COLUMN | The Dark Tanker Fleet and its insurance: how a major oil spill may not be covered [Offshore Accounts]

Last week, the BBC reported that the British government is investigating 37 British businesses for violations of the sanctions on Russia. "It is understood some are likely to be maritime insurance firms," reporter Jack Fenwick noted.

The Group of Seven (G7) coalition has a US$60 per barrel price cap on seaborne Russian oil, to restrict Moscow's oil export revenues. The oil price cap bans G7 and European Union companies from providing transportation, insurance and financing services for Russian oil and oil products if they are sold above the US$60 cap. Other sanctions restrict dealings with Russian companies like Gazprom, Lukoil and Rosneft and with individuals associated with the Russian government, including many oligarchs.

We don’t know which companies are under scrutiny, but companies involved with the Dark Fleet of tankers transporting sanctioned Russian, Iranian, and Venezuelan crude are facing increased scrutiny as Russian attacks on civilians in Ukraine continue, along with credible allegations of the execution of yet more Ukrainian prisoners of war by Russian troops.

So far, patient investigative journalists have taken the lead in looking at shipping’s ties to Vladimir Putin’s regime.

US$1.6 billion of possible consequences

The consequences of an incident involving the Dark Fleet are potentially very serious.

Last Thursday, Petras Katinas and Luke Wickenden of Finland’s Centre for Research on Energy and Clean Air (Crea) published a hard-hitting report into the large volumes of oil transported by the Dark Fleet and the potential cleanup costs for an oil spill involving a Dark Fleet tanker. They estimated that such a pollution incident could cost “from US$859 million to US$1.6 billion” and that likely the costs would be borne by coastal countries as the Dark Fleet vessels “frequently operate with inadequate or no protection and indemnity (P&I) insurance.”

Since the start of Russiaʼs full-scale invasion of Ukraine, Dark Fleet tankers have been involved in 50 incidents, including in the Danish Straits and the Turkish Straits, as well as two serious incidents off Malaysia: the explosion of the Gabon-flagged Aframax Pablo in 2023, and the collision between the Sao Tome and Principe-flagged very large crude carrier (VLCC) Ceres I and the Singapore-flagged product tanker Hafnia Nile earlier this year.

The latter incident resulted in the Hafnia vessel catching fire, and Ceres I being detained after it had switched off its AIS and departed the scene.

So far only the concierge has been fined

You would think that the possibility of a devastating oil spill might focus the mind of both flag states (who may have more liability than they like to think) and coastal states whose beaches and fisheries could be devastated. So far, the record of enforcement against companies and individuals in the United Kingdom that break the sanctions imposed on Russia has been weak.

Only one British business has been fined by the Office of Financial Sanctions Implementation (OFSI), despite the agency receiving an additional £50 million (US$65 million) in funding in March, and that was a concierge service that was managing a flat for a Russian. In September, OFSI fined Integral Concierge Services £15,000 (US$19,600) for having made or received 26 payments that involved a person whose assets had been frozen under the British sanctions against Russia.

OFSI has the power to impose fines of up to £1 million (US$1.3 million) or 50 per cent of the value of the breach of the oil price cap plus other penalties for dealing with sanctioned parties.

On October 10, the British government announced it was forming a new Office of Trade Sanctions Implementation (OTSI), to “work with industry to make complying with sanctions obligations as straightforward” with “powers to publish information about sanctions breaches and impose civil monetary penalties.”

Tom Wilson reveals US$700 million of ship purchases

Whilst the government continues to dither, British investigative journalists have been stepping up to the task of reporting the connections between British citizens and British companies, and the Dark Fleet.

On Thursday, shares in shipbroker and shipping services company Braemar fell sharply and closed down eight per cent on the week after the Financial Times reported that the company had acted as the intermediary in the sale of at least nine of 25 tankers purchased by a 74-year-old British accountant called John Ormerod between December 2022 and August 2023, for a total cost of more than US$700 million.

It's a huge sum for a pensioner not previously known for owning a large fleet. How did Mr Ormerod afford the ships?

Advanced payment of charter hire by Lukoil subsidiary, considerably advanced

FT journalist Tom Wilson detailed at length how “each ship was bought by a different special purpose company incorporated by Ormerod in the Marshall Islands, but Lukoil’s Dubai-based subsidiary Eiger Shipping DMCC provided the funds by paying in advance to charter the vessels” before they were even purchased.

Leading shipping law firm Watson Farley and Williams was found by Mr Wilson to have acted as escrow agent for the funds used in at least 11 of the ship sales to Eiger Shipping. One of the 25 vessels purchased by Eiger, Canis Power, went on to lose power (oh, the irony) and black out off the coast of Denmark last year whilst under the Cook Islands registry. It has subsequently been renamed N Cerna and its flag changed to Barbados after the vessel was targeted by British government and EU sanctions in June.

The FT was at pains to point out that “it is not alleged that the transactions have broken any laws.”

I am sure that is a relief to Lukoil, to Mr Ormerod, to those dying in Ukraine, and to the compliance departments of the companies involved.

What do we know about Dark Fleet insurance?

The claim that the UK government might finally be investigating maritime insurers and the Crea report on the massive cost of a possible oil spill from the Dark Fleet made us wonder what we do know about the insurance coverage of the tankers carrying sanctioned Russian oil.

Most Russian flag vessels are insured by state insurer Ingosstrakh, which was sanctioned by the US, UK and EU earlier this year, but, of course, the Dark Fleet aren’t Russian flagged. The tankers operate in plain sight under open registries like Gabon, Palau, Sao Tome, and the Cook Islands. When Ingosstrakh was subject to British sanctions in June, the Cook Islands and other registries requested ships under their flags to find new insurers to issue their pollution insurance and P&I.

Michelle Wiese Bockmann digs into the Blue Card

Once again, the hard work and diligence of another excellent investigative journalist comes into play. When Michelle Wiese Bockmann investigated Ceres I (the tanker that collided off Malaysia), she found that “Maritime Mutual Insurance Association (NZ) issued the Blue Card for the very large crude carrier, which regularly shipped and stored Iranian crude over the past 18 months,” according to the ship registry.

The Blue Card is a mandatory requirement under the International Convention on Civil Liability for Oil Pollution Damage (CLC) to prove that a tanker owner has valid insurance to cover any oil spill liabilities. It is issued by the ship’s P&I insurer to the flag state registry and they, in turn, issue a CLC Certificate to the registered owner of the tanker.

Maritime Mutual, which is headquartered in New Zealand, declined to respond to numerous emails and phone calls from Ms Wiese Bockmann requesting confirmation it had issued the Blue Card for Ceres I.

Strange that.

Maritime Mutual in the spotlight in Auckland and Liechtenstein

Despite its name, Maritime Mutual is not a mutual co-operative insurer like the member owned P&I clubs such as Gard and North-Standard that many readers will be familiar with. It is a private company, seemingly headed by its Director, Paul Rankin, who is based in Auckland, but has a Liechtenstein phone number, as per the company’s contact listing online.

We should emphasise that we are not alleging any wrongdoing by the company, its directors, its employees, or any of its affiliates and associates.

Strangely, two of its senior managers also share the Rankin family name, including Sarah Rankin, its London-based Director of Legal and Compliance, and assistant underwriter Clare Rankin, who is based in Liechtenstein.

It would be a very unorthodox compliance structure if Ms Rankin were related to Mr Rankin. Who knows?

“Not without past controversy”

The company has not been without past controversy, however.

In 2021, Lloyds List reported in its Daily Briefing that it had identified six tankers insured by Maritime Mutual “as engaged in evasive or deceptive shipping practices associated with Venezuela’s and Iran’s oil and shipping sectors.”

The publication contacted Mr Rankin, who professed to be shocked by the discovery:

“Our procedure in the event of such inquiries is to contact our members or the vessels managers for their comments. Regrettably however no such response has yet been received to date. No system is flawless and is therefore vulnerable to a certain extent. We believe no P&I Club has the resources to check on the day-to-day movements of the thousands of vessels insured by them.”

Really? That was the defence? What about AIS?

In 2005, Tradewinds reported that “the Japanese government has made diplomatic representations to New Zealand about the little known Maritime Mutual Insurance Association (MMIA) and cover it is providing to North Korean cargo ships.”

We can agree that this seems a little unfortunate, but, again, it was a long time ago.

What cover is available?

So, what cover would have been available to the owners of Ceres I? Maritime Mutual’s website provides a graphic illustration of the cover available to its customers:

"Maritime Mutual’s insurance cover is provided through the process of mutuality and the premiums paid by its members," the company said. "To further protect its members, the club’s retained exposure is limited to the first US$250,000 of any claim. Claims in excess of this amount are reinsured through a high-quality programme created by renowned London market reinsurance brokers."

We saw above how Crea estimates that a significant oil spill (whether from the Dark Fleet or another tanker) could easily cost more than US$1 billion. And note the caveat on the maximum cover of up to US$1 billion, the word “facultatively.”

What does "facultatively" mean?

Facultatively means “taking place under some conditions but not under others,” so there is no guarantee of any cover above US$250 million for any or all Maritime Mutual’s customers, as the higher cover is placed “facultatively”.

Maybe it is there, maybe not, it depends.

We note that as per Crea, US$250 million would likely be insufficient to cover a major oil spill, or another major incident like a bridge strike. In many cases, the facultative cover up to US$1 billion would also be insufficient, even if it were in place.

So how can London underwriters and their hardworking brokers be sure that the customers of a maritime insurer are not violating sanctions and trading oil above the G7 price cap, even if they are providing US$250 million or more of high-quality reinsurance cover?

Simple: self-certification by the tanker owners.

Do you swear to tell the truth, the whole truth, and nothing but the truth?

I am not making this up. To ensure compliance, Maritime Mutual requires its owners to complete an Attestation Letter that they are not breaking the G7 rules “to be provided to the association within 30 days of loading Russian oil cargo.”

They can send in their signed attestation a month after they load the crude. Does anyone else see any potential problems with this as a system of compliance? Maybe you should contact Ms Rankin.

Being honest and honourable people, I am sure no shipowner would be tempted to make a false declaration on the form when “The member represents and warrants that it has not taken and will not take any action with the effect or purpose of evading, circumventing, or attempting to violate the price cap policy.”

Null and void for sanctions breakers anyway

Even if an insurer was hypothetically providing a Blue Card and P&I cover to a Dark Fleet vessel engaged in the Russian oil trade above the price cap, most P&I insurers, including we understand Maritime Mutual, have coverage rules that include sanctions clauses. These void any liability to the insurer if vessels are involved in sanctions-busting.

So, if there is a large oil spill from a Dark Fleet tanker and it is found that the vessel was breaking G7 sanctions, then the insurers would not have to pay out anyway, as the cover would be voided by the sanctions violation. De facto, any vessel operating in violation of sanctions has no valid cover, even if it has a Blue Card.

Once again, we emphasise that we are not alleging any wrongdoing by Maritime Mutual, its directors, its employees, or any of its affiliates and associates. We are simply highlighting the status of the cover it and its underwriters provide to its customers, based on public statements from Mr Rankin and on the information freely available on the company’s own website. What we see, we find alarming.

However, it is not just Maritime Mutual that has been in the spotlight in New Zealand over maritime disasters. Later in the week. we turn armchair admiral, couch commodore, and living room lieutenant and look at one very obvious lesson from the unfortunate sinking of the hydrographic dive support ship HMNZS Manawanui off Samoa.

Background reading

Our earlier three pieces on the Dark Fleet provide a good overview of the challenges facing the industry – a world where private companies run open registries like the Cook Islands, Gabon and Sao Tome, providing what are often referred to as “flags of convenience” to the owners of aging and often unsafe vessels trading sanctioned cargoes, switching flag and changing class to stay ahead of regulators.

Part I: flag state responsibility should be flag state liability 

Part II: who profits from these sanctions-busting ships?

Part III: Palau, the Cook Islands and the Swedbank precedent