Deceptive shipping activity is on the rise.
It is also attracting an increased focus from OFAC, the US Department of the Treasury’s Office of Foreign Assets Control.
Responsible for issuing and enforcing sanctions based on US foreign policy, OFAC recently updated its advisory documentation to raise awareness of some of the deceptive shipping practices deployed specifically by North Korea to get goods into the country.
Over the past few weeks, the media has also reported several stories relating to shipping sanctions that have either been issued or evaded. For example, the US sanctioned four shipping companies and nine ships with ties to Venezuela, in efforts to step up pressure on President Maduro’s regime. Additionally, UniCredit has agreed a $1.3bn settlement over allegations it violated several US sanctions programmes, including helping Iran’s national shipping company, Islamic Republic of Iran Shipping Lines, to evade sanctions.
The issue is widespread and it’s not going away.
Battling the Sanctions Busters
The trade finance community is a crucial link in the global supply chain, and its compliance with international regulations is pivotal in preventing commodities from reaching embargoed countries.
Yet, much work is needed to raise awareness of the issues surrounding sanctions and illicit shipping activity, which affects the entire ecosystem of businesses and individuals involved in global trade.
That is why OFAC, along with the U.S. Department of State and the U.S. Coast Guard, released its latest advisory documents. The goal is to make everyone – including those businesses financing and insuring shipments, the operating ports, and other key players in the supply chain – aware of these practices, and to “implement appropriate controls to ensure compliance with their legal requirements.”
On 21st March 2019, these same parties issued an updated advisory notice.
The latest guidance demonstrates that OFAC’s mandate is not solely to implement and enforce sanctions programs, but also to promote good sanctions compliance and risk management practices. It does so by inviting the shipping industry to account for three types of risk:
- High-risk areas – OFAC has provided a list of ports and a map of areas that it associates with potential illicit shipping practices.
- Suspicious practices – OFAC has highlighted the issue of vessels manipulating or disabling their Automatic Identification System (AIS) in order to conceal the illegal ship-to-ship transfer of goods. Suspicious practices also include altering the identification of vessels and falsifying cargo and vessel documentation.
- High-risk vessels – OFAC has updated the list of North Korean vessels capable of engaging in ship-to-ship transfers (from 24 to 28 since the 2018 guidance). It has also issued two further lists of vessels that are believed to have engaged in ship-to-ship transfers with North Korean tankers, and to have exported North Korean Coal since August 5, 2017.
While OFAC makes it clear that the vessels named in this guidance are not necessarily subject to sanctions, some of them are included in the Specially Designated Nationals and Blocked Persons list (SDN list).
In any case, professionals in the shipping industry need to account for the high risk of conducting business with the vessels identified in these advisories, by thoroughly assessing and mitigating any attempt to evade sanctions.
Mitigating Risk Effectively
As with any risk, identifying it as quickly as possible is the preliminary step to any form of mitigation. However, considering the risk factors mentioned above, detecting sanctions risks within the complex international shipping environment can prove extremely difficult.
Trade finance is one of the areas that requires a robust due diligence and screening process, in order to detect potential sanctions risks. However, trade compliance screening comes with a number of complexities, including:
- Trade finance transactions often involve a large number of counterparties that all need to undergo KYC checks;
- Much of the data and documentation used in trade finance is still paper-based or in an unstructured format, making it difficult to digitalise the process;
- There are numerous international reference lists to manage to ensure the screening process is as accurate and up to date as possible.
To identify and avoid risk during the trade lifecycle, it is critical for the organisations involved to have the right data and software in place. Trade compliance screening technology can help to identify vessels that are owned, operated, or managed by sanctioned entities (such as North Korea), as well as check ships’ historical journeys to determine whether they have visited any sanctioned ports.
Registering Risks in Real Time
Trade compliance technology can also help organisations to keep track of vessel name changes as they occur, which is a common deceptive practice and difficult to manage manually. For instance, the vessel named “SAM MA 2” that was listed on the 2018 OFAC advisory has since changed its name to “MYONG SIN”, and was listed on the 2019 advisory.
By waiting for new advisory notices to come out, organisations can become exposed to the potential risks that occur in real time. In order to protect their business and its reputation, it is important for them to be proactive in spotting red flags themselves.
A further example is that a vessel named “ASIA HONOR” was not listed on the February 2018 advisory, even though it had visited the port of Najin, North Korea on June 23rd, 2017.
Sophisticated trade compliance software can spot such activity and alert the organisation to the risk, even if the regulator does not.
Some of the risk patterns OFAC has called out suggests that a more prudent approach to identifying risks related to trade is needed.
This goes beyond the complex due diligence that must be conducted prior to agreeing to finance a transaction, and requires ongoing vigilance to identify other red flags, such as when a ship approaches a sanctioned or high-risk port or when they turn off their AIS tracker.
The challenge of mitigating sanctions risks in trade finance transactions is firmly on OFAC’s radar.
Organisations involved in trade must be proactive to stay ahead of the risks.