Much of the world’s focus is on the COVID-19 pandemic, and rightfully so, but sanctions regulators also have their gazes fixed on another issue: the maritime industry. On May 14 2020, we saw the U.S. Departments of State and Treasury, together with the U.S. Coast Guard, release a long-awaited advisory (the “Advisory”) warning actors within the maritime industry of sanctions evasion schemes and offering compliance best practices. Echoing the concerns of the United States, on July 27, 2020, the UK’s Office of Financial Sanctions Implementation (“OFSI”) released guidance (the “Guidance”) for entities and individuals who operate in, or with, the maritime shipping sector. In the wake of these guidance documents, the message is clear: expectations have been set as to what compliance best practices look like in the maritime sector, and failing to meet those standards will have consequences. In fact, in the context of the Advisory, MoFo’s National Security team spoke to a senior official within the maritime industry who views the Advisory as putting the maritime industry on “prior notice” of illicit evasion tactics, so that, in the event of a violation, the U.S. Office of Foreign Assets Control (“OFAC”) or other enforcement agencies would expect the violating company to have taken steps to address the previously announced risk based on the guidance provided. The Guidance is the latest development in this trend.
I. Key Takeaways
- Two of the most sophisticated sanctions regimes in the world, the United States and United Kingdom, have recently issued guidance documents for sanctions compliance in the maritime industry, highlighting the importance and particular vulnerability of the industry.
- While there is no uniform foolproof approach to sanctions compliance, companies must assess their individual risk profile and adopt the best practices provided by OFSI and the U.S. government as appropriate.
- A wide range of maritime actors are exposed to sanctions risks, such as maritime insurance companies, charterers, unions, classification societies, petroleum companies and refineries, customs and port state controls, flag registries, and shipping industry associations.
II. OFSI’s Maritime Guidance
The UK relies more heavily on the maritime industry, both historically and currently, than most other countries. OFSI’s guidance recognizes this fact, noting that the UK continues to move 95% of all its imports and exports by sea. Additionally, 13 of the world’s largest Protection and Indemnity Clubs, collectively insuring around 90% of global tonnage, operate out of the UK. The Guidance identifies several illicit and suspicious shipping practices common in the maritime industry and offers due diligence best practices to aid with compliance.
Specifically, the Guidance identifies the following methods commonly used to breach sanctions:
- Ship-to-ship transfers, which is the term for transfers of cargo between vessels positioned alongside each other at sea
- Automatic identification systems (“AIS”) – OFSI notes that AIS is often intentionally disabled by vessels that seek to obfuscate their whereabouts in furtherance of illicit trade practices
- Cyberattacks have been reportedly used to illegally force the transfer of funds from financial institutions and cryptocurrency exchanges to circumvent financial sanctions. State-sponsored cyber operators have employed this tactic
- The use of crypto assets to obscure the true nature of certain transactions
- Abuse of the financial system via the creation of bank accounts specifically established to engage in and conceal illicit activities
- Physical concealment of illicit cargo during transit as a precautionary measure and during active inspections
Additionally, the Guidance provides information on specific sanctions regimes relating to North Korea, Iran, Libya, and Syria, including due diligence best practices.
Helpfully, the Guidance discusses key due diligence best practices to alleviate the compliance risks associated with the above nefarious activities. As sophisticated sanctions compliance professionals are no doubt aware, there is no one-size-fits-all prescription for sanctions compliance. OFSI stresses that every company must assess its own exposure to sanctions risks and put due diligence measures in place commensurate with those risks. A wide range of actors within the maritime industry are exposed to sanctions risks: maritime insurance companies, charterers, unions, classification societies, petroleum companies and refineries, customs and port state controls, flag registries, and shipping industry associations. Although OFSI does not mandate specific due diligence measures be taken, the Advisory does outline several recommendations that may be helpful to the aforementioned industries. These best practices include:
1. Having a robust understanding of the sanctions regulations in place in jurisdictions of operation and reaching out to specialized sanctions counsel where necessary. Companies with business activities in or around high-risk jurisdictions should develop a thorough understanding of applicable sanctions regulations and obligations. This includes seeking independent legal advice when necessary and conducting business with a risk-based approach via enhanced due diligence to understand the full range of activity, the persons involved in supply chains, and other factors critical to the applicability of relevant sanctions provisions.
2. Employ AIS screening and include “AIS switch off” clauses in contractual language. OFSI notes that while turning off an AIS does not necessarily confirm illicit shipping practices, it may be one of several indicators to identify potential sanctions violations. For example, by contacting vessels that have “gone dark,” ship owners, charterers, insurers, flag registries, and port state control entities can better understand the cause of disconnections, note such instances, and review them for trends.
3. Utilize either free or subscription-based resources to check ownership structures, vessel flag information, details of home ports, and ports recently visited. OFSI indicates that this information can be helpful to carry out a variety of checks to provide initial indicators of a particular actor’s behavior.
4. Check suspected fraudulent letters of credit, bills of lading, loans, and other types of financial instruments with relevant financial institution for validity. OFSI directs entities to access the clauses within the letters of credit, loans, and other types of financial instruments along with the validity of insurance documents, bills of lading, and cargo lists prior to agreement. Particular care should be taken when dealing with funds or economic resources owned, held, or controlled by sanctioned persons or those operating on their behalf.
The upshot is that all actors within the maritime industry must significantly improve their due diligence and compliance programs to avoid breaching global sanctions and the potentially devastating consequences that follow.
III. OFAC Advisory
The UK Guidance closely tracks similar guidance put forth by the United States earlier this year. Specifically, the Advisory notes the unique compliance problems facing the maritime industry and provides specific guidance and best practices to the following actors: maritime insurance companies; flag registries; port state control authorities; shipping industry associations; regional and global commodity trading, supplier, and brokering companies; financial institutions; ship owners, operators, and charterers; classification societies; vessel captains; and crewing companies.
The Advisory highlights the following tactics used by malign actors to facilitate sanctionable or prohibited maritime trade, specifically linked to Iran, North Korea, and Syria:
- Disabling or manipulating the AIS on vessels
- Physically altering vessel identification
- Falsifying cargo and vessel documentation
- Ship-to-ship transfers
- Voyage irregularities
- False flags and flag hopping
- Complex ownership or management
In an effort to provide a blueprint for combatting these malign activities, the Advisory encourages at-risk companies to incorporate specific practices, identified below, into their compliance programs to effectively identify potential sanctions evasion schemes:
- Institutionalize sanctions compliance programs
- Establish AIS best practices and contractual requirements
- Monitor ships throughout the entire transaction lifecycle
- Know your customer and counterparty
- Exercise supply chain due diligence
- Incorporate best practices in contractual language
- Industry-wide information sharing
The U.S. government published the Advisory at a time when the Trump administration is ramping up sanctions enforcement in shipping and related sectors. For example, in 2019, the Trump administration blacklisted units of the Chinese state-owned shipping company COSCO Group and dozens of tankers for allegedly shipping Iranian oil in violation of U.S. sanctions and, in January 2020, OFAC issued an enforcement action against a U.S.-based ship management company for violations of the former sanctions on Burma. Additionally, the Advisory updates and expands on the North Korea-related shipping advisories OFAC issued on February 23, 2018 and March 21, 2019; the Iran-related shipping advisory OFAC issued on September 4, 2019; and the Syria-related shipping advisories OFAC issued on November 20, 2018 and March 25, 2019.
Given recent actions by OFAC and new guidance documents issued by the U.S. government and OFSI, it is a safe bet to predict that sanctions enforcement in the maritime industry is likely to pick up. It is crucial, therefore, for all actors within the maritime industry to critically assess their respective risk profiles and craft tailored compliance policies to fit their situations.
Raymond Rif, a legal analyst in the Morrison & Foerster LLP National Security practice, contributed to this alert.