In the current sanctions environment, selling an oil tanker is far from simply signing a contract. According to EU regulations, the seller must notify the relevant authorities and, in some cases, obtain prior approval to avoid liability if the vessel is subsequently used to transport sanctioned Russian oil. The question is: to what extent should the seller be held responsible?
On December 18, 2023, the EU introduced measures to prevent the circumvention of sanctions through the sale of oil tankers. Article 3q of EU Regulation /2014 (hereinafter “the Regulation”) stipulates that the sale of any tanker suitable for transporting the crude oil or petroleum products listed in Annex XXV of the Regulation (hereinafter “Annex XXV Goods”) requires immediate notification to the relevant authorities, and in some cases, prior authorization. This aims to increase the transparency of ownership transfers and prevent tankers from being sold and then used to transport sanctioned Russian oil. Therefore, it is crucial for any applicable seller involved in such vessels to understand the specific entity information of the purchaser and, where required, to obtain prior authorization and fulfill notification obligations.
Scope of Application
The Regulation applies to sellers of any of the following types: citizens of EU Member States, natural persons residing within the EU, or “legal persons, entities, or bodies established within the EU.” The EU has made it clear that if an EU individual holds a tanker registered under a third-country flag through a third-country company, the Regulation still applies to them.
Requirements
Paragraph 4 of Article 3q of the Regulation stipulates that any seller meeting the above definition must immediately notify the relevant competent authority (RCA) of their member state when selling or otherwise transferring ownership of a tanker suitable for transporting Annex XXV Goods (i.e., crude oil and petroleum products). However, the Regulation does not specify the exact timing for “immediate notification,” whether it is after the sale agreement is reached or after the sale is completed.
The notification must contain at least the following information:
The identity of the buyer and seller;
(If applicable) The registration documents of the buyer and seller (including shareholding structure and management structure);
The vessel’s International Maritime Organization (IMO) number and call sign.
Sales Involving Russia
Furthermore, paragraphs 1 and 2 of Article 3q collectively stipulate that if the vessel is sold to a natural person, legal person, entity, or body in Russia, or is intended for Russia-related activities, the seller must obtain prior authorization from the relevant competent authority (RCA). The Regulation does not specify whether authorization must be obtained before the sale agreement is reached or before the sale is completed, and the handling of approvals may vary among Member States. When reviewing applications for authorization to sell or transfer, the relevant competent authority will assess whether the vessel is likely to be used to transport Russian-origin goods to the EU or third countries in violation of the oil price cap. It is currently unclear for how long after the change of vessel ownership the authority will assess its intended use. The Gard Association recommends a broad interpretation of the Regulation and advises initiating the authorization application process as early as possible.
The EU states that an application for sales authorization should only be submitted to the relevant competent authority if due diligence indicates that authorization is required.
Liability, Penalties, and Methods of Circumvention
If a seller is found to have sold a vessel in violation of the Regulation, they may be held liable for participating in a scheme to circumvent sanctions.
Penalties are determined by the relevant competent authority, and the seller may still be held accountable even if they were unaware of the vessel’s intended use after the sale.
Of course, the core issue is how to determine in advance whether a vessel will be used to circumvent sanctions in the future, and in what specific way – it is unlikely that the buyer will reveal any illegal plans to the seller! The EU also recognizes this reality. Therefore, if the seller can prove that they “did not know and had no reasonable grounds to suspect that the sale would constitute a violation of the sanctions” (see Article 10 of the Regulation), they can be exempted from liability. To prove this, the seller needs to provide details of the due diligence conducted prior to the sale, as well as findings that support their belief that the sale would not violate the Regulation.
In any case, the Gard Association recommends that EU sellers falling within the above definition seek legal advice before proceeding with any tanker sale, especially if the seller has concerns about how the buyer might use the tanker. Legal advice can also help clarify the standard of due diligence that should be followed in specific circumstances and what /shareholder information should be requested from the buyer.
Example Scenarios
Scenario 1: The buyer is Russian /or the vessel is intended for use in Russian activities, and the seller did not obtain authorization from the relevant competent authority.
In this scenario, the seller is in violation. Note that the Regulation applies if the new registered owner /or the ultimate beneficial owner is a Russian entity. This means that even if the new registered owner is not a Russian entity, but the actual beneficiary of the sale is a Russian individual, institution, or entity, the seller may still be held liable.
The seller can only avoid penalties if they can prove they “did not know and had no reasonable grounds to suspect that the sale would constitute a violation of the sanctions” – this requires them to provide the due diligence materials they conducted to the relevant competent authority.
Scenario 2: The buyer is not a Russian entity, but resells the vessel to a Russian entity or intends to use it for Russian activities.
In this scenario, the original seller may be in violation for participating in a scheme to circumvent sanctions: the Regulation prohibits the sale or transfer of ownership “directly or indirectly,” and also prohibits the transfer of ownership for the purpose of “re-export to Russia for use or for use by a Russian entity.”
Again, the seller can only avoid penalties if they can prove they “did not know and had no reasonable grounds to suspect that the vessel would be resold in a manner constituting a violation of the sanctions.” This requires them to provide the due diligence materials conducted on the buyer and their intentions to the relevant competent authority.
Summary
The Gard Association recommends that any seller of an oil tanker with connections to the EU should conduct due diligence, even if the sale does not require approval from the relevant competent authority. It is equally important that the due diligence process is properly documented and retained, otherwise the seller may be held liable for misuse of the vessel by the buyer. Due diligence may include: inquiring with the buyer about their purchase intentions, and analyzing the operations of the buyer’s /historical fleet.
