Understanding the Oil Price Cap advisory and risks of evasion through falsified Certificates of Origin

This article was authored by Natalia Hniezdilova, Litigation Assistant.

On 21 November 2024, The Office of Financial Sanctions Implementation (OFSI) issued an advisory to help UK business’ ensure adherence to the price cap on Russian oil and avoid the risks of evasion.

Background

In December 2022, the UK and the EU introduced a ban on the maritime transportation of Russian oil and oil products, along with associated services. This was coupled with the implementation of the Oil Price Cap mechanism, which eased restrictions on maritime transportation of Russian oil but only on the basis that the price the oil is sold is at or below the cap.

The intention behind the price cap is intended to allow shipments of Russian oil to third countries, thereby preventing a shortage in world supply, whilst at the same time restricting the revenues for Russia.

Under the price cap regime, UK businesses engaged in or facilitating maritime trade (including insurers) must undertake due diligence to make sure that they are not supporting trades in breach of the price cap.  

Alongside measures that affect the UK maritime sector as a whole, the UK is also taking steps to target known instances of breach, in particular with respect to the so-called “shadow fleet.” On 25 November 2024, a further 30 oil tankers were designated by the UK, bringing the total so far to 73 vessels. This move strengthens enforcement of sanctions and further restricts Russia’s ability to profit from its oil exports.

Red Flags and detection

Industries such as shipping, refining, and fuel trading, which rely on oil imports, are particularly vulnerable to the risks posed by fabricated Certificates of Origin (CO). These sectors face challenges in verifying the true origin of oil due to the complexity of global supply chains, intermediaries, and trading hubs known for ship-to-ship transfers.

To ensure compliance and avoid involvement in sanctions violations, UK businesses are advised to conduct rigorous checks on the origin of goods, especially when dealing with COs. OFSI has highlighted the risks of fabricated or falsified COs being used to disguise Russian-origin oil as non-Russian. These fraudulent certificates may list countries with little or no oil production as the source of the oil, which can be contradicted by vessel tracking data showing shipments from Russian ports.

Certain red flags may indicate manipulation of product origin, including:

1. The CO lists a country or outer port limits (OPL) that does not typically export oil, or the volume of oil does not match historical data.
2. The CO claims non-Russian origin, but vessel tracking data shows the product originated in Russia without substantial processing in a third country
3. Inconsistencies between COs and other documents, such as bills of lading, contracts, and cargo records, may suggest falsification.

Entities involved in the trade of Russian oil and oil products must implement due diligence to protect against potential violations of sanctions. This includes a thorough review of COs and other relevant documentation. Falsified COs can result in severe consequences, including reputational damage, fines, and legal repercussions.

Mitigating the Risks

OFSI has issued important recommendations to address the risk that falsified COs are used to conceal Russian oil shipments. These steps include:

1. Confirming that the country listed on the CO is one that produces and exports the stated oil.
2. Comparing the oil volume on the CO with historical trade and export data to identify discrepancies.
3. Assessing any COs that are incomplete, inconsistent, or contradict publicly available information.
4. Using online tools to confirm the CO’s authenticity, particularly if it is issued by a recognized organisation such as a chamber of commerce.
5. For self-certified COs, carrying out Know Your Customer (KYC) and Know Your Customer's Customer (KYCC) checks to identify ultimate beneficial ownership and any potential links to Russian entities.
6. Reporting any suspected fraudulent activity to the relevant national authorities promptly.

By following these steps, companies can better manage the risk of engaging in illegal trade and protect themselves from sanctions violations.

Comment

To navigate these complex regulatory requirements, businesses should ensure they keep fully appraised of the evolving sanctions provisions. Expertise should be sought to advise on enhancing internal controls, reducing risks and ensuring compliance. This will assist in protecting against inadvertently supporting sanctions violations linked to the maritime transportation of Russian oil and oil products.