US and EU sanctions for vessel passing the Kerch Strait - Maritime and Transport Law Committee, July 2020

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Arthur Nitsevych
Interlegal, Odessa
selivanov@interlegal.com.ua

Mikhail Selivanov
Interlegal, Odessa
nitsevych@interlegal.com.ua

EU and US sanctions have been imposed on Russia due to the latter’s aggression against the Ukraine. Sanctions of such jurisdictions are certainly not the only ones in the world upon this issue, but they do have a real impact on the economy and can affect the interests of the persons engaged in international shipping. International economic sanctions have struck the Russian economy rather seriously. Shipping companies are a particular subject of such sanctions, as they may not be direct entities of US or EU sanctions, although the aforesaid restrictions will anyway affect their interests. As for US sanctions, they are imposed by presidential decrees, the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (SSIDES) and the Ukraine Freedom Support Act of 2014 (UFSA). In the US there is a special body responsible for control over the above issue, the Office of Foreign Assets Control of the US Treasury Department (OFAC).

Like the US, the EU imposed sanctions (or restrictive measures) against Russia in 2014. The EU imposed sanctions related to Ukraine largely in cooperation with the US. EU sanctions are similar, though not identical to US sanctions. However, EU sanctions are imposed for a limited period not exceeding one year and sometimes for six, or even for three months only. Upon expiry of such period, the EU shall review the current situation and shall make a decision of whether to extend sanctions or not. As for the Crimea, they similarly impose restrictions on economic relations with the occupied Crimean peninsula. The EU prohibited both natural persons and companies based in the EU to import goods, to export certain goods and technologies and to provide tourist services in the Crimea.

US sanctions

It should be noted that US sanctions usually have no extraterritorial effect, while prohibitions imposed by the sanction regime shall apply to US persons only. The term ‘US person’ means any citizen of the United States of America, a foreigner having permanent residence in the US, an entity incorporated under the US law or under any jurisdiction within the United States (including foreign branches), and all the persons physically located within the United States. With regards to the aforesaid, there is no direct jurisdiction of the US/OFAC regarding foreign persons (ie citizens of a foreign country, entities incorporated under the laws of foreign states, etc). But it is a well-known fact that each transaction with a US financial institution shall be governed by OFAC rules and shall be subject to a review of sanctions. Since US financial institutions are strictly regulated and are subject to periodic inspections, almost all US banks support sanction compliance programmes that include review of sanctions against customers and transactions. If the US correspondent bank that conducts a transaction knows or has reason to know that a certain person or entity engaged in a bank transfer or referring thereto is subject to US sanctions, such bank shall be responsible if it fails to take appropriate measures in order to make sure that the fund remittance was blocked. Thereafter, the US bank shall notify OFAC on the blocked/rejected transactions as soon as possible.

With regards to business aspects, it means that enterprises must be aware of the sanctions and avoid  the US financial system for sanction-related activities. In the context of shipping, US sanctions concerning the Crimea are the most vital ones. They prohibit the following:

– new investments in the Crimean region of Ukraine by a US person or US legal entity, wherever they are;

– import of any goods, services or technologies from the Crimea to the US, directly or indirectly;

– export, re-export, sale or supply of any goods, services or technologies from the US to the Crimean region, directly or indirectly; and

– any approval, financing, assistance or warranty from any US person, wherever they are.

EU sanctions

Specification of applying EU sanctions in practice is the following: they do not provide direct negative effects in view of charging penalties, for those who violate the above sanctions. Their effect shall be secured by means of mandatory implementation of sanctions legislation by EU Member States whose regulatory acts stipulate clear rules and responsibility for violation thereof.

Understanding our logic, passage of the Kerch Strait by vessels is a bright example of possible financing (or other financial impact) in favour of maritime business entities being subject to sanctions. Following annexation of the Crimea, the Russian Federation believes that the Kerch Strait has ceased to be inland water area of both the Russian Federation and Ukraine and now belongs solely to Russia. De jure, the Russian status of the Kerch Strait is not recognised by any state, except the Russian Federation itself. Ukraine still considers the Kerch Strait as common territory.

Therefore, vessel transit through the Kerch Strait, as well as carriage of goods on board thereof, cannot be regarded as a prohibited activity. In such a case, a vital issue arises in respect of port dues, namely in respect of the persons acting as ultimate beneficiaries of such port dues. With regards to the ultimate beneficiary of funds, it should be noted that State Unitary Enterprise of the Crimean Republic ‘Crimean Sea Ports’, mentioned in both the US and EU sanctions lists, in practice did not act as beneficiary in the framework of international cost remittances. Actual options, when such cases may occur in certain circumstances, are the following:

– a legal entity facilitating payment of the port dues (owner/charterer/ship manager) is registered in the USA (or in the EU) and therefore shall comply with the sanctions regime;

– beneficiary is an entity mentioned in the SDN/SSI list (or EU list of specially designated nationals);

– a business entity engaged in rendering services is incorporated in Crimea and therefore is directly treated as the subject of sanctions; and

– the goods being transported by vessel are of the Crimean origin.

Summary and conclusion

Today there are no other global reasons to worry about while facilitating passage of the Kerch Strait, from the aspect of global sanctions.

It should be noted that sanctions and regulations concern not only shipping companies, but also companies financing their activities by any means (eg various banks). Therefore, special attention should be drawn to the latter ones, in respect of conditions where under shipping companies operate.

Of course there are far  more issues related to the application of sanctions imposed by the EU and the US, although all of them can be settled by means of thorough analysis, as shown clearly by our experience.

Large shipping companies, as well as banking institutions, have employed experts in sanction regimes, but the specific nature of sanctions in the maritime shipping industry requires additional special knowledge and skills (such as determining the status of the strait, or the entity entitled to pay port dues at certain sea ports, etc), which may prevent them from making a gross mistake and, as a result, having to incur unnecessarily high expenses.

After the Russian occupation and annexation of Crimea, the United States government imposed sanctions against persons they deem to have violated or assisted in the violation of Ukraine's sovereignty. These sanctions were the most wide-ranging applied to Russia since the fall of the Soviet Union. The European Union has introduced restrictions on economic relations with Crimea. International economic sanctions help Ukraine to find peace on the basis of state boundaries reconstruction, ie restoration of the position which existed prior to the violation of a right of Ukraine.

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