On December 11, 2023, the US Departments of Commerce, the Treasury, Justice, State, and Homeland Security issued a “Quint-Seal” Compliance Note titled Know Your Cargo: Reinforcing Best Practices to Ensure the Safe and Compliant Transport of Goods in Maritime and Other Forms of Transportation (“Note”).
The Note is directed at the maritime and other transportation industries—including transportation companies, maintenance companies, insurance providers, financial institutions, and “other entities involved in funding and facilitating the transport of cargo”—and provides red flag indicators of sanctions and export controls evasion relevant to such industries, a list of best trade compliance practices, and examples of criminal and civil enforcement actions involving such industries. The Note also calls on various types of individuals and entities involved in the global transport of goods to assess their risk profiles and implement risk-based compliance programs, including vessel owners, charterers, exporters, brokers, shipping companies, freight forwarders, commodities traders, and financial institutions.
The Note is not tied to any particular sanctions program (e.g., Russia sanctions) but rather focuses on evasion generally and the potential consequences of a failure to detect it. Similar to the previous “Tri-Seal” notes on Russia-related sanctions and export controls evasion and voluntary self-disclosures, the Note does not necessarily reflect changes in the law but may shed light on US government priorities with respect to investigating and enforcing sanctions and export controls and could reflect an expectation that companies involved in the transportation industry could play a role in helping identify evasion efforts.
The Note begins by identifying and describing various tactics that may be used alone or in combination to evade US sanctions and export controls, including:
- Manipulating data related to carrier location or identification, including by disabling or manipulating the internationally mandated Automatic Identification System (“AIS”) used to track vessels at sea;
- Falsifying cargo and vessel documents, such as bills of lading, certificates of origin, invoices, packing lists, proofs of insurance, and lists of ports of call;
- Ship-to-ship transfers at night or in high-risk areas;
- Voyage irregularities and abnormal shipping routes without legitimate reason intended to disguise the origin or destination of cargo, such as indirect routing, unscheduled detours, and transit or transshipment through third countries;
- Frequently changing the same vessel’s registration to a different country’s flag; and
- Complex ownership or management structures to disguise the ultimate beneficial owner of the cargo, the end user, or other entities involved in the shipping process.
To combat such practices, the Note advises adopting compliance practices such as:
- Implementing written, standardized, risk-based compliance policies, procedures, standards of conduct, and safeguards, which may include communicating an expectation to counterparties that they too ensure they have such compliance policies in place;
- Conducting due diligence on the location history of vessels, vehicles, and aircraft and encourage continuous broadcasting of location data by counterparties;
- Incorporating contract language prohibiting dealings restricted under US laws or regulations, where appropriate;
- Screening transaction parties against restricted lists and otherwise conducting risk-based due diligence on counterparties;
- Requesting and reviewing copies of licenses and complete, accurate shipping documentation, and conducting independent research to ensure cargo was delivered to the destination identified in the documentation; and
- Sharing information on challenges, threats, and risk-mitigation measures via industry groups and reporting red flags to relevant US authorities for investigation.
The latter half of the Note describes the enforcement roles played by the US Department of Justice (“DOJ”), the Bureau of Industry and Security (“BIS”), the Office of Foreign Assets Control (“OFAC”), and the Directorate of Defense Trade Controls, including various criminal and civil enforcement actions they have brought against US and non-US persons involved in shipments of cargo made in violation of US sanctions and/or export controls. The penalties and remedies for such enforcement actions can include imprisonment, criminal and civil monetary fines, civil forfeiture, and deferred prosecution agreements/settlement agreements. In addition, BIS and OFAC have a number of non-enforcement measures they can take to restrict US and non-US persons’ activities with non-US parties outside their jurisdictional reach, such as denial of export privileges and imposition of sanctions or export controls (e.g., designation as a Specially Designated National (“SDN”) or to the Entity List).
The Note goes on to provide links to previous guidance issued by these agencies—including BIS’s Freight Forwarder Guidance, which is slated to be updated soon—as well as examples of recent criminal and civil enforcement actions taken in response to alleged sanctions and export controls violations, including:
- On September 8, 2023, DOJ announced a criminal corporate resolution against a charterer of a crude oil tanker that carried Iranian oil and a separate deferred prosecution agreement with another company that managed the operations of the vessel while it took on and transported that oil. Both defendants were non-US companies accused of violating US sanctions by causing US financial institutions to process US dollar-denominated transactions on behalf of the Iranian Revolutionary Guard Corps (“IRGC”) and the IRGC Quds Force, both of which have been designated as SDNs and Specially Designated Global Terrorists. The charterer pleaded guilty and was sentenced to three years of corporate probation and a fine of nearly US $2.5 million. Under the deferred prosecution agreement, the operations manager company agreed to transport the oil to the United States at its own expense where the Iranian oil (nearly 1 million barrels) is now the subject of a civil forfeiture action by DOJ. The Note describes the deceptive tactics used to disguise the Iranian oil cargo, including fabricating shipping records and vessel logs, engaging in an unreported ship-to-ship transfer, spoofing AIS transponder information to broadcast a false location while loading oil, and more. The Note also describes earlier civil forfeiture actions brought by DOJ related to shipments of Iranian oil to Venezuela and similar tactics used in those cases.
- In 2018, BIS imposed a civil penalty against a logistics company for unauthorized exports to entities in China and Russia that were on the Entity List. Although the logistics company was the freight forwarder acting on behalf of the principal parties in interest, evidence indicated that the logistics company ignored or overrode red flags on multiple occasions. BIS determined that the company had “self-blinded,” willfully ignoring or misusing information indicating potential problems with the shipments.
- In 2019 and 2022, OFAC imposed civil monetary penalties of US $871,837 and $6,131,855, respectively, in connection with shipping and logistics companies. The 2019 case involved a US-based shipping company that had allowed its Turkish and Chinese subsidiaries’ transactions involving blocked Iranian vessels to go forward despite knowing that banks had rejected multiple payments related to the vessels. The 2022 case involved an Australia-based freight forwarding and logistics company causing US banks to process transactions involving sanctioned jurisdictions (Iran, North Korea, Syria) and persons. These examples show the extraterritorial reach of US sanctions.
Although not specifically mentioned in the Note, OFAC has also recently targeted companies and vessels involved in the maritime transport of Russian-origin crude oil and petroleum products purchased at prices above the relevant price caps for such products imposed by the US and its allies (see recent designations here, here, and here). The Note does reference the October 2023 advisory issued by the Price Cap Coalition (Australia, Canada, the European Union, France, Germany, Italy, Japan, the United Kingdom, and the United States) as well as other previous guidance related to sanctions evasion and deceptive shipping practices (previously covered in our blogs here and here).