On May 14, 2020, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the Department of State, and the U.S. Coast Guard issued a Sanctions Advisory for the Maritime Industry, Energy and Metals Sectors, and Related Communities, reflecting increased scrutiny and enforcement attention by U.S. government agencies on curbing illicit shipping practices. Recognizing that 90% of global trade involves maritime transportation, OFAC has identified a number of ways in which bad actors exploit maritime trading. The interagency advisory provides a broader U.S. government perspective and complements earlier OFAC guidance, providing information regarding common deceptive shipping practices as well as compliance recommendations tailored to maritime shipping-related businesses; it also updates and expands on prior OFAC sanctions shipping advisories regarding North Korea, Iran, and Syria. As a whole, the advisory warns companies what compliance measures OFAC expects companies to implement to address this threat. In light of increased sanctions enforcement across the industry, the guidance also serves as a warning to companies that they should abide by applicable sanctions regulations.
Who is this guidance for? The guidance is specifically addressed to entities engaged in the maritime industry as well as the energy and metals sectors. The deceptive shipping practices discussed create significant sanctions risks for companies and individuals working in those sectors.
The advisory offers compliance recommendations to mitigate this sanctions risk, with guidance tailored to a variety of functions operating in these sectors, including maritime insurance companies; flag registry managers; port state control authorities; regional and global commodity trading, supplier, and brokering companies; shipping industry associations; financial institutions; ship owners, operators, and charterers; classification societies; crewing companies; and vessel captains.
What are deceptive shipping practices? The advisory identifies several tactics used by illicit actors to evade sanctions, facilitate smuggling and terrorist activities, and engage in the proliferation of weapons of mass destruction. Those tactics frequently consist of disabling or manipulating the Automatic Identification System (AIS) on vessels; physically altering vessel identifiers; falsifying cargo and vessel documents; making ship-to-ship transfers (STS) (especially at night or in high-risk areas); voyage irregularities (e.g., indirect routing, unscheduled detours, transit/transshipment through third countries); using false flags and flag hopping (frequently changing flag states); and adopting corporate structures that disguise beneficial ownership.
How are these practices used to evade sanctions? North Korea, Iran, and Syria use deceptive shipping practices in different ways to facilitate the illicit export and import of goods and to finance terrorist organizations. For example, North Korea uses deceptive shipping practices to facilitate export of its embargoed products as well as prohibited imports, including illicit STS transfers and barges that do not transmit AIS signals, to transport goods to China. Iran maintains a global network that uses deceptive shipping techniques to facilitate illicit transactions, particularly in the petroleum shipping industry. To evade U.S. sanctions, actors, including Iran’s Islamic Revolutionary Guard Corps Quds Force (IRGC-QF), alter documents to obfuscate origin, destination, and recipient information related to oil shipments. Payment derived from illicit oil shipments is used to finance Hezbollah and IRGC-QF. Iran and Russia have used deceptive shipping techniques to provide the Syrian regime with goods in violation of sanctions.
The advisory to the maritime shipping community is one of a number of recent actions this year indicating increased OFAC focus on sanctions evasion in the shipping industry. On June 8, 2020, sanctions designations targeting two Iranian shipping companies went into effect. In December 2019, the U.S. government designated the Islamic Republic of Iran Shipping Lines (IRISL) and its subsidiary, E-Sail Shipping Company, Ltd, but postponed the effective date for six months to allow companies legally doing business with Iran for humanitarian purposes to find alternative shipping companies. According to the Department of State IRISL facilitated the transport of items related to Iran’s ballistic missile and military programs.
On June 2, 2020, OFAC designated four companies involved in shipping Iranian oil to Venezuela in violation of U.S. sanctions. OFAC’s action blocked any property or assets the companies might have in the United States and restricted them from any business transactions with U.S. companies or persons, including others involved in the shipping industry. These designations follow a May 28, 2020, action involving two Greek-owned, Liberian-flagged vessels. Those ships changed direction away from Venezuela after being informed they faced sanctions if they continued toward their destination. According to news reports, U.S. officials stated that if the vessels had continued, their owners would have been denied access to insurance and international banking systems, effectively putting them out of business.
Earlier this year, Eagle Shipping negotiated a settlement with OFAC over several apparent sanctions violations involving transport of sea sand from Burma to Singapore. Eagle Shipping ultimately agreed to pay $1.125 million to settle its potential civil liability for the violations. One of the mitigating factors OFAC considered in this case was that Eagle Shipping significantly enhanced its compliance program to include appointing a compliance officer and a formal sanctions compliance program with procedures for screening parties, employee training, transaction checklists, and red-flag identification tools.
The Eagle Shipping settlement and the later actions targeting the ships bound for Venezuela reflect increasing OFAC sanctions enforcement against maritime shipping and related businesses as well as the severe consequences of violations. These cases also illustrate the importance of establishing an effective sanctions compliance program to mitigate risk.
Recommendations to minimize risk. The OFAC advisory provides tailored guidance relevant to certain businesses associated with maritime shipping. It also offers several general practices to help identify these deceptive practices and minimize risk of sanctions violations. For instance, actors in the maritime shipping industry should institutionalize sanctions compliance programs. These programs need to include sufficient due diligence and demonstrate that the company knows its customers and counterparties (including documenting identifying information on beneficial owners).
The guidance also urges everyone involved in maritime shipping to establish common best practices, such as developing requirements to minimize opportunities to manipulate or disrupt AIS data. This might include researching a ship’s history to identify previous AIS manipulation or instances where AIS was disabled while cargo was in transit. OFAC further recommends these practices be incorporated into contractual requirements where possible.
OFAC recommends continuous monitoring of ships throughout their life cycle, including periodic identification and tracking as well as verification of ships’ identifying information and flags. Owners and companies working in the industry should disseminate information wherever possible regarding suspected deceptive tactics in order to raise awareness among their colleagues.
Exporters and others involved in the maritime supply chain also need to conduct adequate due diligence to ensure that recipients of counterparties are not dealing in sanctioned commodities. This due diligence should include a review of the voyage details, confirmation of applicable export licenses, and verification of origin and recipient of goods.
Notably, while these recommendations emphasize increased due diligence, they go further by encouraging the industry to work together to develop consistent standards and share information to develop enhanced awareness and more-effective mitigation techniques. While OFAC is not prescribing companies adopt all of these recommendations, and encourages companies to engage a risk-based approach to sanctions, in the event of a violation, OFAC likely will consider the extent to which a company incorporated these recommendations when it conducts its penalty assessment.
The issuance of the advisory combined with the recent enforcement actions reflect OFAC and the U.S. government’s growing focus on the use of maritime shipping to evade sanctions and could be interpreted as a shot across the industry’s bow. While all companies have varying capabilities unique to their business and limited resources to apply to compliance, entities working in maritime shipping should pay close attention and where possible consider adopting the recommendations in the advisory. In the event of an inadvertent violation, OFAC considers a company’s compliance procedures as a possible mitigating factor–addressing the recommendations in the latest advisory could go a long way toward minimizing a company’s risk and ultimate liability.
Reprinted with permission from the June 9, 2020, issue of the American Journal of Transportation. © 2020 American Journal of Transportation. All Rights Reserved. Further duplication without permission is prohibited.Click here to view the full article