Compliance on the High Seas: Dissecting OFAC’s Maritime Shipping Advisories To-Date

February 22, 2020
By: Benoit Beaulieu, ACSS Reporter

In accordance with sanction regimes targeting Syria’s Assad regime, North Korea, and Iran, maritime shipping has been a point of focus for sanctions authorities and those operating within their jurisdiction. This focus was prompted by the U.S. Treasury Department’s Office of Foreign Asset Controls (OFAC) issuing an advisory in 2018. OFAC has since updated this advisory in 2019 and issued another, related advisory, in 2020.

While these advisories are not legally binding, they include lists of vessels, some of which are included in OFAC’s Specially Designated Nationals (SDN) list – leaving the others in legal ambiguity. Consequently, these advisories have had tangible ramifications and have created a precedent for other sanctions authorities to follow.

With much to discuss and analyze since publication, ACSS takes a look back to determine the impact of OFAC’s original advisory and those that followed. Specifically, the impact on the parties involved with petroleum shipments to Syria as well as the influence on sanctions compliance in the global maritime shipping industry in general.

The 2018 Maritime Shipping Advisory

In November 2018, OFAC issued an “Advisory to the Maritime Petroleum Shipping Community” (the 2018 Advisory) to highlight a number of sanctions risks relating to petroleum shipments to Syria. The U.S. government’s Syrian sanctions regime has been in place since 2011 and prohibits U.S. persons from engaging in any transaction involving the Government of Syria, including any dealings in or related to the country’s petroleum or petroleum products industry.

Directed toward a broad range of entities involved in the maritime shipping sector, including insurers, shipping companies, financial institutions, vessel owners, and operators, this 2018 Advisory provided a non-exhaustive list of 35 foreign-owned vessels that delivered oil to Syria from 2016 to 2018.  The names, flags, owner countries, and current sanctions status of these vessels are detailed below.

Five of the vessels listed in the 2018 Advisory have been added to OFAC’s SDN list:

The Golden Sea and the Maestro (formerly named “Blue Way” and “Green Light”, respectively), had already been blocked as SDNs in September 2015 pursuant to the designation of their owner, Milenyum Energy S.A. According to the U.S. Treasury Department, Milenyum (Turkish firm registered in Panama) had employed these two vessels to regularly supply the Assad regime with petroleum products in violation of OFAC’s Syria Sanctions Program.  The Maestro sank in the Black Sea in January 2019.

The Volga, formerly known as the Marshal Zhukov, was also identified as property of a blocked person prior to the publication of the 2018 Advisory. The ship’s owner and manager, Russia-based Trans Flot was designated in 2016 facilitating fuel shipments to Crimea in violation of the U.S. government’s Ukraine and Russia sanctions program.

Crude oil tankers, the Rise Dignity and the Rise Glory, were identified as property of blocked persons pursuant to the addition of their owner, India-based Mehdi Group, to OFAC’s SDN list in September 2019. Mehdi Group and its subsidiaries reportedly facilitated shipments of Iranian oil to Syria on behalf of the Islamic Revolutionary Guard Corps-Quds Force and its proxy, Hizballah – both of which are designated as Foreign Terrorist Organizations by the U.S. government.

The Yaz, a tanker owned and operated by Russian shipping firm Transpetrochart Ltd., was added to OFAC’s SDN list in September 2019 after it was caught providing jet fuel to the Assad regime. Transpetrochart has been sanctioned under OFAC’s Ukraine and Russia Sanctions Program since 2016. Yaz continues to sail under the same name and Transpetrochart is still listed as the vessel’s owner and manager.

In addition, the owner and manager of the Senna 8, Lebanon-based Nasco Polymers & Chemicals, was designated under OFAC’s Syria Sanctions Program in 2018 for facilitating shipments to Syrian ports.  The Senna 8, however, has not been added to OFAC’s SDN list.

Other notable characteristics of this list of ships:

• 10 out of 35 vessels listed in the 2018 Advisory’s annex are registered under either Iranian or Russian flags. This signals that OFAC is purposefully singling out both governments. Non-U.S. persons that knowingly own, operate, control, or insure a vessel that transports crude oil from Iran to Syria may also be subject to secondary sanctions under Iran sanctions.
• A majority of remaining vessels are registered as either Panamanian, Liberian, Mongolian, or Tanzanian. This assortment of countries (particularly land-locked Mongolia) may appear rather odd at first glance, but it is actually quite common for ships to sail under these “flags of convenience” (FOC) for tax purposes.

A vessel flying a FOC is one that flies the flag of a country other than the country of ownership. A foreign owned vessel looking to fly another flag must first register with the corresponding country. This is made possible via open registries. A list of countries labeled as FOC can be found here. Other states not labeled as FOC have registries that shipping companies can take advantage of as well. For example, Russia has six shipping registries, including the Russian Open Register of Ships (RORS), that foreign firms can access and subsequently fly a Russian flag.

It’s worth overstating that registry does not equate to ownership. It’s not uncommon for a vessel to be owned by a shell company and registered under a FOC, making it incredibly difficult for stakeholders to assess any sanctions risks involved.

‘Pseudo-Designations’ within the Maritime Shipping Industry 

OFAC’s decision to append this list of vessels to the 2018 Advisory has created some confusion for sanctions professionals and compliance officers alike.

ACSS spoke with Andrew Wragg, Global Head of Sanctions and Financial Crime at AXA XL, who highlighted the compliance challenges that arose from the 2018 Advisory’s annex.

First, from a risk perspective, the 2018 Advisory has been seen by some in the market as having effectively issued pseudo-designations for activity that was not definitively sanctionable. Although the 2018 Advisory states that inclusion of a vessel in its annex “does not constitute a determination by OFAC that the vessel has been identified as property in which a blocked person has an interest”, the parallel inclusion of previously sanctioned vessels and vessels owned by blocked entities perhaps sent a conflicting message. It appeared to confer a special degree of risk upon the entire list of vessels without fully clarifying whether firms should continue to conduct business with such suspect entities.

Second, the 2018 Advisory’s Annex is a permanent record of suspicious activity, even if parties linked to these vessels improve sanctions compliance practices and cease petroleum shipments to Syria. As Mr. Wragg noted, “in contrast to a formal designation or enforcement action, there isn’t an obvious way for vessels to come off this list because inclusion was not an explicit indication of illicit activity in the first place. This was perceived to be somewhat unfair across the maritime shipping community.”

Mr. Wragg surmised that the Annex to this 2018 Advisory was likely an attempt by OFAC to test out a new, tougher approach to encouraging stronger sanctions compliance practices across the global maritime shipping industry.

Common Deceptive Practices in the Maritime Shipping Sector

Beyond its Annex, the 2018 Advisory issued guidance that is largely consistent with measures recommended by OFAC in other shipping-related advisories.  This guidance highlights several deceptive shipping practices that persons in the petroleum shipping industry have employed to circumvent sanctions.

These practices include:

Falsifying Cargo and Vessel Documents 

Complete and accurate shipping documentation (i.e. bills of lading, certificates of origin, invoices, packing lists, proof of insurance, and lists of last ports of call) is critical to ensuring all parties to a transaction understand the persons, cargo, and vessels involved in a given shipment. Shipping firms and operators have been known to falsify vessel and cargo documents to obscure the destination and/or content of sanctioned shipments.

Ship to Ship (STS) Transfers

This is a method of transferring cargo from one ship to another while at sea rather than while located in port. STS transfers can conceal the origin or destination of cargo.

Disabling Automatic Identification System (AIS)

AIS is a collision avoidance system, which transmits a vessel’s identification and selects navigational and positional data. Ships meeting certain tonnage thresholds and engaged in international voyages are required to carry and operate this system. In order to conceal the destination of contraband or sanctioned cargo, vessels have been known to intentionally disable their AIS transponders to mask their movements.

The 2019 Maritime Shipping Advisory

In March 2019, OFAC issued an updated version of the 2018 Advisory called ‘Advisory to the Maritime Petroleum Shipping Community’ (2019 Advisory). This document reiterates many of the risks and recommendations laid out in the 2018 Advisory, while adding further guidance and concerns relating to petroleum shipments of Iranian origin. It also includes an annex listing dozens of new vessels involved in suspected illicit oil shipments, including sixteen additional vessels that delivered oil to Syria and another thirty that engaged in ship-to-ship transfers.

Non-Exhaustive List of Vessels That Delivered Oil to Syria 2016-2018 (March 2019 Advisory)

⁵ Formerly ALTERA 1
⁶ Formerly ALMETYEVSK
⁷ Formerly ARAMIS
⁸ Formerly VENICE
⁹ Formerly DISTYA AKULA
¹⁰ Formerly G MUSE
¹¹ Formerly GEMINI
¹² Formerly GITTA GAS
¹³ Formerly GVENOUR
¹⁴ Formerly MEDIATOR
¹⁵ Formerly MOTIVATOR
¹⁶ Formerly IRIS GAS
¹⁷ Formerly ODYN GAS
¹⁸ Formerly RISE DIGNITY
¹⁹ Formerly RISE GLORY
²⁰ Formerly BUKHARA
²¹ Formerly MUKHALATKA
²² Formerly MARSHAL ZHUKOV

Notably, this updated vessel list names all of the ships that had been included in the 2018 Advisory annex.

Of the ships listed, a few have made recent headlines, with some no longer operable. For example, the Candy (formerly the Venice) was scrapped in early 2019, along with the previously referenced Maestro. The Tour 2 and Rawan have run aground, while the Sea Shark has been seized by Egyptian authorities.

Other vessels not listed in the 2019 Advisory have been targeted by OFAC. Most notably, the Grace 1¸ originally seized by Gibraltar, was transferred to U.S. authorities this past summer, in addition to the U.S. Justice Department seizing four vessels suspected of engaging in ship-to-ship transfers of Iranian gasoline intended to reach Venezuela.

While it’s clear that OFAC’s enforcement has increased, vessels continue to mask their actions and violate U.S. sanctions using complex tactics. Since the 2019 Advisory update twelve Iranian tankers have been caught violating U.S. sanctions, including the Devrez and Sinopa. In August, another sixteen ships breached sanctions after they were found to have manipulated their AIS data (rather than turning off transponders) and engaged in ship-to-ship transfers of Iranian oil. Some vessels are more blatant in their attempts. For example, last December, an Iranian flagged tanker, the Honey (formerly the Horse), was caught loading Venezuelan crude oil after being caught offloading a week earlier.

While violations continue to occur since the 2019 Advisory was issued, registries are increasing their compliance efforts and have de-flagged a number of vessels, including the Sobar, which previously sailed under the Panamanian flag. Moreover, with the 2019 Advisory effectively alienating 3% of oil tankers, freight rates have surged, indicating that firms have actively sought to abide by OFAC guidance. OFAC has since provided market relief by issuing a general license for oil traders conducting business with Cosco Shipping Tanker – China’s largest shipping company.

OFAC’s Broader Aim

Despite their unmistakable focus on petroleum shipping and Syrian sanctions, both the 2018 Advisory and the 2019 updated version are perhaps best understood as part of a broader effort by OFAC to raise substandard sanctions compliance practices across the global maritime shipping industry.

Since January 2018, OFAC has issued three other advisory notes to the maritime industry, regarding North Korea (February 2018 Advisory and March 2019 Advisory) and Iran (September 2019 Advisory).

Additionally, in May 2020, OFAC published a 35-page Sanctions Advisory for the Maritime Industry, Energy and Metals Sector, and Related Communities (2020 Advisory). This document released new guidance and compliance expectations not only for U.S. entities involved in the international trade and movement of cargo, but also foreign persons. This advisory specifically recommends foreign persons that “conduct transactions with or involving the United States or U.S. persons” to develop risk-based compliance programs designed to detect and mitigate risk of exposure to U.S.-sanctioned parties and jurisdictions.

Concerning their Syrian sanctions regime specifically, OFAC has recently designated another two individuals, nine business entities, and the Central Bank of Syria.

In combination with industry-related enforcement actions, these maritime shipping advisories reflect a carrot-and-stick model of cooperation with the private sector – alternating prescriptive guidance with new, heightened compliance expectations and, as in the case of the 2018 Syria petroleum shipment advisory, regional sanctions risk alerts.

Again, it’s worth emphasizing that these sanction advisories are not legally binding and do not set forth requirements based in U.S. law. They do, however, foreshadow that international shipping is and will continue to be a focal point of U.S. sanctions implementation and enforcement.

Other Maritime Advisories

As previously alluded to, the advisories and guidance that OFAC has issued over the past three years have prompted other states to follow the U.S.’ lead, while others have at the very least adjusted their shipping practices and improve the surveillance of their waters.

Following the guidance that OFAC published last May, the U.K.’s Office of Financial Sanctions Implementation (OFSI) issued guidance of its own in July. The guidance is largely in line with OFAC’s, with additional commentary on deceptive practices related to cyberattacks and cryptocurrencies. Guidance related to the U.K. regime against North Korea, Libya, Syria, and Iran, is also included. As a global insurance hub, OFSI’s guidance was certainly in need, especially ahead of the Brexit transition period deadline.

Indonesia is an exemplary case of a state that has actively sought to improve its shipping practices since OFAC’s advisory, specifically with regard to improved monitoring of its seaboard. Most recently, Indonesian authorities seized two supertankers on the grounds of barring passage close to one of its three shipping lanes. The Panama-flagged MT Frea and the Iranian MT Horse – a vessel that had been listed in OFAC’s 2019 advisory – had been caught engaging in ship-to-ship transfers of sanctioned Iranian crude oil. Both vessels had turned off their AIS transponders and had covered their names. At the time of writing, it is unclear what the next course of action Indonesian authorities will take, since the U.S. regime falls outside of its jurisdiction.

Lastly, and perhaps most surprisingly, OFAC has authorized U.S. companies to engage with Venezuela’s maritime authority (INEA), if needed, to access other South American ports – only after having designated INEA two weeks earlier. The port authority was blacklisted by OFAC alongside other maritime authorities it says was involved in facilitating the transport sanctioned Venezuelan crude oil. OFAC justified this move, stating that it “calibrates” the U.S. regime by still targeting the Maduro government and its enablers, while lightening adverse consequences on port activity.

Despite there being a strikingly new tone and creed in the White House, it’s likely that OFAC’s maritime sanctions policy will remain consistent with what’s been implemented over the past four years. With states, aligning their own sanctions regimes with OFAC’s guidance, and others paying closer attention to deceptive shipping practices in its waters, it’s clear that OFAC has set a tone that most members of the international community seem to be, and will continue to, comply with.