Now that we have seen the EU’s adoption of a slimmed down 10th sanctions package on Russia after months of ambitious discussion of imposing new costs, it makes sense for us in the compliance community to step back and take a wider view of why politicians and officials increasingly impose complicated sanctions measures and what it means for the future.
So, why do we increasingly see new sanctions measures that are very limited in their intended impact? The simple answer is that there is a belief in sanctions policy making circles that sanctions measures can be precisely tailored to achieve a specifically desired impact on the target with minimal or even zero spillover impact to others. We see it in the US Treasury’s Sanctions Review and in every paragraph of EU sanctions regulations containing the phrase “the prohibition…shall not apply…”
And the fervent embrace of complicated sanctions is only growing. They started with the enactment of sectoral sanctions against Russia following Moscow’s invasion of Crimea in 2014. But since then have been deemed such a success to have been deployed toward Venezuela and again towards Russia to impose the same restrictions again (See EO 14024 Directive 3 and EO 13662 Directives 1, 2, 3) as well as the much hyped oil price caps.
The Complicated Compliance of the Price Caps
The oil price caps, which politicians are touting as a great success despite the increasing evidence of their limited impact, are a prime example of measures with disproportionate compliance costs to their actual impact on the target.
The price caps have been enacted to soften the potential blow to the global oil market from the EU’s import embargo to ensure that Russian oil continues to flow to international markets. Because the primary focus of the measure is to not impact energy flows, the result is a much more complicated compliance task than what would have been required if the EU’s ban on services had proceeded as originally enacted in June 2022.
Even with the extraordinary guidance and embrace of an “attestation model” from US Treasury’s OFAC, the EU , and UK OFSI to purposely lessen the compliance burden of the price caps, as we in the compliance know, we are now in the position of having to gather and assess a multitude of information against a number of different factors to make a determination if activity is prohibited by sanctions or not.
If the EU’s original ban on services for Russian seaborne crude and products had proceeded, companies would in most cases only need to ask one question, “is the product of Russian origin” to get to a definitive answer of it being prohibited or not. But with the price cap, to know if the activity is in compliance with the restrictions, we need to be asking:
- Is the product of Russian origin?
- Where is the product headed?
- Does the destination have an import ban in place?
- What is the specific product and which CN code would apply?
- Based on the CN code which price cap applies?
- Was the product purchased for a price below the price cap maximum for the CN code of the product?
- Is there any evidence that the stated purchase price is the true and final purchase price and that there will not be any supplementary compensation to, in effect, have a price above the price cap?
- Are the shipping costs and other related services in line with industry norms and without evidence that they are inflated to, in effect, have a price above the price cap threshold?
- And more…
The value proposition of the oil price caps, a high compliance burden for market stability and the “right” impact on Russia, is made more perplexing when senior policymakers publicly permit Moscow’s use of its “shadow fleet” to ship oil outside the price cap restrictions. And this is before we consider the extensive track record of the Russian government and aligned actors to work to evade and circumvent sanctions, exploiting carve outs, exceptions, and general licenses to mitigate the impact of sanctions and make compliance all the more difficult.
What does it Mean for the Future?
There is a paradox of applying sanctions, the more complicated the measures and more difficult they are to implement, then the more the impact of sanctions is disconnected from the policy intent. Complicated sanctions create more opportunities for evasion and circumvention by design, and they also lead to “over compliance” because the questions and documentation needed to be gathered for compliance and thus the costs of personnel to ensure compliance are too great for the business value when there is enforcement risk for getting the rules wrong.
But so long as policymakers are able to tout the success of the oil price caps and that sanctions can be narrowly tailored to take greater effect over time, complicated measures are here to stay and will continue to be deployed in future regimes. Therefore it is important for us in compliance to face reality and build compliance programs that are robust and adaptable to a changing environment to enable company leadership to take decisions on what activity is within or outside of risk appetite. This is where we at Sanctions Advisory are uniquely positioned to support Nordic companies to make sure complying is a business advantage and not a burden.
Feel free to contact us at inquiries@sanctionsadvisory.dk to discuss further how we can help your company best address the complex future of sanctions compliance.