U.S. Sanctions on Russia: Impact on Shipping Business and Contractual Considerations
Latest Actions Include New Task Force "KleptoCapture" to Enforce Sanctions and Restrictions
- The ongoing military invasion of Ukraine by Russia has now given rise to a new swath of far-reaching sanctions that will touch on the global reach of shipping, including financial and contractual matters for financial institutions, shipowners, charterers, suppliers, insurers, ports and cargo owners, among other parties collaterally impacted by the sweeping sanctions.
- In addition, the U.S. Department of Justice (DOJ) has established a new Task Force "KleptoCapture," an interagency law enforcement task force dedicated to enforcing the sweeping sanctions, export restrictions and economic countermeasures that the United States has imposed, along with allies and partners.
- Industry stakeholders should take clear note of these recent developments given the potential impact on respective commercial operations.
The shipping sector is fundamental to international trade in a global economy that is more interconnected than ever. In response to the Russian invasion of Ukraine, the United States, European Union (EU), United Kingdom (U.K.) and many other countries have imposed severe sanctions on Russia and Russian entities. In particular, the U.S. government is well aware of, and using to great effect, the reliance of international shipping trade on the U.S. financial system and the U.S. dollar, to punish Russian aggression.
The U.S. dollar serves as the leading global currency. It is intricately linked to countless transactions across the marine industry and permeates countless aspects of shipping. It has also become central to the primary U.S. "soft power" enforcement tool of choice in response to Russia's unprovoked military invasion of Ukraine. Specifically, in recent weeks the United States, along with other allies, have imposed multilateral sanctions and export control restrictions against Russia and Russian entities through a barrage of actions, with additional sanctions promulgated almost on a daily basis. While there are differences, U.S. sanctions have been coordinated with those of U.S. allies and impact several sectors, including shipping, banks, insurers, cargo owners, shippers, receivers, charterers, shipowners, service providers and port operators. (See Holland & Knight's previous alert, "U.S., Allies Impose Further Sanctions, New Export Controls on Russia as Military Advances," Feb. 28, 2022.) Moreover, some Russian shipping companies and certain Russian-owned vessels have been specifically targeted by sanctions, as have a number of Russian financial institutions that could be involved with trade-related transactions or financing related to shipping. For a risk-averse industry, stakeholders are treading more carefully than normal, and for good reason.
The ongoing military invasion of Ukraine by Russia has given rise to a new swath of far-reaching sanctions that touch the global reach of shipping, including financial and contractual matters for financial institutions, shipowners, charterers, suppliers, insurers, ports and cargo owners, among other parties collaterally impacted by the sweeping and ever-increasing sanctions. Restrictions on a company's ability to conduct transactions in U.S. dollars have exponentially grown as multiple U.S. agencies have ratcheted up the ante, including the new Task Force "KleptoCapture." Industry stakeholders should take clear note of these recent developments given the potential impact on respective commercial operations.
Market and Operational Impact
In short order, Russian-related sanctions are already beginning to impact all shipping segments, including commodity traders, tankers, containers, dry bulk and gas. The market consequences will likely continue to exacerbate supply chain congestion as vessels are diverted or delayed. Indeed, the shipping sector is already seeing companies divest themselves of connections with Russia, and some countries are developing restrictions on port access by Russian-owned vessels. Large shipping container lines have stopped service to Russia. Some banks have reportedly paused their Russian activities and may refuse to issue, confirm or advise letters of credit directly or indirectly connected with Russian parties and Russia-related transactions as they assess the tidal wave of sanctions and attendant regulatory requirements.
As an example of the potential impacts, shipping companies could run afoul of sanctions if they pay a Russian crewmember through a sanctioned bank, make payments for services or supplies rendered at a port or marina to a Russian-controlled vessel or yacht, such as bunkers provided to yachts owned by Russian oligarchs, repairs rendered and the shipyards doing work. Of course, the ever-present risk to a shipowner and operator is if a P&I Club cancels or suspends insurance cover (a ship's so-called "ticket to trade") due to transactions that present an unacceptable sanctions risk or violate respective Club rules.
The Need to Revisit Contracts and Charterparties Obligations to Measure Risk
From a practical view, vessel operations around the world continue to trade amid the new sanctions. So, those entities that may have entered into, or are contemplating entering into, charterparties or other shipping or sales contracts that may be affected by the wide-ranging Russian sanctions should carefully consider existing or future contractual relationships. Respective charterparties may include bespoke clauses dealing with the key considerations, and thus must be carefully scrutinized to assess rights, obligations and defenses.
Recent events could give rise to scrutiny of safe berth/safe port clauses in charterparties. Last year, the U.S. Supreme Court found the Asbatankvoy form must be construed as an express warranty of safety and imposes on the charterer an absolute duty to select a safe berth. (See Holland & Knight's previous alert, "Supreme Court's Landmark Decision Reaffirms Popular Form Safe Berth / Safe Port Clause," April 1, 2020.) Generally, a port is safe if, in the relevant period of time, the particular ship can reach it, use it and return from it without, in the absence of some abnormal occurrence, being exposed to danger which cannot be avoided by good navigation and seamanship. Whether a port is safe or unsafe potentially encompasses consideration and danger beyond just physical risks, but also risk of being detained or blacklisted (as a result of sanctions), as well as political risks and the risk of war. Determining whether a port is unsafe is a fact-specific undertaking and advice may differ if the question arises under a voyage or a time charter. The court recognized a ship's master continues to play an important role in this consideration.
Local conditions or government orders to vessels, such as restriction of movement or detentions, could also invoke clauses related to "princes, rulers, and people," "force majeure" and "any action taken by a government or public authority." Moreover, disputes could arise if owners refuse to call on, or remain at, a Ukrainian or Russian port. Claims for demurrage and detention may also ensue for delays that vessels experience resulting from restrictions on port access or as vessels are unable to transit the Black Sea and the Sea of Azov to meet laytime obligations. Such instances could lead to claims of frustration for the charterparty. Additionally, significant delays caused by the Russian invasion could lead to cargo damage claims, in particular since Ukraine is the second-largest global grain shipper and a major sunflower oil exporter, as well as a producer of iron ore pellets and steel. This could have a knock-on effect to global commodity prices and trading, and could raise issues with cargo insurers.
Stakeholders should also evaluate charterparties to confirm if they have include comprehensive sanctions clauses such as the BIMCO Sanctions Clauses for Time or Voyage Charter Parties 2020. Additionally, the Joint War Committee in London has recently designated Ukrainian and Russian waters in the Black Sea and the Sea of Azov as Listed Areas, meaning additional premiums could be set by war-risk insurers as applicable to such areas, or give required notifications to insureds that war-risk will not be available for certain geographic regions. Stakeholders should also be aware of export controls and supply contracts that could be impacted involving, for example, oil and gas equipment destined for use in Russia, as well as broad restrictions on exports of previously uncontrolled good to Russia.
As discussed in a previous Holland & Knight alert, bills of lading and dock receipts or other negotiable instruments and nonnegotiable sea waybills issued by the ocean carriers for all sorts of shipments might present a problem when goods arrive and have to be released to consignees at destination. (See Holland & Knight's previous alert, "U.S., Allies Impose Further Sanctions, New Export Controls on Russia as Military Advances," Feb. 28, 2022.) Additionally, if any intermediary (e.g., a forwarder or non-vessel operating common carrier) is involved, they may be affected. Practices such as telex release and express release bills of lading may come under additional scrutiny. Consequently, it is more important than ever to vet counterparties for sanctions risk, a process now much harder amid unprecedented sanctions on Russia. Even so, more sanctions are expected, and stakeholders should closely pore over contracts and charterparties, and screening (and rescreening) counterparties for any nexus to Russian entities.
Enforcement Measures Following KleptoCapture
The recent enforcement posture of the U.S. government signals a shifting paradigm and goes beyond traditional measures and thus requires a broader understanding of the intersection among the varying authorities of U.S. agencies and how they could impact any particular shipping-related operation. U.S. enforcement efforts to combat sanctionable activity have been building for years: since 2018, the U.S. government has published several maritime advisories, including most notably Global Maritime Advisory issued in May 2020, which was followed by an IG P&I Circular that was subsequently issued in early February 2022.
Make no mistake though, the pace and scope of enforcement, including risk of asset forfeiture and threat of criminal or civil penalties, is quickening. Indeed, on March 3, 2022, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) designated as an Specially Designated Nationals and Blocked Persons (SDN) a Cayman Islands flag megayacht allegedly owned by a sanctioned Russian billionaire. Reactions have been swift, including in China, where Chinese refiners dependent on Russian oil imports are reportedly already attempting to develop alternate paying mechanisms for Russian crude oil, such as using cash transfers, as banks become increasing wary of the risk of sanctioned activity and distance themselves from financing related to Russian oil trade.
The White House announced that it will launch a multilateral transatlantic task force to identify, hunt down and freeze the assets of sanctioned Russian companies and oligarchs. Accordingly, the U.S. Department of Justice (DOJ) has established a new Task Force KleptoCapture, an interagency law enforcement task force dedicated to enforcing the sweeping sanctions, export restrictions and economic countermeasures that the United States has imposed, along with allies and partners, in response to Russia's unprovoked military invasion of Ukraine. DOJ notes that the task force will be "fully empowered to use the most cutting-edge investigative techniques — including data analytics, cryptocurrency tracing, foreign intelligence sources, and information from financial regulators and private sector partners — to identify sanctions evasion and related criminal misconduct." The term "private sector partners" is not defined, though it can be expected that the U.S. government will continue to press flag states, shipowners, classification societies and third-party vendors to provide assistance.
Notably, the KleptoCapture mission includes prosecution of those who try to evade know-your-customer (KYC) and anti-money laundering measures. Thus, KYC and monitoring of funds has taken on renewed importance. While there are inherent jurisdictional challenges in trying to extra-territorially enforce U.S. sanctions laws, DOJ added that "arrests and prosecution will be sought when supported by the facts and the law" thus having an understanding of the applicable laws and respective authorities of the several interagency actors is vital to understanding respective risk. The task force (thus far) includes the FBI, U.S. Marshals Service, U.S. Secret Service, U.S. Department of Homeland Security – Homeland Security Investigations, IRS – Criminal Investigation and the U.S. Postal Inspection Service.
Shipowners, operators, charterers, issuing banks and P&I Clubs should be on heightened alert as these task forces will no doubt take an aggressive posture. Of course, even if a task force is "multilateral" or "interagency," it will still need to conform to legal restrictions related to jurisdiction and authority over the conduct as U.S. sanctions, which while far-reaching, are not universal in nature. Such considerations include concepts such as flag state and coastal state jurisdiction, the United Nations Convention on the Law of the Sea (to which both Ukraine and Russia – though not the U.S. – are party) and principles of freedom of navigation, and the underlying authority for the respective agencies involved. Failure to comply with these principles could usurp or frustrate the government's ability to effectively enforce sanctions. In other words, sanctions are extensive but not carte blanche for violations of customary international law or conventions, they must be implemented and enforced, as the White House stated, "under the law."
What Should the Shipping Sector Be Doing Now?
Insurers should continue to monitor their insured. At the crux of any sanctions violation is the extent of due diligence exercised by a shipowner or other party before an alleged breach occurs, however, this has become increasingly complicated. In practice, there have been instances where the U.S. acts against a party for what may be deemed engaging in an unlawful trade even before they compel a full assessment of compliance procedures taken by that party, including with the threat of secondary sanctions or criminal action. Such steps could be taken with disregard for private contract obligations, preventing a party from receiving payment for goods already delivered or services already provided in good faith. That being said, the U.S. government may only take criminal enforcement measures if it has jurisdiction and authority to do so, which in the international context, must also conform with principles of customary international law and obligations under international treaties.
Given the extensiveness of the new U.S. sanctions, and the complexity of OFAC's regulations and implementation, there are several important steps that stakeholders can take to ensure compliance and mitigate risk, including the following.
- Conduct an internal assessment of your company's business connections and potential to exposure to Russia, and in particular, Russia's financial services sector, and supporting arrangements such as banks confirming or advising on letters of credit or providing supporting guarantees or holding collateral.
- Conduct renewed or enhanced due diligence and screening of counterparties, and restrictions on cargoes to Russia. This should be particularly emphasized in the financial sector when involving investors and in daily operations for any transactions in U.S. dollars with suppliers or charter counterparties. Because new entities are being targeted daily and sanctions expanding, rechecks of sanctions may be warranted – for example, before loading or discharging cargo.
- Review and undertake focused assessments of contracts with counterparties and service providers, including indirect relationship parties such as financial services institutions arranging trade finance, credit support and insurance, for compliance with all applicable sanctions laws.
- Utilize open source and P&I Club resources related to compliance guidance.
- Monitor newly emerging Russian sanctions that could extend further into the maritime, energy and aviation sectors.
- Consult with counsel to pressure test the assumptions made, the initial assessments and determine if additional prophylactic steps should be undertaken.
Overall, the risk of engaging in trade with Russia has increased manyfold. There is the risk of noncompliance that would inhibit ability to operate under the status quo, and the reputational risk of being seen as associated with or supporting Russian activities. In addition, given the rapidity with which sanctions were imposed, there will doubtless be disputes as companies unwind transactions. For those who continue operations, as opposed to shutting down and taking a wait-and-see approach, the foregoing considerations should be at the forefront of decision-making. The game has changed with these new task forces – it is not enough to merely take note of the sanction regulations; stakeholders must now take action and understand the complex web and reach of interagency enforcement efforts in order to truly evaluate their risk.
For more information, questions or additional guidance, contact the authors or another member of Holland & Knight's Maritime Team.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.