Australian sanctions on the shadow fleet

Australian sanctions on the shadow fleet

The Australian Minister for Foreign Affairs recently designated 60 tankers as sanctioned vessels under Australia’s autonomous sanctions regime. The list of vessels can be located here: Sanctioned Vessels – Russia.

This is the first set of autonomous Australian sanctions specifically targeting ships in response to the war in Ukraine.^[1]

Announcing the designation, the Minister, Penny Wong, explained that the vessels were part of the so-called shadow fleet used to circumvent international sanctions against Russia following its war against Ukraine.^[2]

Effect of designation

Key points

• The Minister may direct a sanctioned vessel to leave Australia, or not enter a port or place in Australia.
• It is an offence to cause a sanctioned vessel to contravene such a direction.
• A sanctioned vessel that has contravened a ministerial direction is liable to be forfeited.

Comment

The regulations do not prohibit dealings with a sanctioned vessel. They only prohibit conduct causing the vessel to contravene a Ministerial direction.

Before making such a direction, the Minister must have regard to Australia’s obligations at international law. This likely includes the obligation to afford vessels the right of innocent passage.

It is an offence if a person ‘causes the sanctioned vessel to contravene the direction.’

If convicted of such an offence, individuals face imprisonment for up to 10 years and a fine of up to the higher of A$825,000 or, if the contravention involves a transaction, 3 times the value of the transaction.

A body corporate faces a fine of up to the higher of A$3.3 million, or if the contravention involves a transaction, 3 times the value of the transaction. An offence by a body corporate is one of strict liability.

What exactly is conduct that ‘causes’ a vessel to contravene the Minister’s direction would likely involve questions of fact and degree. The conduct, which can occur outside Australia, will have to be examined to determine if it procured or brought about a contravention of the direction. It is likely that the conduct must be accompanied by an intention (at least when carried out by an individual) to cause the vessel to be operated in breach of the Ministerial direction.

In the appropriate circumstances, it may include:

• chartering the vessel with one of its ports or places of call located in Australia; 
• being a party to a contract of carriage of goods by the vessel with the load or discharge port located in Australia; or
• being a party to a contract for the sale and purchase of goods, where the goods are shipped on the vessel with the load or discharge port located in Australia.

It is questionable whether the provision of routine services to such a vessel in the course of its normal operations would be caught by the prohibition.

The Commonwealth Attorney-General may apply for an injunction (without the usual undertaking as to damages) to restrain a person from engaging in conduct that involves a contravention of such a direction.

Exceptions

Conduct would not contravene a Ministerial direction if it was necessary to secure the safety of life or the vessel.

It is a defence to a charge against a body corporate if it proves that it took reasonable precautions and exercised due diligence to avoid contravention.

While there is a mechanism for the owner or person in control of a sanctioned vessel to apply for the revocation of the designation, there is no express provision allowing for the Minister to grant a permit authorising conduct that would otherwise cause a contravention of a Ministerial direction in respect of the vessel.

Shadow fleet

The sanctioned vessels are said to be part of the ‘shadow fleet’, which generally refers to vessels that deliberately evade international sanctions.

In the case of Russia, such sanctions comprise various trade and financial restrictions, including prohibitions on imports of Russian crude and oil products, and a price cap by the G7 and Australia on seaborne exports of Russian-origin crude oil and oil products. The price cap includes restrictions on the provision of services that enable the maritime transport of such cargo above the cap.

These sanctions are aimed at squeezing Russian export revenue to diminish Russia’s ability to continue to finance its war effort in Ukraine, while reducing supply shocks to the global economy.

There are nevertheless available markets for Russian exports that exist beyond the reach of the sanctions, and there are vessels whose owners/operators are willing to service those markets.

To evade scrutiny and possible penalties by the G7+ and others, these vessels engage in tell-tale practices to get around the sanctions, or to conceal activity that may contravene the sanctions. These vessels make up what is known as the ‘shadow fleet’.

The Australian Sanctions Office provides guidance as to the common ‘red flags’ that could indicate that a vessel is part of the shadow fleet, namely:[3]

• operating to higher risk countries like Russia, Iran and North Korea;
• frequently changing flag or falsely representing registration under a certain flag;
• registration in open registries;
• engaging in frequent STS transfer operations;
• unusual or irregular sailing patterns;
• opaque and complex ownership structures;
• recent vessel acquisitions, especially of older vessels;
• frequent changes of ownership and/or management;
• use of false or fraudulent documents;
• deceptive practices like disabling or spoofing AIS transmissions; and
• physically altering vessel name and IMO number.

Quite apart from their effect of evading sanctions, there is a real risk that some of these practices result in vessels not being adequately insured, or vessels being poorly maintained because they do not need to meet more stringent insurance, flag state and class requirements. Such vessels pose significant risk to their crew, coastal states and the marine environment.

Australian sanctions generally

Australia’s sanctions laws are enforced by the Australian Sanctions Office, within the Department of Foreign Affairs and Trade.

The sanctions framework can broadly be categorised into two regimes – first, those sanctions imposed by the UN Security Council, which Australia is obliged to impose as a member of the UN; and secondly, autonomous sanctions imposed as a matter of Australian foreign policy.

The vessel sanctions to which this note refers are in the second category. Broadly, and apart from sanctioned vessels, sanctions under this category prohibit:

• making a sanctioned supply of certain goods which are transferred to, for use in, or for the benefit of certain countries or regions;
• making a sanctioned import of certain goods exported from or originating from certain countries or regions;
• engaging in a sanctioned commercial activity in relation to specified persons, entities or activities in certain countries or regions;
• providing a sanctioned service comprising technical advice, assistance or training, financial assistance or service, or some other service that relates to a sanctioned supply, import, commercial activity, or other specifically sanctioned activity;
• certain designated persons from travelling to, entering or remaining in Australia;
• making certain assets available to or for the benefit of designated persons or entities; and
• using, dealing or facilitating the use or dealing of controlled assets owned or controlled by a designated person or entity.

It is possible that a sanctioned vessel is also a controlled asset owned or controlled by a designated person or entity, which in turn raises distinct restrictions on dealings with it.

Managing compliance and risk

Generally, compliance with the sanctions laws requires a proactive and structured way of conducting due diligence, identifying sanctions risks, and evaluating and managing those risks.

The Australian Sanctions Office has produced a Sanctions Compliance Toolkit that provides guidance on such an approach, which can be accessed here: Sanctions Compliance Toolkit.

It has also produced guidance and advisory notes for specific sectors and activities, including for the maritime sector.

Additionally, a proactive approach to contractual negotiations can also assist to manage risk of non-compliance, especially given the often fast-moving nature of sanctions laws. To that end, some considerations as to contractual terms may include:

• notice to be given of nominated vessels, and their owners and operators
• continuing representations or undertakings as to sanctions compliance
• a sanctions clause that would trigger an appropriate allocation of risk and liability if a sanctions risk materialised
• whether there should be provision for quarantining of funds to deal with short-term prohibitions that may temporarily restrict payment but subsequently be lifted during the term of the contract
• appropriate suspension and termination provisions, including for force majeure, noting that automatic termination may not always be appropriate
• how sanctions exposure is defined in the contract – for e.g. is it merely a risk of sanctions, or the actual breach of sanctions that would engage the sanctions clause
• specifying the relevant jurisdictions whose laws would be relevant to determining sanctions risks (including Australia, if the governing law is not Australian law)

Sanctions compliance can be complex and difficult, particularly given their susceptibility to change. Organisations ought to focus on effectively managing the associated risks through well-documented, clear and regular policies, procedures and controls specific to the business.

As the Australian Sanctions Office advises, independent legal advice can be an important tool in managing sanctions risks, including by interpreting potentially complex regulations, accurately identifying risks arising from the organisation’s specific circumstances, and assisting to document steps taken to demonstrate the exercise of due diligence.

This publication is intended only to provide a summary and general overview. It is not intended to be comprehensive, nor does it constitute legal advice. You should seek legal or other professional advice before relying on or acting on its content.

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[1] There are separate designations of sanctioned vessels in respect of North Korea (under the Autonomous Sanctions (Classes of Sanctioned Vessels – Democratic People’s Republic of Korea) Designation 2017, the Autonomous Sanctions (Sanctioned Vessels – Democratic People’s Republic of Korea) Designation 2015, and the Charter of the United Nations (Sanctions – Democratic People’s Republic of Korea) Regulations 2008); and Libya (under the Charter of the United Nations (Sanctions – Libya) Regulations 2011).

[2] <https://www.foreignminister.gov.au/minister/penny-wong/media-release/australia-imposes-sanctions-russian-shadow-fleet-vessels>.

[3] See also IMO Resolution A.1192(33) adopted on 6 December 2023.