It is about ensuring that you do not do business with a sanctioned person or company – even inadvertently, as ignorance is not an excuse.
With ownership structures often being very complex, it can be difficult to work out who is the ultimate owner, or “beneficiary” of a company.
Unfortunately, sanctions regulators leave it to individual businesses to find out if their transactions violate sanctions. That is why due diligence is so essential.
What’s more, you can often be under heavy time pressure when fixing a charter party or a contract.
There are two sides to the risk: you have a risk if you violate sanctions and also a risk if you terminate a contract because you incorrectly believe the other party is sanctioned. Doing the former exposes you to enforcement actions from regulators and doing the latter exposes you to a potential claims for damages from your counterparty or others involved.
This note is intended to provide some guidance on what sanctions risk due diligence should look like and what prudent businesses should do. You should, however, take specific legal advice from a sanctions lawyer and contact your P&I club in each individual case as well as monitor the overall sanctions situation closely.
1. Check your counterparty – what does that actually mean?
It means that you must find out who you are dealing with.
It is not sufficient just to go through the various published lists such as:
USA: Specially Designated Nationals and Blocked Persons” (“SDN List”)
European Union: Consolidated List of Persons, Groups and Entities Subject to EU Financial Sanctions (“EU Consolidated List”)
That is because there is a secondary group of persons, entities, bodies, or vessels that are effectively subject to the same restrictions because of their corporate affiliations. In other words direct or indirect ownership by the persons or entities on the lists.
These are deemed by the US to also be SDNs because they are directly or indirectly owned 50 percent or more in aggregate by one or more persons on the SDN List even though that entity is not itself listed.
Similarly, this applies to any entity or vessel designated by the EU or UK because it is directly or indirectly owned more than 50 percent by an entity or person that is designated, or where the entity or person has a majority interest in it or is “controlled” by a designated entity.
Such entities will not appear on the above lists but it is important that you identify them.
2. How can you find out whether your counterpart or ship is controlled or owned by a sanctioned person?
Some companies have their own department with a designated person or team performing the required due diligence before a contract is entered into and during its performance. Others may consult a lawyer specialised in sanctions or use a specialist service provider. It is important to monitor the sanctions landscape closely.
To cut through complex ownership structures is a challenge for many. It is thus important to make sure that you have the right expertise - whether by internal or external resources- to perform the required due diligence before entering into a contract and during the performance to ensure sanctions compliance..
3. Who and what needs to be checked?
Remember to check your contractual counterparts and also other parties involved in the transaction, such as
The cargo owner, receivers, shippers, forwarders etc
Ports to be called
Other persons involved
You must also check the banks involved in transmitting, sending or receiving payments.
4. Make sure you have a right to terminate your contract in case of sanctions violation
There is no automatic right to terminate a contract when your counterpart is sanctioned. So it is essential to include a clause in the contract which gives you the right to terminate a contract if your counterpart is sanctioned or performance of the contract would violate sanctions.
BIMCO recommends using the BIMCO sanctions clauses which give you the right to terminate a contract and protect your business.
6. What should you do when you identify a “sanctions hit”
You must get immediate advice from a specialised sanctions lawyer or your P&I club before taking any action.
This is because the different sanctions operate in different ways and some transactions will be permitted while others will be prohibited. There may also be general licences which allow the performance of an already existing contract for a specific period of time.
Fifth package of EU sanctions against Russia: import ban on coal from Russia, a full transaction ban on four key Russian banks, a ban on Russian vessels and Russian-operated vessels from accessing EU ports and specific new import bans on products from wood to cement
General overview on sanctions landscape
Different levels of required due diligence in EU/US/UK
Ukrainian ports are closed and though apparently not yet hindered much by sanctions, many shipping companies have vowed to disengage from the Russian export and import markets. Many other companies are divesting or putting their activities in Russia on hold. At the same time, the EU is contemplating to follow the UK and ban Russian-owned vessels from the region’s ports.
The global economy is already suffering from increased commodity prices. Oil, wheat, and maize (all key exports from Russia and Ukraine) are trading at decade highs, at least. This will fuel further inflation that in many countries is already at its highest level in memory. Increased shipping costs due to historically high bunker prices will only add to the inflationary pressure. The increased prices may also lead to destruction of demand as consumers and businesses prioritise spending.
“The National Institute of Economic Research in the UK has estimated that the war could reduce global GDP growth by as much as 1 percentage point. No matter the specific Russia and Ukraine export developments, this will hurt growth projections for all shipping sectors,” says Niels Rasmussen, Chief Shipping Analyst at BIMCO.
Ukraine crisis – a net negative for the bulk market
Within Russia’s and Ukraine’s top export commodities (listed below) the two countries combined hold a global market share of more than 10% within coal, wheat, and maize. Of particular concern to global supply is the export of wheat and maize, which is mainly loaded in the Black Sea.
It is difficult to imagine that what is left of Ukraine’s 2021 harvest will be shipped any time soon and, depending on developments, the 2022 harvest may also be hit. How much of Ukraine’s export can be replaced by export from other countries remains to be seen but to the extent that it is possible it could lead to increased tonne miles demand.
Russia is a major player in both coal and wheat though for both commodities the majority is exported from Baltic and Pacific ports. None of the commodities are currently sanctioned and we believe that the Black Sea exports are at a higher risk of seeing disruptions due to lack of shipping companies’ willingness to serve the area and/or increasing shipping cost.
Top export commodities ex Russia & Ukraine 2017-2021
Share of global seaborne export
China (24%), EU (34%), Japan (13%)
China (47%), EU (39%)
Egypt (20%), Turkey (13%), Indonesia (6%)
EU (38%), China 18%), Egypt (10%)
EU (25%), China (21%), USA (10%)
“All in all, we believe that despite possibilities of increasing tonne miles demand for certain commodities, the war in Ukraine is a net negative for the bulk market driven by both a lack of commodity supply and reduced demand due to price increases,” says Rasmussen.
“Further steps to sanction some or all of Russia’s exports could cause further disruption although we believe that China may continue to be a taker for Russian commodities,” he says.
Much-awaited tanker market rebound could be delayed
Unlike the bulk market, Ukraine is not a factor in the tanker market. Russia, however, controls about 10% of all seaborne exports of both crude oil and refined products; the majority of which is exported from Black Sea ports.
The EU is the major taker of all Russia’s export and has so far taken no steps to sanction it; nor has the US White House despite pressure from Congress. In the meantime, European buyers appear to be shying away from Russian crude oil and it is being reported that as much as 70% of crude exports do not have a buyer despite being heavily discounted.
OPEC+ has, for now, decided to stick to already planned increases and crude oil price futures indicate that prices will remain above USD 100/barrel. The high prices are likely to cause demand destruction while supply shortages may also hurt shipping prospects.
“China could emerge as a buyer for Russian crude which could help alleviate some of the current global supply concerns as the EU could in turn buy more from the Middle East,” Rasmussen says.
“This could lead to increased tonne miles demand but if the high prices are sustained, overall demand would still suffer. We therefore believe that the much-awaited rebound in the tanker markets will be further delayed and be more muted than otherwise expected,” he says.
Top export commodities ex Russia & Ukraine 2017-2021
Share of global seaborne export
EU (59%), China (32%)
EU (59%), USA (34%)
EU (67%), Turkey (14%)
EU (36%), USA (15%)
EU (56%), China (13%)
Container market – earlier “return to normal” if growth is hit
Many of the largest container lines have decided to suspend bookings to and from both Ukraine and Russia despite no sanctions currently being in place. Neither Russia nor Ukraine is, however, key markets for the liners. Considering the very high global demand, the developments in the two countries should not be much of a concern for container rates or demand.
“On specific trades the loss of Russia and Ukraine volume may, however, be felt and we believe that this may be especially on some reefer trades,” says Rasmussen.
The impact of the war on the global economy and consumer confidence may however weaken growth prospects. This could lead to an earlier “return to normal” from the current elevated demand, which in turn could ease congestion in ports.
The impact, however, is likely some way off and in any case, longer-term contracts have already been signed at high rates.
Crimean ports closed to international shipping On 15 July 2014 the Ukrainian Ministry of Infrastructure Decree No. 255 dated 16 June 2014 “On Closure of Sea Ports” was published and immediately entered into force. Hence the Crimean ports Evpatoria, Kerch, Sevastopol, Theodosia and Yalta are now closed to international shipping.
The practical implications of breaching the Ukrainian ban on calling Crimean ports is unclear, but could result in detention and/or fines, as well as criminal charges against master, crew and owners.
Though much uncertainty remains, the immediate commodity price increases and supply challenges caused by Russia’s invasion of Ukraine are likely to be felt throughout 2022. Also, recently implemented sanctions on Russia are not likely to be lifted any time soon. This may have sustained spill-over impact on the global economy.
We are aware that there are some companies with a similar name to ours which are offering employment opportunities.
Please note that we only advertise our employment opportunities on job portals such as www.jobindex.dk and LinkedIn.