way, entities enabling Russian circumvention often employ complex and irregular corporate structures to hide their intentions and their ultimate beneficial owners. This can include the use of shell companies, frequent changes in, or multiple levels of ownership and management.

Sanctions, including those related to oil, Russia’s largest single driver of revenue, have hit Russia hard. Since the implementation of sanctions including the Oil Price Cap, by the Group of Seven Plus (G7+) Coalition, Russia has spent considerable resource on efforts to circumvent. This includes purchasing second-hand tankers which it can run to service its oil exports, independent of any G7+ services.

Some of these tankers may be old (15+ years) and sold at a significant premium above the historic market price for these types of tankers given Russia’s urgent requirements for vessels. As such this market is likely to remain lucrative to prospective sellers.

It will therefore be important for industry actors to be mindful of this context, capturing it within any due diligence processes. This will help to mitigate any risk that second-hand vessels sold become part of Russia’s ‘shadow fleet’; vessels which are usually opaquely owned and may use illicit maritime practices as a means of circumventing sanctions imposed on Russia, particularly on oil.

Regulations

Sellers of vessels and brokers thereof are reminded that regulations 25 and 29 of the Russia (Sanctions) (EU Exit) Regulations 2019 (the ‘Russia Regulations’) concern respectively the making available or acquiring of, and brokering services relating to ‘restricted goods’.

Such goods include certain vessels listed in Part 7 of Schedule 2A, also known as ‘critical-industry’. Regulation 29 in particular prohibits the provision of brokering services in relation to an arrangement whose object or effect is:

• the direct or indirect supply or delivery of restricted goods from a third country to a place in Russia

• directly or indirectly making restricted goods available in a third country for direct or indirect supply or delivery to a person connected with Russia or to a place in Russia

Ensuring Due Diligence

It is important to conduct risk based Know Your Customer and Counterparty due diligence to identify the ultimate beneficial owner of the proposed buyer or the true intended “end-user” of the vessel. This should ensure that this is not a ‘person connected with Russia’ for the purposes of the Russia Regulations (as determined in regulation 21).

The ultimate beneficial owner of the potential buyer, where the intended vessel purchase is for sanctions circumvention purposes, is unlikely to approach sellers directly or be named as such on paperwork. Instead, the ultimate beneficial owner often uses a layered approach to conceal their purchase. Closer scrutiny of intermediary companies and apparent end-users can uncover discrepancies.

Appropriate due diligence might include obtaining the contact details, source of funds and copies of identification of the buyer’s beneficial owner or owners. This information could also be verified against third party databases, media and market intelligence to ensure that they are the true end-user or ultimate beneficial owner.

On established counterparties, due diligence will need to be periodically reviewed as appropriate, assessed on a risk basis or when triggered for example by change of directors, owners, or vessel trading patterns.

In this vein and where they have not already done so, ship brokers are advised to implement a system of ‘red flags’ into their due diligence processes. Key risk indicators to support this process are laid out below.

Key Risk Indicators

Those attempting to circumvent sanctions constantly seek new ways to exploit global supply chains for their benefit. Risks need to be considered in the circumstances of individual companies and due diligence and internal governance tailored accordingly. These can be broadly grouped by transaction, buyer and jurisdiction.

The below risk indicators are intended to assist stakeholders in identifying behaviours used in attempts to facilitate circumvention of trade sanctions and ensuring good practice on compliance. This list is not exhaustive and the examples below are intended to be indicative.

We recommend that industry participants involved in the sale of vessels to third countries, especially tankers, continue to be vigilant against and exercise heightened due diligence with respect to the following risk indicators. This will limit the risk of involvement with prohibited activity.

The transaction

We recommend heightened due diligence when:

• the transaction concerns a vessel that is relatively old (15+ years)
• the purchase price for the vessel appears materially above market price or is otherwise not consistent with the quality and age of the vessels being sold
• the description of the vessel and related terms and conditions on trade finance documentation is non-specific or misleading
• the transaction is inconsistent with normal pre-invasion geographic trade patterns; for example, the country of the special purpose vehicle buyer is not in line with industry norm;
• the transaction concerns a vessel which via its particulars or structures of sale has or will have deliberately obscured legal ownership
• there is evidence or suspicion that documentation or material particulars therein are fraudulent

Potential buyer

We recommend heightened due diligence when:

• the potential buyer is, directly or indirectly, involved in the supply, sale, delivery or purchase of restricted or high-risk goods, particularly to higher-risk destinations
• is physically located in a country for which the market for second-hand vessels has increased significantly since Russia sanctions were introduced
• maintains connections with Russia or has previously had dealings with individuals or entities now designated
• has entered into a joint venture or cooperation agreements with designated persons;
• uses complicated structures to conceal involvement – use of layered letters of credit, front companies, intermediaries and previously unknown brokers or brokers/intermediaries associated with prohibited activities
• the potential buyer’s personnel, address or telephone number matches or is suspiciously similar to any found on publicly available lists, including the UK sanctions list
• uses difficult to trace or untransparent payment methods or unusual payment terms;
• lacks transparency, especially regarding source, end user and/or end use
• provides incomplete information and is resistant to providing additional information when requested

Country or Jurisdiction

We recommend heightened due diligence when:

• the transaction involves countries which are actively engaged in trading with a sanctioned country
• a route of shipment of goods or transactions inconsistent with normal geographical or trade patterns or the potential buyer’s expected business activity
• payments or transfers made to importers, exporters, agents or brokers that export to countries and ports near the border of sanctioned countries
• or shipments involving individuals, business or a shipment route located in a country with weak export control laws or weak enforcement of these laws

Compliance

Industry participants are advised only to conclude deals where they are confident that a process of cross-checking of these risk indicators provide reassurance that compliance thresholds are met. This includes any other indicators that factor into in-house due diligence processes.

Any non-compliance with UK sanctions is a serious offence and punishable through large financial penalties or criminal prosecution. HM Revenue and Customs (HMRC) is responsible for enforcing the licensing restrictions and investigating suspected offences of trade sanctions. HMRC undertakes a preliminary assessment into all credible intelligence or allegations of trade sanctions offences.

Contact

Trade sanctions

Export Control Joint Unit
Department for Business and Trade
Old Admiralty Building
Admiralty Place
London
SW1A 2DY

Email tradesanctions@businessandtrade.gov.uk