Further sanctions against Russia

The introduction of Art. 3q of the Regulation (EU) 833/2014 (the “Regulation”) has ushered in a new era of sanctions against Russia, specifically targeting the sale and ownership transfer of tanker vessels. The Regulation imposes strict measures that demand attention and compliance from those shipping companies selling or brokering sales of tanker vessels.

The scope of the new Regulation

Art. 3q covers ships that are capable of transporting crude oil or petroleum products[1]. The subjects under Art. 3q are (i) EU nationals, persons residing in the EU, and (ii) entities established in the EU. Further, the obligations pursuant to Art. 3q may under certain circumstances also apply to (iii) indirectly to non-EU companies.

Prohibition: A comprehensive restriction

Art. 3q (1) of the Regulation prohibits all direct or indirect sales or other transfers of ownership of tanker vessels from EU entities to any natural or legal person, entity, or body in Russia or for use in Russia.

So far, the European Commission has provided little guidance in the interpretation and clarifications of the key prohibitions and notification obligations relating to the sale of oil tankers. Companies in the shipping sector should be attentive to the broad scope of the prohibition in general and in particluar the following key take-aways:

Application to “indirect” transfers of ownership, i.e. sellers that are beneficially owned by EU nationals/residents and EU companies

1. • As the prohibition also covers “indirect” transfers, EU sellers of non-EU companies with direct or indirect interests in tankers may also be covered by the prohibition.

1. • By way of example, an EU-national selling its non-EU legal entity (equity sale) to a Russian buyer may constitute a violation of Art. 3q if the non-EU target entity owns tanker vessels comprised by Art. 3q.

1. • Based on the EU Commission’s guidance relating to other restrictive measures set out in the Regulation, it is also likely that the prohibition will apply to EU nationals or EU shipping companies if they “participate in activities” which are prohibited. This is emphazised by the general prohibition against circumvention of sanctions set out in the Regulation, Art. 12.

The prohibition also covers “for use in Russia“

1. • The prohibition covers the sale of vessels “for use in Russia“. This means that also sales of tanker vessels to non-Russian persons or entities will be prohibited if the vessel is to be used in Russia.

1. • While the exact meaning of “use” is unclear, it implies an enhanced due diligence obligation on sellers to investigate potential buyers’ intentions to either trade in Russia or trade Russian oil.

1. • The absence of specific guidelines from the EU Commission along with the general prohibition against circumvention places a broad obligation on sellers to also include contemplated use of the tanker vessel as a focus point in sellers’ due diligence before finalising a sale.

Authorisation

Art. 3q (2)-(3) allows for the competent authorities in each member state to authorise transactions under conditions they deem appropriate, providing a mechanism for exceptions to the prohibition. The provision does, however, not provide guidance on the relevant criteria.

Notification obligations

Art. 3q (4) introduces a generel notification requirement for any sale or ownership transfer of tankers to countries outside the EU. Notably, this requirement does not refer to “indirect” sales, meaning that the obligation is only put on the EU-based shipping company if the shipping company is the seller of a tanker.

Additionally to the above current notification requirement, all past sales or other transfers of ownership of oil tankers covered by the above-mentioned scope in the period after 5 December 2022 and before 19 December 2023 shall be notified to the competent authorities before 20 February 2024, see Art. 3q (5).

The Danish Maritime Authority has, as the competent authority in Denmark, developed a digital form that shipowners can use to make the notifications.

Need for contractual safeguarding mechanisms and increased due dilligence

The ever-increasing due diligence requirements across all EU sanctions, including Art. 3q, suggest significant scrutiny for all tanker vessel sales.

The EU Commission’s strict stance on sanctions violations, circumvention and evasion implies the necessity for sellers to also cover potential liabilities through comprehensive contractual undertakings. Shipowners are advised to be proactive and implement a clause in their standard MOA sanctions clauses which compels a buyer to comply strictly with the new requirements.

Additionally to the contractual safeguarding of the risk, every seller of tanker vessels should  consider maintaining documentation and “defense files” relating to sale of tankers – irrespectively of the nationality of the buyers – to be able to demonstrate its due diligence efforts to the relevant authorities. In a FAQ published on 26 January 2024 the EU Commission acknowledged that there is no “one-size-fits-all model of due diligence”, and that it is up to each operator to develop, implement, and routinely update EU sanctions compliance plans and related risk assessments to be able to detect red flag transactions.

Correlation with the oil price-cap rules

The new regulation will impact buyers wanting to utilise a vessel under the oil price-cap regime, as the restriction of selling vessels for use in Russia in Art. 3q of the Regulation – and any contractual restrictions imposed by the seller – will entail that the vessel cannot be used in Russia even though the vessel may be used to trade Russian oil within the price-cap, outside of Russian waters, without prior authorization.

Conclusions and looking ahead

As the maritime industry adapts to the complexities of Art. 3q, shipowners must be proactive in understanding and complying with the new restrictive measures.

Gorrissen Federspiel’s shipping and sanctions teams have extensive knowledge of the risks related to EU sanctions regimes, including transactions under the new Art. 3q and can provide advice in this regard.

As industry stakeholders await additional guidance, it is crucial to acknowledge the far-reaching obligations imposed by Article 3q, demanding thorough due diligence and Know Your Customer (KYC) process for all future tanker vessel sales.

[1] The provision applies to all tankers covered by the CN code 8901 20 provided the tankers transport crude oil or petroleum products covered by Annex XXV, i.e. CN Code 2709 00 and 2710, see Art. 3q.