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Solving Sanctions Compliance and Due Diligence in Maritime Trade

windward
The Iranian product tanker Fortune arrives in Venezuela with a sanctioned cargo, May 2020 (file image courtesy FANB)

By Ami Daniel 02-17-2021 06:37:00

After a rocky 2020, the global trade landscape is hardly shaping up to be a smooth one in 2021.

In 2020, the Office of Foreign Assets Control (OFAC) in the U.S. published its maritime compliance advisory in May and the Office of Financial Sanctions Implementation (OFSI) in the UK followed suit in June with its own maritime advisory. Both advisories require all companies in the maritime ecosystem to screen for vessel behaviors, and not just the vessel itself. However, it is now increasingly clear that basic blacklist screening methods for customer due diligence no longer suffice.

Due to these advisories and other regulations in 2020, we saw 58 vessels and 35 shipping-related companies blacklisted. But maritime stakeholders shouldn’t only be focusing on who is being sanctioned, but also why and where. While each of these acts of sanction may have been appropriate on their own terms, viewed in the aggregate, the crackdown is raising serious questions in relation to the ability to trade with confidence. Given this dynamic, a new way of approaching compliance, anti-money laundering (AML), and financial crime is required.

In a recent conversation with David Peyman, a former State Department official who created the department’s first economic sanctions targeting team, he drove home just how profoundly the sanctions landscape has shifted. From a regulatory perspective, Peyman told me, the maritime sector today is where the banking sector was before the introduction of AML and anti-secrecy laws, implying we can anticipate regulatory changes that will force actors to increase their compliance controls and due diligence procedures. The good news is that there are tools – including those based on AI – that allow these actors to not fall behind the ball.  

With a new U.S. administration, now is the time to take a step back to understand what we are seeing regarding sanctions and AML, and to chart the appropriate approach for 2021.

No longer black and white

According to Rick McDonell, Executive Director of the Association of Certified Anti-Money Laundering Specialists (ACAMS), “The digitization of financial services has greatly improved access and convenience for everyone, but it’s also opened the doors for more opportunity, diversity and complexity in terms of financial crime. For financial institutions and regulators, ensuring that compliance departments and officers are properly trained to detect financial crime, and empowered actually to do something about it, is paramount.” 

Recently, we’ve seen one of the largest AML cases ever in Hong Kong, which joins an IMF investigation in the Nordics and Baltics.

But with the new U.S. administration signaling their intention to reopen diplomatic negotiations with Iran, the outlook for sanctions is a complicated one. The days of black and white are over, and we are all left navigating a constant mix of shades of grey. It won’t be only about whether you can or can’t trade with a certain country. There will be a growing number of restrictions and provisions that will take compliance professionals an increasing amount of time to navigate as they seek to ensure their companies stay out of harm’s way.

The shipping industry’s unique challenges

On the shipping and trading side, the new compliance requirements enacted by the U.S. (OFAC) and the UK (OFSI) make it increasingly difficult for the average compliance professional.

Not only do AML, financial crime, and compliance professionals at banks and energy companies need to navigate ever-changing regulations and multiple relevant databases, now they also need to become experts in the complex maritime industry. Underscoring the scope of the challenge, recent reports indicate that there are multiple cases of vessels registered in different Pacific islands as a means to circumvent sanctions – a phenomenon that used to only exist in the law enforcement space, rather than being relevant for standard compliance and shipping professionals. 

In January 2021 alone we witnessed a surge of maritime related sanctions:

For the first time ever, after many warnings, we’ve seen a vessel and a company blacklisted by the U.S. over their involvement in the Russian-backed Nord Stream 2 pipeline project. The vessel Fortuna – a pipelaying vessel – could be just the first warning, with many insurers and banks refusing to do business with entities involved in this project. The blacklisting comes as the US-Russia relationship faces new turbulence in the wake of the Solarwinds hack, and the heightening of geopolitical tensions all but guarantees that the Nord Stream issue is unlikely to be resolved anytime soon. According to Windward data, the recently sanctioned Fortuna pipelaying service vessel has used three ports in Germany as a base of operations for the German Landfall of the Nord Stream 2 project. When cross-referencing this with the Russian port supporting this operation we see 16 other vessels operating in both ends of the project in the past six months. In addition, 11 unique vessels have been supporting the Fortuna directly in the past six months and conducting multiple STS operations, only four of which are Russian flagged. Based on the feedback of both insurers and financial institutions regarding the due diligence process, these vessels and their respective companies could find themselves exposed.

The U.S. Treasury targeted six vessels and three companies trading with Venezuelan oil, including Swissoil (based in Geneva) and Elemento (based in Malta). If we focus on Fides Ship Management LLC, all four of its now sanctioned vessels have changed flags to Cameroon in 2020. Two of the tankers performed what is defined by OFAC as “Flag Hopping” – repeatedly registering with new flag states. The flags of choice are not surprising as the registry process is fairly easy with the registries not being fully aware of what is being done under their flag.

Cuba has been placed on the U.S. blacklist recently, in a step that should not change much since it has long been a complicated country to conduct business with. Based on Windward’s insights, there are still approximately 330 vessels with a high risk of designation for Cuba-related activities. But even for entities that have previously been trading in Cuba there is a 30% decrease in port calls in Cuba during Q4 2020, probably due to the blacklisting by the Trump Administration.

The U.S. Commerce Department has put China’s CNOOC on its “entity list,” meaning that U.S. groups will be unable to export products or technology to the company in the absence of a hard-to-obtain license. Although the Entity List (EL) deals with export control and is very different from the Specially Designated Nationals (SDN) list, it still requires a special permit which is unlikely to be provided, with the new trend in U.S. banks' AML and financial crime due diligence processes to query questions to or from EL entities. This complexity is even greater since the company's tankers perform numerous STS operations with a global fleet including nearly 50 vessels owned and managed outside China. Although the exposure is different than with SDN list entities, vessels and companies interacting with the CNOOC fleet in Southern China could find themselves exposed.

Time for a different approach         

With so many evolving risks, and so many people talking about the fact that data is the new oil, it’s time to consider a different approach – one that harnesses the power of data to drive better business decisions.

At a time when even screening of the standard shipping company’s “Seven Levels of Ownership” has become a complicated task, AI platforms can provide a bottom-line recommendation with clear explanations and an audit trail. We should empower compliance, AML, and financial crime professionals to embrace specialized AI systems that leverage domain expertise, providing them with bottom-line recommendations. These recommendations – on the vessel, company, and cargo levels – can be fully integrated into existing IT systems and allow for Customer Due Diligence (CDD) and deep investigations.

With specialized AI systems, trading with confidence in 2021 and beyond doesn’t have to be complicated.

By Ami Daniel is the CEO & Co-Founder of Windward.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.