By David Williams, ACSS Editor
February 19, 2022
Rogue operators in shipping pose a flotilla of challenges for compliance officers. Banks, insurers and the wider financial community must validate customers, entities and parties who transact maritime business. They do this by constructing an intricate due diligence program that accounts for arcane shipping practices devised to obscure the identities of vessels, owners and cargo. If they fail to meet their legal obligations, they can be fined millions of dollars.
Governments’ regulations are onerous, and their advice, rules and recommendations place a large burden on financial institutions. The last advisories published in 2020 by the US Treasure of Foreign Assets Control (OFAC) and other agencies and the UK’s Office of Financial Sanctions (OFSI) announced that all entities across the maritime sector and related supply chains – traders, banks, brokers, flag registries, commodities dealers and the like – must improve their compliance programs to avoid breaches.
“Mentioned in the guidance is that efforts should be made to mitigate the risk of sanctions evasion practices,” says ACSS Executive Director Saskia Rietbroek. “For example, compliance officers must be on the alert for any tampering with automated identification systems [AIS] or for illicit ‘ship-to-ship’ transfers.”
Agencies Did Not Offer Much Practical Advice
Saskia says OFAC always stresses the importance of assessing risk when designing or updating a sanctions compliance program. “To assess the risk, you need to know where the risks are. But the advisories did not provide detailed practical advice.”
The identification of commodities and trade corridors where ship-to-ship transfers occur falls to insurers, bankers and others to determine. They must probe ships’ logs, check where the AIS technology tracked the vessels and whether dubious shipping patterns emerge after careful analysis.
Against this background of demanding compliance, yawning gaps in government advice and weak vessel registration laws, three principals servicing their maritime clients’ needs collaborated to research and write an informative white paper. Sanctions advisories for the maritime industry synthesizes the efforts of ACSS, maritime intelligence company IHS Markit and the Institute of International Banking Law and Practice (IIBLP) to produce after reviewing OFAC and OFSI advisories and consulting with service providers, consultants and thought leaders in shipping to identify overlapping concerns.
The final port of call was banks, shipping and intergovernmental organizations. After listening to their practical experiences, the researchers could help determine the extent that vessel-screening tools and procedures are needed.
“As well as desktop research, we also wanted to interview maritime professionals, bankers and other experts to find out how they were dealing with these topics in real life,” Saskia says. “We approached both larger and smaller banks to interview, plus many other organizations like maritime shipping companies to obtain information from different angles.”
Surprises Surface in Research
Byron McKinney, Director, IHS Markit, and Michael Byrne, CEO, IIBLP say some of the findings surprised them. “My preconceived idea was that the real-time tracking of a vessel would be a must for all banks, as it would give a good indication as to the ongoing compliance status of that ship,” Byron says.
Michael is quick to agree. “That was our assumption, but real-time tracking is only a part of the solution.”
Byron says that the institutions, in particular, “apply a holistic approach that looks at the vessel historically” to build a picture of suspicious activity. “Some elements of this historical check include lookbacks on port calls, offline AIS periods, changes to ownership and flag nationality.”
Michael adds that knowledge of vessels’ past activities is a good indicator of whether they are likely to conduct illicit trade. “Knowing the history helps you determine whether there is an actual problem or an incident is just random.”
Plans Are Underway to Issue Set of Guidelines
Sanctions advisories for the maritime industry provides a set of recommendations to help financial institutions of all sizes better manage their maritime obligations. Plans are underway by the working group that prepared the paper to issue a set of training guides to help financial institutions’ employees further their knowledge of the US and UK advisories. And the working group will continue to monitor shipping regulations, experiences and applications of new technology to update this paper and report the findings.
Commenting on the most pressing requirements to address, Byron points to “dark activity” – when vessels’ AIS tracking software is switched off. “Dark activity has become a major feature in regulatory guidelines. The use of this technique by sanctions evaders means that banks need to account for it in their compliance screening programs and understand that when the vessel is dark it could have made a port call or transferred cargo at sea to another vessel.
“This is one area that banks need assistance with, as dark periods can be too short to make port calls, for example. Which dark periods should be monitored and raised as a suspicious activity? Guidelines and recommendations in this area would be welcome from regulators,” Byron says.
Independent Guidance Now Fills the Gap
Knowing that much time can pass before regulators offer advice, Michael says the decision was taken for Sanctions advisories for the maritime industry to feature independent guidance. ”We took it upon ourselves to offer some guidance, based on curated information of what the experts say combined with what some banks are doing to comply,” Michael says.
“For those who think this happens only in dark, empty places – a Cargill-operated vessel almost crashed into two vessels doing a ship-to-ship transfer with their AIS dark. The Cargill vessel captain was barely able to avoid crashing,” Michael says. “Some of those vessels are as large as a city block and take a long time to steer and turn.”
Looking forward, Byron says the key to progress is standardization that utilizes the International Maritime Organization (IMO) number for vessel registration in trade finance documents. “Most banks and others rely on vessel names to identify a ship,” he says.
“Ships often use the same name and this can cause confusion when trying to identify the correct vessel for compliance screening. The IMO number would help solve this problem if it can be standardized across the bill of lading and other documents so that the industry begins to use the IMO as the default and not the ship name,” Byron says.
Michael nods his head. “It’s funny how little airtime this gets, but those on the ground doing vessel searches with free tools and just a vessel name might find themselves staring at a list of a dozen or more possible candidates. Knowing the IMO would end this problem.
SWIFT Urged to Include IMO or MMSI
“One interviewee practically begged us to push SWIFT [Society for Worldwide Interbank Financial Telecommunication] to include a required field in select message types asking for the IMO or MMSI [Maritime Mobile Service Identity] or both. That would ensure the IMO/MMSI information travels throughout the SWIFT network with LC [letter of credit], BL [bill of lading] and other documents,” Michael says.
While maritime sanctions rules will continue to present sticky problems, compliance officers, at last, have solid guidance to help avoid scuppering prospective deals and navigating a course for their companies. Adjudging risk has required specialist maritime information not readily available… until now.