Russian-owned yachts stuck in muddied legal waters
Oct 3, 2022 by Gemma Harris
What can and will happen to oligarch-owned vessels is open to interpretation and likely to have far-reaching consequences.
It has been six months since the global hunt began to find and seize luxury assets of those close to the Kremlin.
Unlike their frozen bank assets, which the public cannot see, their very visible luxury superyachts have captured the spotlight. At least 17 such yachts have been reportedly searched, detained, arrested or seized since the sanctions took effect in March. Tracking these assets has become a consistent game of cat and mouse for authorities, with many superyachts moving to “safer” waters, such as those of Turkey or the Seychelles.
“Oligarchs be warned,” U.S. Deputy Attorney General Lisa Monaco stated at the initiation of Task Force KleptoCapture, an interagency task force created by the U.S. Department of Justice to enforce the sweeping sanctions, export restrictions, and economic countermeasures that the U.S. and its allies have imposed on Russian oligarchs in response to Russia’s attack on Ukraine. “We will deprive you of safe haven and hold you accountable,” Monaco, who oversees the task force, said. “We will use every tool to freeze and seize your assets.”
That part is clear — unfortunately, it’s the only part that is. How sanction regulations are implemented, who they actually apply to, what is prohibited and what exactly can be done with the targeted assets are interpreted in divergent ways by American, British and European authorities. And if the sanctioning authorities themselves cannot agree on what the restrictions entail, there is little hope that anyone in the yachting industry can be anything but confused.
There have been many words bandied about when it comes to the handling of the yachts deemed subject to sanctions. “Frozen,” “arrested,” “detained,” “controlled,” “seized” — they have all been used interchangeably, when in fact, they each have their own specific meaning, according to Dominic Bulfin, director of the London-based luxury asset law firm Bargate Murray.
A yacht whose ultimate beneficial owner (UBO) is on the sanction list is subject to an asset freeze, which generally means it cannot be sold or its value otherwise dissipated. “The state has no physical control over the asset, and it remains in every way owned by the existing owner and free to go where it pleases,” Bulfin explained.
Whereas, with S/Y A, frequently reported as having been seized in Trieste, Italy, the action would be “more accurately described as ‘control,’” Bulfin said, “since the state has not attempted to deprive the owner of its title, but merely placed restrictions on its freedom.” In another case, M/Y Flying Fox was detained in the Dominican Republic while U.S. authorities investigated its UBO, only to be permitted to sail sometime later.
By contrast, M/Y Axioma was arrested and put on the auction block in Gibraltor, although the sale had more to do with repossession by JPMorgan for a loan default than sanctions. Benjamin Maltby, a partner at Keystone Law in London, said that under U.K. law, if the owner owes money, there is an arrest. He uses M/Y Phi, the first vessel to be detained in the U.K., as an example, pointing out that the same owner still has possession and use of his other yachts.
The M/Y Amadea, subject to forfeiture under new powers created by U.S. legislation, was seized in Fiji by U.S. authorities and is now moored in San Diego with a U.S. flag and a U.S. crew. While the legality of such a seizure has been questioned by some, the Civil Asset Forfeiture Reform Act in the U.S. allows for assets to be forfeited to the government in relation to foreign crimes. Technically, in order to take such ownership, criminality in relation to the yacht would have to be proven, but “the U.S. has proposed using a streamlined administrative process that wouldn’t require proof that the yacht constitutes the proceeds of criminal activity,” according to Quentin Bargate, CEO of BargateMurray law firm. This type of administrative seizure of private assets is troublesome, Bargate said, as it is “inconsistent with human rights legislation protecting an individual’s rights to private enjoyment of his or her property.”
These differences in approaches are interesting, Maltby said. “Do countries continue to detain, do they seize or go somewhere in between?” The glaring question now, of course, is what will happen to these yachts? Will there be an un-sanctioning? Could some be refitted and turned into hospitals or refugee centers, or auctioned off with the proceeds given to Ukraine? Or will they be left to sit and rust? Governments have hugely underestimated the cost of maintaining seized yachts, Maltby said. “European authority is in a ‘damned if they do and damned if they don’t situation.
… Do they continue spending taxpayers’ money looking after an oligarch’s yacht?” Bulfin and Bargate paint an even more worrisome picture. “We have seen suppliers, flag states, local representatives, classification societies, insurers, and many more withdraw services,” even when the UBO is not subject to sanctions in any jurisdiction, Bulfin said. “This means that already there is significant uninsured, unflagged, and classless tonnage all over the world. These yachts may prove to be ticking time bombs.”
“The ironic paradox here,” he added, “ is that many of the yachts affected by sanctions have historically been flagged with first-class flags, classed with leading IACS classification societies, insured with first-class London- market insurance, and supplied with first-rate parts and supplies by first-rate suppliers.”
A down-shift in the standard to which these yachts (some of the largest in the world) are operated and maintained could have far-reaching implications, Bulfin said. Imagine if one such yacht, lacking P&I coverage, caught fire — they would not be insured for environmental damage, wreck removal, injury to crew or third parties, and other damages.
“In the case of a major incident, the legal repercussions will be significant,” Bargate said.
To read about how crew are dealing with this, click here.