This article was published on 15 September 2022 by Thomson Reuters Regulatory Intelligence, which closely tracks supervisory actions and expectations, blending news and expert commentary to keep compliance professionals updated on key developments. Reprinted with permission.
U.S. Treasury ‘Preliminary Guidance’ on G7 Price Cap on Russian Oil Includes Unexpected ‘Safe Harbor’
By Brett Wolf, Regulatory Intelligence
The U.S. Treasury Department has issued preliminary guidance aimed at creating an industry compliance regime to facilitate a plan by G7 nations to cap the price of Russian oil. In a move that surprised many, the guidance issued by Treasury’s Office of Foreign Assets Control (OFAC) on Friday proposed a “safe harbor” from enforcement for private sector actors that take mandated steps to avoid entanglement in price cap violations.
The G7 agreed to the price cap on September 2, in an attempt to enable Russian oil to continue to flow to dependent global markets while limiting the profits Moscow reaps from the sales. The effort is part of an effort by the United States and allies to pressure Russia over its invasion of Ukraine. The cap is due to come into force on December 5, but vital details are yet to be ironed out. The impact on the private sector—including refiners, importers, commodities brokers, financial institutions providing trade finance and insurance brokers among others—is only just emerging.
In the preliminary guidance, OFAC said that to implement the cap, it plans to issue rules pursuant to Executive Order 14071, which prohibits new investment in and certain services to the Russian Federation.
OFAC’s eight-page document said its anticipated regulations “will permit the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of services related to the maritime transportation of seaborne Russian oil, if the . . . oil is purchased at or below the price cap and prohibit such services if the . . . oil is purchased above the price cap.”
It added that it anticipates publishing guidance for industry alongside the rules, although it offered no timeline.
Still, the preliminary guidance laid out a bare bones compliance framework that includes foundational elements of its plan.
Collection of Price Information ‘When Practicable’
For instance, it states that financial institutions—which “are sometimes able to request and receive price information from their customers in the ordinary course of business”—should, “when practicable, request, retain, and share, as needed, documents that show that seaborne Russian oil was purchased at or below the price cap.”
It adds: “When not practicable to request and receive such information, (financial institutions) should request customer attestations in which the customer commits to not purchase seaborne Russian oil above the price cap.”
An Unexpected ‘Safe Harbor’
This recordkeeping and attestation process “is designed to create a ‘safe harbor’ for service providers from liability for breach of sanctions in cases where service providers inadvertently deal in the purchase of seaborne Russian oil above the price cap due to falsified records provided by those who act in bad faith and make material misrepresentations,” the document states.
It adds that OFAC “anticipates publishing information to alert the industry of possible red flags for evasion of the price cap,” and in fact outlines several of them, including a customer’s “refusal, reluctance, or hesitation to provide the necessary documentation or attestation.”
With regard to enforcement of violations, OFAC said its planned “safe harbor” will protect financial institutions and other services providers “in cases where (they) inadvertently deal in oil purchased above the price cap due to falsified records provided by illicit actors.”
It adds those who “knowingly provide false information, documentation, or attestations to such a service provider, will have potentially violated the maritime services policy and may be a target for a sanctions enforcement action.”
It also notes that Treasury and other U.S. government agencies will coordinate enforcement with other members of the coalition implementing the price cap, including by sharing information.
The “safe harbor” proposal is an unprecedented gesture from the U.S. sanctions enforcer, whose traditional strict liability enforcement regime has traditionally viewed any sanctions violation as fodder for potential enforcement, only later considering potential mitigating factors.
A Novel OFAC Approach
In a conversation with Regulatory Intelligence, Katya Hazard, associate managing director with consultancy K2 Integrity, described OFAC’s “safe harbor” proposal as “novel” and added that it yields “a lot of unknowns.”
“It is not clear if OFAC may assert in the future that such reliance should be warranted by enhanced due diligence, rigorous KYC processes, or other means of ensuring customers and counterparties do not lie,” she said. “It is also not clear whether a bank may rely on this safe harbor only after it has considered and documented that requesting and reviewing underlying trade documentation is not practicable.”
U.S. persons will be required to reject participating in an evasive transaction or a transaction that violates the maritime services policy and price exception, and report any such transaction to OFAC.
Importance of Examiner Training
Former OFAC compliance officer Daniel Tannebaum said his “initial reaction is that best efforts to evidence that you’re ensuring that impacted clients are adhering to the cap gets you a safe harbor very explicitly.”
“The question I have is who will be checking for compliance? Is there a plan to train-up supervisors in the U.S. on this program. Otherwise I’d worry there would be little supervisory/regulatory support to advise and counsel on effective implementation, instead you’d really just hear how you’re doing as it relates to an OFAC enforcement proceeding,” Tannebaum, now partner and global head of sanctions at Oliver Wyman in New York, said in a statement emailed to Regulatory Intelligence.
Industry Reaction to OFAC’s Plan Should ‘Color In’ Ultimate Price Cap Compliance Framework
As previously reported by Regulatory Intelligence, last week, U.S. Deputy Treasury Secretary Wally Adeyemo said during a speech at a banking industry event that in order for the price cap to be effective, “we need service providers, especially those providing financial services, to help with implementation.”
He added that Treasury wants to work with the financial services sector “to design a compliance regime that is as simple as possible and helps to accomplish our objectives.”
OFAC does not have a rulemaking process analogous to its anti-money laundering counterpart at Treasury, the Financial Crimes Enforcement Network (FinCEN), so there is no formal process for financial institutions or other interested parties to submit comments in response to the preliminary guidance.
However, OFAC and other sanctioning authorities “should both look for and benefit from constructive industry reaction,” said Chip Poncy, a former Treasury Department official who now is global head of financial integrity with K2 Integrity.
OFAC’s preliminary guidance is “facilitating constructive discussions across industry, which should inform how the U.S., the G7, and other coalition partners ultimately color in OFAC’s initial framework with additional guidance or regulation that will inevitably attend the formal implementation of the announced price cap policy,” Poncy said.
He added: “Such attentiveness and responsiveness will strengthen implementation and ultimately enhance the effectiveness of the multilateral coalition’s announced policy.”
International Implementation Standards Key for Bank Compliance Professionals
OFAC’s preliminary guidance was “quite direct and clear about what they expect and also very clear about what would and would not lead to enforcement action,” a veteran sanctions compliance officer at a large U.S. bank told Regulatory Intelligence.
“If that bears itself out as the details emerge, I think it could be pretty workable from a bank’s perspective. Changing our processes to accommodate this obviously will have to happen, but trade finance operations are already quite used to complexity so it won’t be unprecedented,” the source said.
The “biggest concern” for banks is which countries will implement this scheme and will they do so in the same way OFAC has articulated it, the source said.
The source added: “If there is alignment between the G7 countries, for example, on implementation expectations and enforcement practices, then that would be hugely helpful.”