OFAC, the State Department and the U.S. Coast Guard (collectively, the "Departments") cautioned participants in the maritime industry of tactics used by bad actors to evade sanctions. The Departments highlighted best practices to detect illicit activity, particularly in the transport of commodities.

In the "Sanctions Advisory for the Maritime Industry, Energy and Metals Sectors, and Related Communities," the Departments recommended methods to help commercial parties avoid involvement in sanctionable trade or illicit activity. The Departments cautioned commercial entities to be "vigilant" of certain evasion tactics by bad actors. These include:

  • manipulating automatic identification systems ("AIS") on vessels, which allows bad actors to conceal information regarding their voyage;
  • obscuring a vessel's identification (e.g., painting over a vessel's name or IMO number) to pose as another vessel;
  • providing false cargo and vessel documents to authorities, typically pertaining to petrochemicals, petroleum, petroleum products, metals or sand;
  • conducting ship-to-ship transfers to evade sanctions, which usually involve transfers that take place at night and the disguising of a vessel's origin or destination;
  • using indirect routing, unscheduled detours and other "voyage irregularities" to conceal the final destination or origin;
  • using a false flag or repeatedly registering with new flag states to hide illicit trade; and
  • constructing complex business structures, such as shell companies, in order to hide the ultimate benefactors of such business.

The Departments encouraged businesses to implement and regularly review practices designed to detect illicit behavior. Guidance includes:

  • Institutionalize Sanctions Compliance Programs. The Departments recommended establishing sanctions compliance and due diligence programs, as well as providing training on how to conduct such programs. Additionally, these programs may include routine audits by third parties. The Departments encouraged entities to communicate to counterparts (i) compliance with U.S. and UN sanctions, (ii) having sufficient resources to ensure compliance of their own sanctions policies, in addition to those of their subsidiaries and affiliates, (iii) implementation of controls to monitor AIS and to evaluate bills of lading for consistency, and (iv) consistent screening of onboarding and offloading cargo high-risk areas.
  • AIS Best Practices and Contractual Requirements. The Departments encouraged all firms active in the maritime industry, including financial institutions and insurers, to "promote continuous broadcasting of AIS through the life of the transactions, . . . especially in those areas determined to pose a high risk for sanctions evasion." This includes contract language making the improper disabling or manipulation of AIS potential grounds for terminations, and prohibiting transfer of cargo to client vessels that are not appropriately broadcasting AIS. The Departments also encouraged firms to investigate "signs and reports" of AIS transponder manipulation when engaging with "problematic vessels." The Departments noted that financial institutions may considering implementing "relevant controls for their maritime industry clients, particularly those that own, operate, and/or provide services to ships" operating in high-risk areas.
  • Monitor Ships throughout the Entire Transaction Lifecycle. Based on the level of risk involved, the Departments encouraged ship owners, managers, and charter companies to continuously monitor vessels, including those leased to third parties, throughout the lifecycle of a transaction. The Departments noted that this could involve supplementing AIS with Long Range Identification and Tracking ("LRIT"), and receiving periodic LRIT signals.
  • Know Your Customer and Counterparty. The Departments advised firms in the maritime industry to maintain risk-based due diligence, which might include the maintenance of records of customers' identifying and beneficial ownership information.
  • Exercise Supply Chain Due Diligence. The Departments stated that exporters and entities within the maritime supply chain must ensure that parties to a transaction do not send or receive commodities that may trigger sanctions (e.g., Iranian petroleum or North Korea-origin coal). In order to do so, the Department recommended implementing certain controls in high-risk areas, requesting copies of export licenses, and reviewing the details of an underlying voyage.
  • Contractual Language. The Department recommended that entities incorporate the best practices as outlined in the advisory into contracts related to their commercial, trade, financial, and other business relationships.
  • Industry Information Sharing. The Departments encouraged industry groups to promote information sharing among members to raise awareness of challenges, threats, and strategies to mitigate risk.

Commentary

This is not the first time OFAC and other agencies have issued guidance regarding economic sanctions risks related to the maritime industry (see here, here and here). The frequency and level of detail of these advisories is noteworthy, and reflects the high level of sanctions risk present in the maritime industry. According to the advisory, approximately 90 percent of global trade involves maritime transportation. As a result, the targets of U.S. sanctions - including Iran, North Korea, and Syria - are almost certain to utilize cargo ships and related facilities and services in their attempts to access foreign markets in violation of U.S. and international sanctions. If they have not already done so, participants in the maritime industry, including ship owners, managers, operators, freight forwarders, insurers, financial institutions and others, should heed the warnings and advice contained in these advisories. After repeatedly cataloguing a wide range of sanctions risks in the industry, and having highlighted key best practices to ensure compliance, OFAC may be unsympathetic to firms that fail to prioritize compliance. These firms may find themselves running afoul of U.S. sanctions as a result.

Originally published 15 May 2020

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