On May 14, 2020, the US Department of State, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), and the US Coast Guard issued guidance to the private sector aimed at preventing deceptive shipping practices used in sanctions evasion, smuggling, facilitation of terrorism, and other criminal activity (the “Advisory”). The Advisory focuses on tactics recently used by malign actors to evade sanctions and sets out a non-exhaustive list of best practices companies may wish to adopt to identify and prevent sanctions violations before they happen. Described as a consolidated and updated iteration of advisories previously issued regarding shipping-related evasion of sanctions targeting Iran, North Korea, and Syria, the Advisory is not limited by territory. (The previous advisories remain on OFAC’s website for those country-specific sanctions programs.)
The Advisory does not place any legal requirements on companies. Consistent with OFAC’s Framework for Compliance Commitments (“OFAC Framework”) that instructs companies to implement risk-based sanctions compliance program tailored to their particular operations, the Advisory alerts certain businesses to heightened risks in the supply chains of crude oil, refined petroleum, petrochemicals, steel, iron, aluminum, copper, sand, and coal, so that they can enhance their compliance processes and procedures as appropriate. The challenge for market players is that many of the practices identified as red flags are often entirely legitimate maritime activities, but they have been identified as open to abuse by bad actors. The Advisory affects everyone involved in the maritime industry, including ship owners, managers, operators, brokers, ship chandlers, Flag Registries, port operators, shipping companies, freight forwarders, Class Societies, commodity traders, insurance companies, and financial institutions. It also contains sector-specific guidance for ten categories of market players.
In addition to sanctions compliance programs based on the OFAC Framework (link provided above), the Advisory recommends certain best practices to detect deceptive shipping practices and potential sanctions evasion, including but not limited to the following:
- Automatic Identification System (“AIS”) due diligence: AIS transmits a vessel’s identification and navigational positional data, and generally Flag States require AIS to be operational save in very limited circumstances regarding safety or security. To hide their movements around sanctioned countries or vessels, certain bad actors might temporarily disable a vessel’s AIS transponders (“go dark”) or manipulate the data they transmit. The Advisory suggests that companies may wish to conduct due diligence regarding a vessel’s history of potential AIS transponder manipulation before entering into contracts with vessels that operate in high-risk areas. There are limits to AIS tracking in its current form, and the International Group of P&I Clubs has produced helpful guidance on those limits and how they will be monitoring the ships they insure going forward.
- Due diligence prior to ship-to-ship transfers (“STS”): STS are common and often entirely legitimate maritime activities. However, as a favored tactic of those seeking to evade sanctions by concealing the origin of a cargo, they pose additional risks and a higher level of duly diligence is recommended. The Advisory suggests that vessel operators involved in STS might consider verifying the other vessel’s name, IMO number, and flag, and checking that it is currently broadcasting AIS. Given the extensive planning that legitimate STS operations require to mitigate environmental risks and to comply with the International Convention for the Prevention of Pollution from Ships, the need to know the counterparty is unlikely to be anything new.
- Long Range Identification and Tracking (“LRIT”): Ship owners, managers, charterers, and port authorities may decide to monitor the movements of vessels operating in high-risk areas, including vessels chartered to third parties, using LRIT.
- Vessel ownership due diligence: The Advisory does not change the existing risk-based due diligence regime. However, it specifically suggests that flag registry administrations, insurers, financial institutions, managers, and charterers might extent this due diligence to include maintaining the names, passport ID numbers, address(es), phone number(s), email address(es), and copies of photo identification of each vessel’s ultimate beneficial owner(s). Due diligence regarding prior transfers of ships between companies controlled by the same beneficial owner is also recommended, as without legitimate purpose this is perceived as a red flag.
- Supply chain due diligence: According to the Advisory, exporters should consider implementing controls to verify that commodities involved in a transaction do not originate from or transit through sanctioned countries, especially when ships that conduct STS transfers are involved. Exporters should consider reviewing shipping documentation including the paper trail of all bills of lading to confirm the chain of custody, and the origin and destination of cargo.
- Contractual requirements: Companies may consider adding contractual language in maritime-related contracts to implement certain compliance measures discussed above. In particular, with regard to AIS, companies might add language to (i) make disabling or manipulating AIS, other than for safety or certain legitimate reasons, grounds for investigation and/or contract termination and (ii) prohibit the transfer of cargo to vessels that are not transmitting AIS or that have a spotty AIS history.
Those in the following sectors are encouraged to consult the specific due diligence recommendations provided for each in Annex A of the Advisory:
- 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.
Annex B of the Advisory includes summaries of US sanctions relevant to the maritime industry with respect to North Korea, Iran, and Syria.