Council Regulation (EU) 2023/2878 of December 18, 2023, amending Regulation (EU) No. 833/2014 resulted in the adoption of the 12th package of sanctions against Russia, with the aim of imposing additional import and export bans combating sanctions circumvention and closing loopholes.

This package of sanctions affects a wide array of areas and industries, ranging from Russian-origin diamond imports to the oil price cap mechanism. In particular to shipping, the regulation introduced article 3q which, among other things, prohibits the sale or transfer of oil tankers to Russia, Russian individuals or entities, or for use in Russia. The article also creates a notification obligation for the sale or transfer of oil tankers to third countries generally.

The fine-tuning of the law was instigated by the reality that the use of loopholes in the previous packages had made it relatively easy for those willing to evade sanctions to do so. Accordingly, this regulation aims to enhance the monitoring of tanker sales to third countries while restricting Russian access to the ‘shadow fleet’ used to circumvent the price cap.

Examples of sanctions busting and deceptive practices include ship-to-ship transfers used to conceal the origin or destination of cargo, as well as the manipulation of the automatic identification system while transporting Russian crude oil or petroleum products.

The prohibition of the sale or transfer of oil tankers to Russian entities or for use in Russia in article 3q(1) is not as straightforward as it may seem and is not a blanket ban. The sale of tankers from EU persons or entities to Russian persons or entities is prohibited and entails an objective assessment.

On the other hand, “for use in Russia” requires a subjective understanding of the transaction at hand. A derogation from this prohibition is possible through article 3q(2) and (3), however authorisation for such a derogation is not to be granted if the Malta Sanctions Monitoring Board (SMB) has reasonable ground to believe that the given tanker would be used to transport crude oil or petroleum products in breach of the oil price cap mechanism and, in fact, should not even be sought by the applicant in the first place.

The regulation grants the SMB the power to receive applications and determine them on a case-by-case basis, and to establish the conditions it deems appropriate for a derogation from the obligation. In essence, the law creates a two-tier scrutiny process, whereby EU persons or entities are to conduct heightened due diligence, which is escalated to the SMB if there is scope for a derogation.

The onus of assessing “for use in Russia” and seeking a derogation (where possible) is placed on the EU persons or entities owning oil tankers and acting as sellers in the given transaction. Similarly, the obligation to notify sales or transfers from EU owners to third country entities rests with the sellers, as per article 3q(4). This is because placing any form of obligation on the purchaser would be very ineffectual given they have no jurisdictional link to the EU.

The FAQs published by the Commission on February 19, 2024, provide insight on several key uncertainties raised by article 3q, yet fail to directly address the subjective interpretation of “for use in Russia”. The FAQs stipulate that the application for derogation from the prohibition of the sale or transfer of oil tankers should take into account the purchaser’s past experience, track record, management and shareholding, their history on sanctions compliance, as well as their intention to regularly access Russian territorial waters.

Such information would serve as the basis for the determination by the SMB of the likelihood of sanction breaches by the purchaser if the derogation were to be granted. In addition to the EU FAQs, the SMB issued its own guidance note defining the term “for use in Russia” on February 28, 2024, directly linking the phrase to the tanker’s likelihood of subsequently violating the oil price cap mechanism.

On the other hand, when it is determined that the vessel will not be purchased for use in Russia or for the benefit of Russian persons, then a simple notification of the transfer to the SMB suffices. It is evident that a proper due diligence exercise is key to determining whether or not the sale or transfer is even possible, as the primary step in the aforementioned two-tier scrutiny process.

It is critical to note that this assessment of “for use in Russia” and the information sought from the purchaser are to form part of an “explicit documented inquiry”. To this end and on the basis of this inquiry, a declaration by the EU seller confirming that it is not aware of any reason why the tanker would be used in Russia and that the purchaser or its ultimate beneficiary owners are not Russian or subject to EU sanctions carries certain responsibilities.

In connection to article 3q and since its introduction as part of the regulation, the Malta Ship Registry has mandated a declaration of conformity from the owners of a tanker being transferred to non-EU nationals or deleted from the Malta flag to the effect that such a transfer or deletion will conform with article 3q and that the proper assessment would have been made in order to determine that the tanker’s new owners will adhere to its provisions. The Registry of Ships will also require evidence that the seller served notice to the SMB.

In conclusion, the regulation presents a number of salient obligations specific to the shipping industry. The fine line between the prohibition on the sale or transfer of oil tankers to Russian entities or for use in Russia and the notification obligation for sale or transfer to a third country entity highlights the EU seller’s duty to conduct an exhaustive due diligence exercise before proceeding with the transaction.

Article 3q in particular and its expected use and interpretation demonstrates the complexity of ensuring the application of effective sanctions and curtailing sanction busting.

Moreover, the obligations and expectations incumbent on EU persons emphasise the reality that everyone has a part to play if we are to achieve the sanction’s intended goals.

Authors: Matthew Attard, Neil Zahra

This article was first published in the Times of Malta on 15/04/2024.