In a much-anticipated and far-reaching action, on May 14, 2020, the U.S. Department of State, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), and the U.S. Coast Guard issued an advisory (the “Advisory”) providing parties engaged in the maritime industry and those active in the energy and metals sectors with information and recommendations to counter current and emerging trends regarding illicit shipping and sanctions evasion, with a focus on Iran, North Korea, and Syria. The Advisory, which has been in the works for months, includes information on deceptive practices used to evade sanctions and general best practices for policies and procedures to counteract such schemes. The Advisory impacts virtually all of the major actors within the maritime industry—flag registries, insurance companies, ship owners, port and terminal operators, managers, and charter companies, etc.—which all are expected to play an active role in ensuring transactions they are involved in are not financing terrorism or violating U.S. sanctions. As the maritime industry is aware, the issuance of the Advisory comes at a time when the Trump administration is ramping up sanctions enforcement on shipping and related sectors to support its national security and foreign policy objectives. For example, last year, the Trump administration blacklisted units of the Chinese state-owned shipping company COSCO Group and dozens of tankers for allegedly shipping Iranian oil in violation of U.S. sanctions and, in January, OFAC issued an enforcement action against a U.S.-based ship management company for violations of the former sanctions on Burma. The Advisory updates and expands on the North Korea-related shipping advisories OFAC issued on February 23, 2018, and March 21, 2019; the Iran-related shipping advisory OFAC issued on September 4, 2019; and the Syria-related shipping advisories OFAC issued on November 20, 2018, and March 25, 2019.
The following are a few key takeaways from the Advisory:
1. The U.S. government (“USG”) believes the maritime industry is a significant avenue for sanctions evasion. The Advisory continues a recent USG effort to more clearly and comprehensively communicate its expectations about appropriate sanctions compliance practices, this time regarding the increasingly important maritime industry. As highlighted in OFAC’s 2019 Framework for Compliance Commitments, the Advisory acknowledges that compliance programs are inherently risk-based and will vary depending on a number of factors, but should include the following: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training.
2. The Advisory provides specific guidance and best practices to the following actors within the maritime industry: maritime insurance companies; flag registries; port state control authorities; shipping industry associations; regional and global commodity trading, supplier, and brokering companies; financial institutions; ship owners, operators, and charterers; classification societies; vessel captains; and crewing companies. We strongly recommend, if your business falls within one of these categories, that you closely review the recommendations provided in the Advisory and conduct an internal review of your compliance program to ensure that it adequately addresses sanctions evasion schemes.
3. Industry reception to the Advisory seems to be a mild sigh of relief. While the Advisory suggests significant compliance obligations for entities that may not have viewed themselves as subject to such substantial burdens previously, such as classification societies and flag registries, the scope of the new compliance guidelines is more “balanced” than draft versions previously circulated to key players in the maritime industry. We’ve heard from industry officials that the industry will likely “learn to live” with the new compliance reality ushered in by the Advisory.
Draft versions of the guidance, circulated within the maritime industry over the course of the last several months, triggered significant concern among global maritime actors, who argued that the new compliance guidelines would unduly burden global trade with complex legal questions, as well as difficult-to-discern information-gathering requirements that are inconsistent with industry practice. The USG appeared to incorporate some industry feedback before issuing the final version of the Advisory, resulting in an advisory that appears more balanced than previous drafts. In any event, the MoFo National Security team concurs with the views of one key industry player with whom we spoke who indicated that the Advisory sends a clear message from the USG that companies operating in the maritime space need to significantly bolster their compliance programs and they need to do so now. The senior industry official views the Advisory as putting the maritime industry on “prior notice” of illicit evasion tactics, such that, in the event a violation were to occur involving the tactics, OFAC or other enforcement agencies would expect the violating company to have taken steps to address the previously announced risk based on the Advisory guidance.
Based on conversations in the past week since the Advisory was issued, we expect industry will probably adopt a “wait and see” approach to assess the Advisory’s impact, with an eye toward outreach to USG representatives should it turn out to be excessively burdensome on global trade. Of particular concern, according to one industry official, is the increased scope of the Advisory, which applies to entities that may not have had significant sanctions compliance obligations previously, such as classification societies and flag registries (as opposed to financial institutions, which have detailed sanctions compliance responsibilities). Additionally, the official warned that several of the provisions, such as Know Your Customer (“KYC”) requirements and beneficial ownership diligence requirements, if taken to their extreme, could become unduly burdensome, especially to smaller actors within the industry.
The Advisory notes that approximately 90 percent of global trade involves maritime transportation. Given the pervasiveness of maritime trade, it is no surprise it is frequently used for malign activities. The Advisory highlights the following tactics malign actors utilize to facilitate sanctionable or prohibited maritime trade linked to Iran, North Korea, and Syria:
AIS is an internationally mandated system that transmits a vessel’s identification and location data. The practice of manipulating AIS data, referred to as “spoofing,” allows ships to broadcast a different name, International Maritime Organization (“IMO”) number (a unique, seven-digit vessel identification code), Maritime Mobile Service Identity, or other identifying information.
Many passenger and cargo ships are required to display their name and IMO number in a visible location on the vessel’s hull or superstructure. Vessels involved in illicit activities have often painted over vessel names and IMO numbers to obscure their identities and pass themselves off as different vessels.
Bills of lading, certificates of origin, invoices, packing lists, proof of insurance, and lists of last ports of call are examples of documentation that typically accompany a shipping transaction. The USG has found that sanctions evaders falsify shipping documentation pertaining, in particular, to petrochemicals, petroleum, petroleum products, metals, and other products in order to disguise their origin.
While the transfer of cargo between ships at sea can be conducted for legitimate purposes, STS transfers—especially at night or in areas determined to be high-risk for sanctions evasion or other illicit activity—are frequently used to evade sanctions by concealing the origin or destination of surreptitiously transferred petroleum, coal, and other material.
Malign actors may attempt to disguise the ultimate destination or origin of cargo or recipients by using indirect routing, unscheduled detours, or transit or transshipment of cargo through third countries.
Bad actors may falsify the flag of their vessels to mask illicit trade. They may also repeatedly register under new flags to avoid detection.
Global shipping is inherently complex and involves multiple interactions with both government and private sector entities. Bad actors attempt to take advantage of this complexity through the use of complex business structures, including those involving shell companies and/or multiple levels of ownership and management, to disguise the ultimate beneficial owner of cargo or commodities in order to avoid sanctions or other enforcement action, among other reasons.
The Advisory recommends that businesses continually adopt updated and effective practices to address red flags and other anomalies that may indicate illicit or sanctionable behavior. The Advisory encourages at-risk companies to incorporate the specific practices summarized below (and discussed in greater detail in the Advisory) into their compliance programs to effectively identify potential sanctions evasion schemes:
The Advisory recommends that private sector entities assess their sanctions risk, implement sanctions compliance and due diligence programs, and provide sanctions compliance training and resources to their personnel. The Advisory also recommends that companies consider communicating with their counterparties, partners, subsidiaries, and affiliates to articulate their compliance expectations.
Those operating in the maritime industry may wish to consider, based on their individual risk assessments, whether to research a ship’s history to identify previous AIS manipulation and monitor AIS manipulation and disablement when cargo is in transit.
As appropriate, and consistent with their risk assessments, ship owners, managers, and charter companies are encouraged to continuously monitor vessels, including those leased to third parties. This could include supplementing AIS with Long Range Identification and Tracking (“LRIT”) and receiving periodic LRIT signals on a frequency informed by the entity’s risk assessment.
This due diligence might include maintaining the names, passport ID numbers, addresses, phone numbers, email addresses, and copies of photo identification of each customer’s beneficial owners.
The Advisory encourages parties to conduct appropriate due diligence to ensure that recipients and counterparties to a transaction are not engaging in sanctionable activities, such as by shipping Iranian petroleum or North Korean coal. They also should consider implementing controls that allow for verification-of-origin and recipient checks for ships that conduct STS transfers, particularly in high-risk areas.
Members of the industry are encouraged to incorporate these best practices in contracts related to their commercial trade, financial, and other business relationships in the maritime industry.
The Department of State, OFAC, and the U.S. Coast Guard recommend that industry groups encourage members to provide relevant information and share it broadly with partners, other members, and colleagues consistent with applicable laws and regulations.
In addition to the general best practices detailed above, the Advisory also provides specific guidance and best practices to the following actors within the maritime industry: maritime insurance companies; flag registry managers; port state control authorities; shipping industry associations; regional and global commodity trading, supplier, and brokering companies; financial institutions; ship owners, operators, and charterers; classification societies; vessel captains; and crewing companies. We strongly recommend that, if your business falls within one of these categories, you closely review the recommendations provided in the Advisory and conduct an internal review of your compliance program to ensure that it adequately addresses sanctions evasion schemes. We provide a few key highlights for each category below:
If you are unsure of your company’s exposure to sanctions issues related to the maritime industry, in particular relating to Iran, North Korea, or Syria, or have questions as to how this new guidance could affect your business, please reach out to our MoFo National Security team for help. We stand ready to assist.