Red Flags, Oligarchs and Superyachts
19 April 2022
The War in Ukraine has resulted in unprecedented international sanctions being imposed upon Russia. Chief among those presently targeted are the super-rich oligarchs, either because they are suspected of providing political or financial assistance to President Putin and/or because the imposition of personal financial pain on them may erode support at the highest levels within Russia for the continuation of the ‘special operations’ in Ukraine.
With the hunt on-going to identify and freeze bank accounts and valuable property such as buildings, great wealth is often tied up in easily moveable property such as luxury yachts, which can be (quite literally) sailed into safe harbour to avoid sanctions enforcement. Although the sheer ostentatiousness being flaunted by oligarchs in possession of super yachts (some with values exceeding $500 million, and even, in the case of Roman Abramovich’s Bermuda-registered, 162.5 metre, Eclipse vessel, possibly $1 billion) may appear to offer a stark invitation to authorities targeting their assets it (perhaps, counter-intuitively) makes perfect financial and economic sense to concentrate high levels of wealth into compact, albeit glaring, luxury assets which can be moved internationally, especially under the legal protection of a sovereign jurisdiction.
Flags of Convenience (“FOC”) are historically associated with merchant shipping (whereby commercial businesses and their owners sought to avoid perhaps more onerous home-jurisdiction laws and regulations concerning profits, taxes or employee working conditions), but wealthy private individuals are similarly drawn to the benefits of registering pleasure craft 'sea jewellery' under FOC.
Sailing under the British civil shipping Red Ensign flag, also known as the ‘Red Duster’, 80% of the world’s yachts of 80 metres length or more are registered with the Cayman Islands Shipping Registry (“CISR”).
The CISR is part of the Red Ensign Group of UK, Crown Dependency, and Overseas Territories shipping registers. Other members comprise Guernsey, Jersey, Isle of Man, Anguilla, Bermuda, British Virgin Islands, Falkland Islands, Gibraltar, Monserrat, St. Helena, and the Turks and Caicos Islands. Any such registered vessel is designated to be a ‘British Ship’ and is entitled to fly the Red Ensign flag. The CISR has Category 1 registration status, enabling registration of ships of unlimited tonnage and type.
Red Ensign registered vessels are afforded the international maritime protection of the Royal Navy and owners may request UK Consular assistance including in situation where sanctions are imposed by a foreign nation. Ironically, should an oligarch-owned vessel arrive in UK waters, it would be subject to seizure following the imposition of sanctions by the UK Government.
Despite tax neutral status and duty-free sales transfer of vessels being legitimate financial benefits for private owners registering pleasure vessels in the Cayman Islands, in conjunction with a corporate structure underpinning the registration, such as a Special Purpose Vehicle or other general enquiry-protected offshore entity (typically operating a yacht under lease agreement arrangements), these immodest floating vaults of wealth can be, to some degree, hidden in plain sight. The combination of being able to register a yacht under foreign laws (the ownership of which can be encased in complex layers of offshore corporate structuring), along with the ability to move the vessel internationally - either continuously or at short notice and without need to periodically dock in registrational home port - is plainly attractive to those whose wealth may be at perceived jeopardy from legal or regulatory claims, political swings of favour, or economic instability, or for whom the basis of wealth is suspect or non-transparent.
Despite this, international authorities appear to be having some success in identifying and seizing Cayman Islands registered luxury yacht assets suspected to be owned or controlled by oligarchs under sanctions, even if such success to-date is largely a consequence of the owners’ failure or inability to move the vessels to safer waters. These include the 88 metre Amore Vero, which was recently seized in France, and the 156 metre Dilbar (as pictured), which is valued in excess of $600 million and has been impounded at the port in Hamburg, Germany. The United States is presently seeking to seize the Cayman-registered yacht, Amadea, which is docked in Lautoka, in the Pacific nation of Fiji. Although ownership of the vessel is in the name of a Cayman company, it is widely believed that the corporation is under the control of oligarch Suleiman Kerimov.
The location of many other Red Ensign Group vessels is known, the website www.shiplocator.com presently showing the Bermudan-registered Abramovich yachts Eclipse and Solaris being anchored in the Aegean Sea off Mugla, Turkey. The Cayman Islands registered Galactica Super Nova, believed to be owned by oligarch Vagit Alekperov, was last recorded off the coast of Montenegro in the Balkans.
While the civilian version of ‘The Hunt for Red October’ continues, perhaps now ‘The Hunt for Red Super Nova’, interest may turn to whether the Cayman Islands Government, and/or Governments of the other Red Ensign Group of shipping registries, deregister the vessels being targeting with sanctions. With international sanctions being imposed on many Russian oligarchs, not least by the UK Government, the continuance of affording Red Ensign status to their luxury yachts seems somewhat at odds with the current objectives.
BDO invites enquiries regarding resources and other ways our firm can provide assistance with such matters to Declan Magennis ([email protected]) or Russell Smith ([email protected]).