HFW Yachting Industry Briefing

As readers will be only too aware, the UK, EU, US, and other countries including Australia, Japan and Canada have imposed unprecedented measures against Russia in response to the invasion of Ukraine and subsequent events. Sanctions have been imposed in a series of waves in the weeks since the invasion and it is expected that they will continue to be expanded.

It is likely that they will remain in place for some time to come. The West’s response has led to the development of many new sanctions’ measures, and regulators have been deploying whatever tools they might have at their disposal. These include targeted actions against the alleged kleptocracy of specific individuals, wide ranging regulations restricting the sale of goods and technical services, and port bans for all vessels legally or beneficially owned by Russian entities or nationals. Some of these moves specifically target Russian oligarchs, whilst others are more generally aimed at disrupting the Russian economy. The yachting industry has been particularly, though not uniquely, hard hit and those servicing it have had to navigate a raft of unintended consequences. A significant number of important contracts have been suspended or terminated and job losses have already been reported. It is anticipated that further consequences will be felt by the industry in the weeks and months to come.

Sanctions

The UK’s sanctions regime is based on the UK’s Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations), which amongst other things impose an asset freeze on the assets of designated persons, by making it an offence to deal with the funds or economic resources owned, held, or controlled by a designated person. Those who find themselves holding funds belonging to or suspected of belonging to a designated individual or otherwise providing services in breach of a sanctions regime should take immediate advice.

The Regulations also prohibit the provision of “technical assistance” for the benefit of a designated person in respect of an aircraft or ship. Of course, there have been questions on what constitutes technical assistance and this is something that must be looked at carefully on a case by case basis. The Regulations apply to all UK persons, no matter where in the world they are based and all conduct in the UK. The same can largely be said of the sanctions regimes of other jurisdictions. Whilst most companies are ready to comply with the rules of the jurisdiction in which they are incorporated, regard should also be had to the rules of any other jurisdiction in which they operate and the jurisdictions from which their employees originate.

 

For example, UK persons providing yacht management services to a yacht in the ultimate beneficial ownership of a designated individual whilst in the course of their employment by or directorship of a yacht management company would likely be in breach of the Regulations, whether or not the management company itself was subject to their jurisdiction.

Crew

Equally, UK persons serving as crew in technical roles on board yachts belonging to designated individuals may well find themselves in beach of the Regulations. We are not aware of any exemptions or carve outs being granted by the UK for UK seafarers and accordingly any UK person still serving on a yacht ultimately beneficially owned by a designated individual should take legal advice as a matter of urgency. Those serving on the yachts of designated individuals have faced real difficulty getting paid their wages. No manager is able to lawfully disperse the funds of a designated individual and, equally, no bank is likely to act on such instructions to pay or otherwise release any such funds to the intended recipient without a licence being granted by the competent authorities. Those looking to secure payment for services rendered may need the support of appropriately qualified legal counsel.

What are the consequences of a breach of sanctions?

The consequences of failing to comply with such regimes are varied but, in all cases, serious. Those in breach of UK sanctions find themselves exposed to the risk of either criminal liability, including, depending on the offence, imprisonment of up to 10 years for trade sanctions and 7 years for financial sanctions and / or unlimited fines. Civil penalties may also be imposed. The penalties for breaching EU sanctions vary across EU member states, but breaches are in most instances criminal offences. The EU is currently developing proposals to make sanctions evasion an EU crime allowing for the ready confiscation of assets. The US takes an active approach to enforcement and has powers to impose substantial civil fines and custodial sentences of up to 30 years.

Due Diligence

With the complex ownership structures employed in yachting, the current situation has prompted many to re-assess who their client really is. Under the Regulations, the offence occurs where the UK person has reasonable cause to suspect that they are dealing with the funds or economic resources of a designated person. A yacht is likely to be considered an economic resource. When assessing the situation, regard should be had not just to the title chain but also to whom instructions are received from, who makes or on whose behalf is payment made and who uses the yacht. At the time of writing, the UK is shortly due to implement a strict liability regime for the imposition of civil penalties for breaches of the UK financial sanctions. This will make it all the more important to undertake substantive due diligence. It will no longer be a complete defence to not have known or not had reasonable cause to suspect that you were dealing with a sanctioned person.

There is much speculation that the situation may have long-term implications for the yachting industry, with, in the future, a greater focus on transparency and, at least in some quarters, a reduced appetite for taking on clients from those jurisdictions perceived as being more high-risk, so called “de-risking”.

Contractual Impact

Whilst a handful of sale and purchase transactions fell away in the early days of the war as buyers baulked at purchasing Russian yachts or sanctions otherwise prevented the deals from proceeding, we are now seeing plenty of buyers interested in taking advantage of what they anticipate will be the bargains to come. However, we are not seeing large numbers of Russian yachts come to the market and this, combined with the difficulties of putting together such deals (for example, few are currently willing to act as stakeholder in such a deal), will likely limit the number of buying opportunities for the time being.

The situation has been far more difficult for those shipyards with ongoing newbuilding and refit and repair projects. The impact of any sanctions designation depends on the jurisdiction making such designation, whether the project or significant suppliers to the project are based in that jurisdiction and the governing law of the project’s contracts. For example, it might not be illegal as a matter of EU law to continue the construction of a yacht in Germany, but where the UK Government has sanctioned the ultimate beneficial owner of that project and the contract is subject to English law, such a designation will result in that contract being frustrated and thus automatically terminated.

In addition, the EU’s prohibition on (among other things) the supply of vessels to persons, entities, or bodies in Russia, or for use in Russia, has impacted on the delivery of a number of projects, with some
still suspended, whilst others were delayed while the shipyards and subcontractors sought the consent of local authorities to continue. We have not yet seen the Ukraine war and ensuing sanctions prompt the widespread cancellation of charters that we saw in response to the pandemic. However, a range of other contracts including refit and repair contracts, ship building contracts, yacht and crew management agreements and design agreements have been affected. As the waves of sanctions continue, more and more shipyards, yacht managers or other service providers are likely to find themselves in the position of having their clients sanctioned. Where this does occur, robust legal advice should immediately be obtained on their obligations and the winding down of any affected contracts. Whether directly affected or not, many of those who do not already include sanctions clauses in their contracts are now taking steps to do so.

Insurance

We have seen the widespread cancellation of hull and machinery cover for Russian owned yachts, with owners given limited notice within which to procure alternative cover. With little spare capacity in the London and European market, many owners have had to look to alternative markets to procure cover or otherwise elect to self-insure. Of course, self-insurance is not an option for P&I cover and though P&I clubs have to date been slower to unilaterally withdraw cover, where the owner of a yacht is sanctioned, we would expect all cover (including P&I) to be cancelled on a contractual basis. In the absence of a contractual right of cancellation, the asset freeze would likely prohibit the receipt of premium and payment of claims. Where an insurer is unable to pay as a result of sanctions affecting the insured, the insurer’s obligation to pay is suspended until the applicable sanctions have been lifted and such suspension will not serve to extend the time bar on claims (which is likely to be 6 years).

Seizure

Large yachts belonging to wealthy Russians have attracted a disproportionate amount of attention from the authorities, the press, and the public. We have seen yachts detained in jurisdictions as widespread as Croatia, Italy, France, Fiji, Germany, Gibraltar, Spain, the Dominican Republic, the Netherlands, and the UK. The language used variously describes such yachts as being seized, detained, confiscated, or arrested but the effect in each case is broadly similar. Local authorities have stepped in for a range of reasons but in each case, by one means or another, prevented a yacht from sailing. We are not aware of any such actions, to date, amounting to the forfeiture or confiscation of a yacht, which in most jurisdictions would likely require a change in law and certainly mark a fundamental change of approach to the application of sanctions. As discussed above, however, the EU appears to be taking steps through the creation of a new ‘EU crime’ of sanctions evasion and its ‘Freeze and Seize’ task force to move away from the historically non- confiscatory nature of sanctions. How this will translate in practice (and in law) remains to be seen.

However, most of these yachts are likely to find themselves idle for some time to come and in some cases their maintenance, especially in the case of those yachts actually subject to sanctions, is likely to become an increasing headache for the local authorities and the owners of any facilities in which such yachts are located

Conclusion

The impact of the West’s response to the Russian invasion of Ukraine is likely to go on being felt by the yachting industry for some time to come. Indeed, if, as is to be expected, more and more high net wealth Russians are added to the lists of individuals designated by the US, EU and UK, that impact is likely
to increase as are the unforeseen consequences for those servicing the industry and the accompanying need to take extreme care not to be caught on the wrong side of the law.

Extract from HFW Superyacht Industry Briefing and here is the link to download the full report.

https://www.hfw.com/Comprehensively-Yachts-Industry-Briefing-Jun-22