In a much-anticipated and far-reaching action, on May 14, 2020, the U.S. Department of State, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), and the U.S. Coast Guard issued an advisory (the “Advisory”) providing parties engaged in the maritime industry and those active in the energy and metals sectors with information and tools to counter current and emerging trends regarding illicit shipping and sanctions evasion, with a focus on Iran, North Korea, and Syria. The Advisory, which has been in the works for months, includes information on deceptive practices used to evade sanctions and general best practices for policies and procedures to counteract such schemes. The Advisory impacts virtually all of the major actors within the maritime industry—flag registries, insurance companies, ship owners, port and terminal operators, managers, and charter companies, etc.—which all are expected to play an active role in ensuring vessels they deal with are not financing terrorism or violating U.S. sanctions. As the maritime industry is aware, the issuance of the Advisory comes at a time when the Trump administration is ramping up sanctions enforcement on shipping and related sectors to support its national security and foreign policy objectives. For example, last year, 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, OFAC issued an enforcement action against a U.S.-based ship management company for violations of the former sanctions on Burma. 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.
The following are a few key takeaways from the Advisory:
1. The U.S. government (“USG”) believes the maritime industry is a favored avenue for sanctions evasion. The Advisory continues a recent USG effort to more clearly and comprehensively communicate its expectations about appropriate sanctions compliance practices, this time regarding the increasingly important maritime industry. As highlighted in OFAC’s 2019 Framework for Compliance Commitments, the Advisory acknowledges that compliance programs are inherently risk-based and will vary depending on a number of factors, but should include the following: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training.
2. The Advisory provides specific guidance and best practices to the following actors within the maritime industry: maritime insurance companies; flag registry managers; 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. We strongly recommend, if your business falls within one of these categories, that you closely review the recommendations provided in the Advisory and conduct an internal review of your compliance program to ensure that it adequately addresses sanctions evasion schemes.
3. Industry reception to the Advisory seems to be a mild sigh of relief. While the Advisory suggests significant compliance obligations for entities that may not have viewed themselves as subject to such substantial burdens previously, such as classification societies and flag registries, the scope of the new compliance guidelines is more “balanced” than draft versions previously circulated to key players in the maritime industry. We’ve heard from industry officials that the industry will likely “learn to live” with the new compliance reality ushered in by the Advisory.
Draft versions of the guidance, circulated within the maritime industry over the course of the last several months, triggered significant concern among global shippers, who argued that the new compliance guidelines would unduly burden global trade with complex legal questions, as well as difficult-to-discern fact-gathering requirements. The USG appeared to incorporate some industry feedback before issuing the final version of the Advisory, resulting in an advisory that appears more balanced than previous drafts. In any event, the MoFo National Security team concurs with the views of one key industry player with whom we spoke who indicated that the Advisory sends a clear message from the USG that companies operating in the maritime space need to significantly bolster their compliance programs and they need to do so now. The senior industry official views the Advisory as putting the maritime industry on “prior notice” of illicit evasion tactics, such that, in the event a violation were to occur involving the tactics, OFAC or other enforcement agencies would expect the violating company to have taken steps to address the previously announced risk.
Based on conversations in the past week since the Advisory was issued, we expect industry will probably adopt a “wait and see” approach to assess the Advisory’s impact, with an eye toward outreach to USG representatives should it turn out to be excessively burdensome on global trade. Of particular concern, according to one industry official, is the increased scope of the Advisory, which applies to entities that may not have had significant sanctions compliance obligations previously, such as classification societies and flag registries (as opposed to financial institutions, which have detailed sanctions compliance responsibilities). Additionally, the official warned that several of the provisions, such as Know Your Customer (“KYC”) requirements and beneficial ownership diligence requirements, if taken to their extreme, could become unduly burdensome, especially to smaller actors within the industry.
Deceptive Shipping Practices
The Advisory notes that approximately 90 percent of global trade involves maritime transportation. Given the pervasiveness of maritime trade, it is no surprise it is frequently used for malign activities. The Advisory highlights the following tactics malign actors utilize to facilitate sanctionable or prohibited maritime trade linked to Iran, North Korea, and Syria:
- Disabling or manipulating the Automatic Identification System (“AIS”) on vessels
AIS is an internationally mandated system that transmits a vessel’s identification and location data. The practice of manipulating AIS data, referred to as “spoofing,” allows ships to broadcast a different name, International Maritime Organization (“IMO”) number (a unique, seven-digit vessel identification code), Maritime Mobile Service Identity, or other identifying information.
- Physically altering vessel identification
Many passenger and cargo ships are required to display their name and IMO number in a visible location on the vessel’s hull or superstructure. Vessels involved in illicit activities have often painted over vessel names and IMO numbers to obscure their identities and pass themselves off as different vessels.
- Falsifying cargo and vessel documentation
Bills of lading, certificates of origin, invoices, packing lists, proof of insurance, and lists of last ports of call are examples of documentation that typically accompany a shipping transaction. The USG has found that sanctions evaders falsify shipping documentation pertaining, in particular, to petrochemicals, petroleum, petroleum products, metals, and other products in order to disguise their origin.
- Ship-to-Ship (“STS”) transfers
While the transfer of cargo between ships at sea can be conducted for legitimate purposes, STS transfers—especially at night or in areas determined to be high-risk for sanctions evasion or other illicit activity—are frequently used to evade sanctions by concealing the origin or destination of surreptitiously transferred petroleum, coal, and other material.
Malign actors may attempt to disguise the ultimate destination or origin of cargo or recipients by using indirect routing, unscheduled detours, or transit or transshipment of cargo through third countries.
- False flags and flag hopping
Bad actors may falsify the flag of their vessels to mask illicit trade. They may also repeatedly register under new flags to avoid detection.
- Complex ownership or management
Global shipping is inherently complex and involves multiple interactions with both government and private sector entities. Bad actors attempt to take advantage of this complexity through the use of complex business structures, including those involving shell companies and/or multiple levels of ownership and management, to disguise the ultimate beneficial owner of cargo or commodities in order to avoid sanctions or other enforcement action, among other reasons.
General Practices for Effective Identification of Sanctions Evasion
The Advisory recommends that businesses continually adopt updated and effective practices to address red flags and other anomalies that may indicate illicit or sanctionable behavior. The Advisory encourages at-risk companies to incorporate the specific practices summarized below (and discussed in greater detail in the Advisory) into their compliance programs to effectively identify potential sanctions evasion schemes:
- Institutionalize sanctions compliance programs
The Advisory recommends that private sector entities assess their sanctions risk, implement sanctions compliance and due diligence programs, and provide sanctions compliance training and resources to their personnel. The Advisory also recommends that companies consider communicating with their counterparties, partners, subsidiaries, and affiliates to articulate their compliance expectations.
- Establish AIS best practices and contractual requirements
Those operating in the maritime industry may wish to consider, based on their individual risk assessments, whether to research a ship’s history to identify previous AIS manipulation and monitor AIS manipulation and disablement when cargo is in transit.
- Monitor ships throughout the entire transaction lifecycle
As appropriate, and consistent with their risk assessments, ship owners, managers, and charter companies are encouraged to continuously monitor vessels, including those leased to third parties. This could include supplementing AIS with Long Range Identification and Tracking (“LRIT”) and receiving periodic LRIT signals on a frequency informed by the entity’s risk assessment.
- Know your customer and counterparty
This due diligence might include maintaining the names, passport ID numbers, addresses, phone numbers, email addresses, and copies of photo identification of each customer’s beneficial owners.
- Exercise supply chain due diligence
The Advisory encourages parties to conduct appropriate due diligence to ensure that recipients and counterparties to a transaction are not engaging in sanctionable activities, such as by shipping Iranian petroleum or North Korean coal. They also should consider implementing controls that allow for verification-of-origin and recipient checks for ships that conduct STS transfers, particularly in high-risk areas.
Members of the industry are encouraged to incorporate these best practices in contracts related to their commercial trade, financial, and other business relationships in the maritime industry.
- Industry information sharing
The Department of State, OFAC, and the U.S. Coast Guard recommend that industry groups encourage members to provide relevant information and share it broadly with partners, other members, and colleagues consistent with applicable laws and regulations.
In addition to the general best practices detailed above, the Advisory also provides specific guidance and best practices to the following actors within the maritime industry: maritime insurance companies; flag registry managers; 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. We strongly recommend that, if your business falls within one of these categories, you closely review the recommendations provided in the Advisory and conduct an internal review of your compliance program to ensure that it adequately addresses sanctions evasion schemes. We provide a few key highlights for each category below:
- Maritime insurance companies
- Monitoring AIS transmissions and investigating the following occurrences when involving an insured vessel: any significant time period with non-transmission that is not consistent with the International Convention for the Safety of Life at Sea (“SOLAS”); navigation of suspicious deviations in routes (e.g., changes without what appears to be a legitimate reason to go off-route, such as unsafe ports, extreme weather, or emergencies); a pattern of turning off AIS in a manner inconsistent with SOLAS; and engaging in trade to or from vessels that are not transmitting AIS consistent with SOLAS.
- Including in pre-coverage and claims presentment appropriate due diligence procedures that assess the AIS history of vessels that engage in potentially illegal activities and operate in areas determined to be high-risk areas for sanctions evasion, both of which may be indicators of possible involvement in illicit activity and may warrant further investigation of the ship’s voyage, charter, ownership, and other factors.
- Ensuring, as appropriate and allowed by applicable laws and regulations, that due diligence documents (e.g., registration documents for flag registries) include a color photocopy of the passports, names, business and residential addresses, phone numbers, email of all individual owners of the vessel(s), and the names and IMO numbers of all the vessels in the fleet of the individual ship owner, for ships operating near areas determined to be high risk for sanctions evasion. Where necessary, include a provision in forms collecting personally identifiable information (“PII”) that the insurers and re-insurers may share the PII with competent authorities if the vessel conducts unlawful activities, as allowed by applicable laws and regulations.
- Flag registry managers
- Verifying the IMO number of each vessel when receiving an application for registration through the IMO’s Global Integrated Shipping Information System (“GISIS”) Ship and Company Particulars module. If the IMO and ship name do not clearly match, additional investigation could be conducted prior to the registration of the vessel, and the manager should contact the previous Flag State to confirm the application and its intended release from the previous registry.
- Conducting research on the AIS history of vessels that transport oil, refined petroleum, petrochemicals, steel, aluminum, copper, other metals, sand, and coal to determine if such vessels have a pattern of AIS disablement or manipulation inconsistent with SOLAS, which could indicate involvement in illicit activities. Any signs of AIS transponder disablement or manipulation inconsistent with SOLAS should be considered a red flag and investigated fully prior to engaging in other activities with such vessels.
- Sharing with other flag registries, commercial databases, and the IMO the names and IMO numbers of vessels that have been denied registration, or deregistered related to involvement in sanctionable or illicit shipping activities, so that other flag registries can be made aware and act in a manner consistent with relevant U.S. and UN sanctions. Flag registry managers should inform the UN DPRK Panel of Experts in the event of registration denial or deregistration for North Korea-related reasons.
- Port state control authorities
- Requiring vessels arriving in port to maintain AIS broadcasts, as provided for in SOLAS.
- Denying port entry to ships with a history of AIS disablement or manipulation inconsistent with SOLAS.
- Requesting and reviewing complete and accurate shipping documentation, including bills of lading identifying the origin of cargo for individuals and entities processing transactions pertaining to shipments involving products going to or from Iran, North Korea, and Syria. As is generally the case, such shipping documentation should reflect the details of the underlying voyage, including the vessel(s), cargo, origin, destination, and parties to the transaction. Any indication of manipulated shipping documentation, whether in connection with these or other areas, may be a red flag for potential illicit activity and should be investigated fully prior to providing services.
- Shipping industry associations
- Disseminating the USG advisory, or creating their own advisory addressing these issues, and providing it to members in order to raise awareness of global deceptive shipping practices and identify the ways that members can mitigate the risks of involvement in illicit shipping activities.
- Providing regular case studies and updates regarding illicit activity in industry-wide circulars, particularly in relation to shipping oil and petroleum products.
- Regional and global commodity trading, supplier, and brokering companies
- Monitoring AIS transmissions of chartered clients, especially in the case of vessels in areas determined to be at high risk for sanctions evasion via ship-to-ship transfers.
- Identifying the vessels which, in the past two years, have a pattern of AIS disablement or manipulation inconsistent with SOLAS and potentially terminating business relationships with clients that continue to use those vessels.
- Ensuring that, in transactions involving ship-to-ship transfers, transacting parties endeavor to note all involved vessels’ IMO numbers and conduct reviews of vessel logs and cargo certificates of origin to establish a relevant chain of custody for the commodity in question.
- Requesting and reviewing complete and accurate shipping documentation, including bills of lading identifying the origin of cargo where individuals and entities are processing transactions pertaining to shipments potentially involving products to or from Iran, North Korea, or Syria. Such shipping documentation should reflect the details of the underlying voyage, including the vessel(s), cargo, origin, destination, and parties to the transaction. Any indication of manipulated shipping documentation is a red flag for potential illicit activity and should be investigated fully prior to continuing with the transaction.
- Financial institutions
- Financial institutions should rely on their internal risk assessments for customers in the maritime industry, in order to employ appropriate risk mitigation measures consistent with applicable existing U.S. laws and regulations designed to combat money laundering and terrorist and proliferation financing.
- While the Advisory primarily addresses sanctions risks, U.S. financial institutions should also be aware that, consistent with suspicious activity reporting requirements in 31 CFR Chapter X, if a financial institution knows, suspects, or has reason to suspect that a transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction, the financial institution should file a Suspicious Activity Report (“SAR”).
- Risk factors that financial institutions may wish to consider as part of their assessment include:
- Identifying commodities and trade corridors susceptible to transshipment and ship-to-ship transfers and the extent of their use by an institution’s maritime industry customer.
- Results from an assessment of the nature of each client’s business, including the type of service(s) offered and geographical presence.
- Client activity for transactions inconsistent with the client’s typical business practices, to include when clients acquire new vessels.
- Client acquisition or sale of vessels to determine that the client’s assets do not include blocked property.
- Ship owners, operators, and charterers
- As appropriate, continuously monitoring ships, including ships leased to third parties, and ensuring that the AIS is continuously operated consistent with SOLAS and not manipulated. Parties could also consider using LRIT in addition to AIS and receiving LRIT signals every three hours.
- Monitoring AIS transmissions of vessels, especially in the case of vessels that are capable of transporting cargoes and susceptible to ship-to-ship transfers that are known to be used in the evasion of sanctions (e.g., coal, petroleum and petroleum products, and petrochemical products).
- Identifying the vessels which, in the past two years, have a pattern of AIS manipulation not consistent with SOLAS and terminating business relationships with clients that continue to use those vessels.
- Classification societies
- Keeping records, including photographs, of recipient vessels and/or recipients located at ports when possible, to enhance end use verification.
- Adopting KYC due diligence measures to the extent appropriate.
- Ensuring due diligence documents (e.g., registration documents for flag registries) include a color photocopy of the passports, names, business and residential addresses, passport numbers and country of issuance, phone numbers, and emails of all individual owners of the vessel(s) and the names and IMO of all the vessels in the fleet of such ship owner, when appropriate.
- Vessel captains
- Understanding, and ensuring your deck officers are aware of, the IMO-required AIS regulations, which include consistently broadcasting AIS transmissions consistent with SOLAS.
- Ensuring that vessel captains conducting ship-to-ship transfers in high-risk areas for sanctions evasion are aware of the potential for blocked vessels or vessels carrying cargo the transport of which is prohibited by U.S. and UN sanctions to use deceptive practices to hide their identities, including by using false vessel names or IMO numbers. To the extent appropriate, vessel captains should ensure that they have verified the vessel name, IMO number, and flag prior to engaging in such a transfer and ensure there is a legitimate business purpose for the ship-to-ship transfer.
- Crewing companies
- Being aware of, and ensuring your crewmembers are aware of, the IMO-circulated guidance in relation to illicit shipping and why these practices are unsafe.
- Communicating to clients that the ships your crews will be operating will be monitored for AIS disablement and manipulation, and that such instances will be investigated.