Look ahead, constantly!

Look ahead, constantly!

IBIA board member and maritime lawyer Steve Simms advises on how sanctions are affecting bunker traders and suppliers

         “Look ahead – constantly” will in 2024 continue to be the best sanctions legal advice for bunker traders and suppliers.  Sanctions continue to change quickly.  As they do, traders and suppliers will have to change sources just as fast.  They must also continue to consider their product sources.

         The most recent quick change is US sanctions affecting purchases of Venezuelan petroleum.  In October 2023 the US conditionally lifted sanctions.  This in part was make more oil available after imposing the Russian oil price cap, following Russia’s invasion of Ukraine.  The condition was that the Venezuelan Maduro government allow open presidential elections.  At the time of writing, the US Treasury Department’s Office of Foreign Assets Control – OFAC – has just announced that Venezuela sanctions resume April 18, 2024 “absent progress” on Venezuela elections.

That is a short time for suppliers and traders looking ahead for bunker sources, to decide whether or not to buy Venezuelan-sourced product or to source elsewhere, so the product is positioned to sell as needed.

With this the February 2024 “Price Cap Coalition Oil Price Cap (OPC) Compliance and Enforcement Alert” issued by the US, EU, UK and allied countries emphasises that they will  continue to press enforcement of the price cap on Russian-sourced petroleum products, and prosecute transport of products priced above the cap. 

To date though, sanctions on Russian petroleum trade don’t – yet  – apply to bunkering services (supplying fuel for use by ships) to vessels transporting Russian crude or petroleum products.  That is, as long as the bunkers purchased aren’t Russian-sourced, purchased by the supplier or trader at prices above the cap.  And, that is, as long as the counterparties for the bunkering aren’t sanctioned persons or entities.

If the goal ever were to become stopping Russian – or Venezuelan – oil trade altogether, though, the obvious sanctions target would be bunker suppliers and traders. 

US and other sanctions of marine trade with Iran, for example, long have restricted bunkering of Iranian vessels or non-Iranian vessels carrying sanctionable goods to or from Iran.  Similar bunkering restrictions apply to North Korea or Syria maritime trade.  That hasn’t ended trade with Iran, North Korea or Syria but that and other sanctions significantly restrict it. 

A similar significant restriction could be applied to bunkering of vessels carrying Russian crude sold at prices above the cap.  That hasn’t happened, yet.  But the potential disruptive effect of such a bunkering sanction is obvious.  Bunker suppliers and traders would have to receive, prior to agreeing to bunker, reliable proof that a tanker cargo wasn’t bought at above the cap price.  What proof would be sufficiently reliable?  What would a trader of supplier have to show to confirm that they had with due diligence, confirmed the proof?

This has, at least publicly, taken to much lower levels of bunker suppliers’ purchases of Russian product for bunkering:  any Russian product used for bunkering must be priced (with proof that the supplier can show for that) at or below the cap and purchased from a non-sanctioned entity. 

It also has, however, led to ship-to-ship transfers (blending product so it’s claimed to be not “Russian”), refining in third countries such as India, and documentation fraud.  Some bunker suppliers, particularly where alternative product is priced higher or otherwise not as available, have bought this product (just as they have, product which ultimately was Iranian sourced, or Venezuelan-sourced before October 2023’s sanctions lift and perhaps, if the US re-imposes Venezuela sanctions in April 2024).  But the risk of sanctions of buying this product still, anecdotally, has also limited its purchase by at least, prominent bunker suppliers.

Bunkering vessels carrying Russian crude hasn’t apparently diminished with the cap, but if traders and suppliers had to prove they only bunkered vessels carrying cap-compliance cargos, that likely would cut the bunkering – by traders and suppliers subject to the sanctions – significantly.  

Could that happen in 2024?   If governments don’t consider their present sanctions to be effective enough, traders and suppliers should expect the sanctions may tighten, to further include them directly as “industry stakeholders” as they already do for Iran, Syria and North Korea.

         “Looking ahead – constantly,” though, shouldn’t only be out of concern about being cited for violating present sanctions or even those which might be imposed.  Experience to date suggests that possibility is unlikely.  No bunker supplier or trader of marine fuels – yet – has been publicly prosecuted for violating sanctions related to marine fuels purchase or sale. 

Instead, bunker suppliers’ and traders main concern about sanctions should focus on  credit, customer relations, and reputational damage that might come from association with customers, counterparties or sources themselves subject to sanctions.

         The first sanctions threat is financial.  Suppliers and traders extending credit to sanctioned persons or entities face the significant risk of non-payment.  If an entity is sanctioned, it may lose the ability to trade and thus to pay down extended credit. 

         For example, there have been increasing examples of tankers being seized or their owners or charterers sanctioned for carrying Russia-sourced product bought above the cap.  There also have been several examples of the seizure of Iran-sourced crude and the tankers carrying it.  If a supplier or trader has extended credit to the sanctioned owner or charterer, the supplier or trader might not be paid, at least in front of the payment that the owner or charterer might be required to make to sanctioning authorities.  If the sanctioning authorities seize and sell the vessel, any supplier or trader claim to arrest the vessel also will come after payment to the sanctioning authorities, which, if title to the bunkered product has passed, might also claim the bunkers.

Sanctions at the same time restrict access to USD, EUR, and GBP, limiting the ability of counterparties to convert local currency to usable funds.

Related is the question of insurance coverage.  That is, sanctions frequently restrict insurers from extending coverage to sanctioned entities, for example, Russian, Iranian, and perhaps soon Venezuelan owners or charterers.  What happens, if there is a spill during bunkering or personal injury during a bunkering operation which turns out to be uninsured because the counterparty, or vessel, either doesn’t (despite assurances otherwise) have insurance or is “insured” by what turns out to be an undercapitalised or fake insurer?  What happens if there is a quality dispute and damage, or claimed environmental violation, where the sanctioned entity has no funds available, and there is no insurance?  The trader or supplier will have no benefit from the effectively non-existent insurance.

There also is the risk of tarnished image.  Engaging with sanctioned entities can damage a supplier’s reputation with banks, financiers, key partners, and the wider industry. This can lead to stricter credit terms, lost business opportunities, and difficulty securing future partnerships. 

Closer to home is personal liability and reputation risk.  For any individual working with a bunker trader or supplier, depending on one’s role within the company, no matter how profitable the trade, no matter the volume of explanation that the person “never could have known” about the customer’s violation or that “everyone else was selling to them,” involvement in a sanctioned transaction is a bad career move bringing personal legal and financial risks.

This is how bunker suppliers and traders should, if they don’t already, look ahead constantly in 2024, and if they do practice this advice, re-focus and reinforce it.

         Traders and suppliers should continue to examine their “know your customer” – “KYC” mechanisms.  Old methods won’t be sufficient with the increasing efforts of counterparties to circumvent sanctions – which are certain to proliferate with the use of artificial intelligence (AI).  There will be increased incidences of spoofed emails, changed wire instructions that look authentic, fake websites, and altered records, even, of records which purport to assure that they are secured and authentic.  Traders and suppliers must continue to train their employees to seek out entities which reliably can confirm customer identities, including whether the customer and its ownership are subject to sanctions.

         Also, there will always be the need – and value – for one central “KYC” practice, though:  always pick up the telephone or better now, click into Teams or similar, and connect with the human you are selling to or buying from.  Always voice or better still, voice and video confirm wire instructions – even if you have done hundreds of transactions with the person who seems to be exactly the same person with whom you’ve done hundreds of transactions before.  And an even older “KYC” practice is arguably now even more important:  meet the humans, in person, you are buying from or selling to.  That is what IBIA – the organisation which of course sponsors the magazine with this article – encourages through a range of in-person meetings throughout the year.

         It’s important to remember that if you are getting paid in US dollars, all transactions move through US New York-based money centre banks which OFAC oversees.  OFAC can instantly freeze accounts, which can be held for months or longer until the trader or supplier proves, to OFAC’s satisfaction (or even longer)  ntity.  While OFAC freezes the money, the legal expense (and lost interest) to get it released will be significant.

Traders and suppliers also should as part of their credit assessments, be aware of how sanctions might affect their customers, minimise credit exposure to sanctioned entities and avoid non-credit deals with uncertain outcomes.  They also – again, with the foremost goal of increasing, not only maintaining reputation, maintain open communication with banks, partners, and authorities, demonstrating commitment to compliance and responsible business practices.

Traders and suppliers also should continue to look ahead for sources and counterparties in alternative markets outside of sanctioned jurisdictions to diversify risk and ensure their business continuity.  Generally, if the deal seems to be too good to pass up, it probably should be passed up.

It is certain that into 2024 sanctions regimes will continue change, and likely be intensified including with authorities’ efforts to detect violations.  At the time it also is certain that those who want to evade sanctions, will and do that with more and more difficult to detect stealth.  It may be that bunker suppliers and traders continue to be outside of the main “crosshairs” of sanctions regimes (even though, they literally are central to “fuelling” many of the evasion of sanctions enabled by tankers carrying Russian, Iranian and, perhaps soon, Venezuelan product).

That doesn’t mean that bunker traders and suppliers won’t have direct and indirect financial losses if they are associated with others prosecuted for sanctions breached.  That is why continuing into 2024, considering sanctions bunker traders and suppliers must continue to “look ahead – constantly.” 

J Stephen (‘Steve’) Simms is a principal of Simms Showers, LLP, an international US-based law firm representing bunker suppliers and traders world-wide. Steve Simms serves as Chair of the International Bunker Industry Association’s (IBIA) Legal Working Group, is an IBIA Board member and serves as Legal Advisor to SEA/LNG, the industry group advancing the use of LNG as a marine fuel.

The opinions and recommendations in this article are the author’s and not necessarily also those of IBIA or SEA/LNG, except if identified specifically as such.

Email: jssimms@simmsshowers.com

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