As the United States battles to prevent its adversaries from evading sanctions on the transport and sale of goods worldwide, an upcoming maritime sanctions advisory looks set to see the maritime industry – like the financial industry before it – pressed into service as an enforcer of the law. Eleanor Wragg reports.


In recent months, the shipping industry has been thrown into chaos by an unprecedented escalation of sanctions activity. Since July 2018, the US, through its Office of Foreign Assets Control (OFAC), has brought close to 800 actions against maritime vessels – the bulk of these in the last year alone. The impacts have been far-reaching: late last year, freight rates soared on the blacklisting of Chinese shipper Cosco for allegedly shipping Iranian crude and gas. The move not only effectively took the world’s largest fleet of dry bulk carriers and container ships off the market, but left companies operating in the maritime ecosystem in growing doubt as to which vessels are safe to do business with from one day to the next.

Amid this uncertainty, David Peyman, US deputy assistant secretary of state for counter threat finance and sanctions, has unveiled plans for enhanced sanctions compliance guidance for the global shipping industry – striking dread into the heart of many players, who fear being caught in the US’ ever-widening net.

Tipped for release at the end of April, the global maritime sanctions advisory will impact everyone, from flagging registries to insurance companies, shipowners, port and terminal operators, managers and charter companies, who will all be expected to play an active role in ensuring vessels they deal with are not financing terrorism or violating sanctions.


Going dark

A key area in the advisory surrounds the use of automatic identification system (AIS) transponders. Mandated by the International Maritime Organization’s (IMO) International Convention for the Safety of Life at Sea, these somewhat low-tech devices broadcast a vessel’s identity, position, speed, and heading to other ships and coastal authorities automatically via VHF. According to IMO regulations, they can be switched off if their operation might compromise the safety of the ship, such as when transiting waters prone to piracy. However, AIS can also be shut off in order to conceal a ship’s illicit activities, which the US aims to stamp out.

“AIS transponders that provide the location of vessels should never be turned off. If they are, that presents a risk that requires heightened due diligence,” said Peyman while previewing the advisory at the Foundation for Defense of Democracies in March. “Flag registries should be asking for AIS from those that seek to register their vessels with flagging countries. They should see the history of the AIS and if the AIS has been turned off or manipulated, that may be a reason to deny services.” Interestingly, this requirement will also go as far as to apply to insurance companies and financial institutions dealing with the vessels, who will need to ensure they have visibility over vessels’ movements before deciding whether or not to transact with them.

The loss of AIS signal, whether intentional or not, isn’t a rare occurrence. Research by maritime analytics firm Windward found that in one month alone, half of the entire global tanker fleet – 15,000 ships – had transmission gaps, with a typical duration of eight hours.

Therefore, for Cari Stinebower, partner at Winston & Strawn, a US law firm which has represented clients before OFAC in the past, checking all potentially illicit AIS gaps is a requirement too far. “This is really aggressive,” she says. “It is similar to what happened to the financial institutions after 9/11 in the sense that the regulators are essentially saying, we don’t care how expensive this is and how onerous this is, you have to start doing it,” she explains. “All the insurers and reinsurers already have compliance with law provisions in their contracts. You are not going to provide cover for illicit activity. So, requiring them to take a further step to affirmatively get warranties that AIS going dark is in fact legitimate is from my perspective overkill.”

Onerous or not, however, those involved in vessel tracking say companies need to make sure they are cross-referencing AIS activity with other markers to proactively tackle potential criminal activity. “If the vessel has switched off its AIS, you then need to look at what the corporate structure looks like, or maybe look at the history of the vessel in a bit more detail,” says Guy Sear, executive director of maritime and trade at IHS Markit. “This assumption by regulators that AIS is a be all and end all certainly isn’t the answer to the problem. We would recommend doing more of a typology review of the vessel: What is the behaviour of the vessel? Has it changed names or flags a lot? Has it swapped between operators? Has it had periods of time where people can’t explicitly see where it has been owned and operated? Those for us are bigger red flags than whether the AIS has stopped working or been switched off.”

Simon Ring, global head of financial markets compliance at Pole Star, which has attended meetings held between the state department and OFAC and the private sector in the UK and Asia, says that there is a recognition from US authorities that AIS is not a panacea. “It is not going to solve all of these issues. It has some downsides. Essentially nobody knows but the crew or the captain or the master on board the vessel whether it has turned its systems off or whether you are just not picking up information because of, say, the curvature of the
earth. Therefore, in the meetings, we have petitioned quite hard for the use of other, additional data,” he says.


Ship-to-ship transfers

Another practice in the crosshairs are ship-to-ship (STS) transfers, where a vessel moves its cargo to another that has pulled up alongside it. While STS transfers are in many cases legitimate – they can, for example, enable ships to transfer their cargo to other vessels without having to dock at berths – both Iran and North Korea have been spotted using the practice to circumvent sanctions on oil trade, with false bills of lading used to disguise the original source of cargoes. Putting an end to this is crucial in the fight against the financing of the North Korean regime and the supply of Iranian oil to the Syrian government.

“There are certain obvious high-risk jurisdictions where vessels engage in ship-to-ship transactions in order to evade US sanctions,” said Peyman, pointing to the Persian Gulf, the UAE, Iraq, Malaysia, Hong Kong, and the Chinese coast. “We are encouraging ship captains and crews to take pictures of the captains and crews of the ships they do an STS exchange with. If that cargo ends up being sanctioned, you will release that information and those pictures to appropriate authorities.” Peyman also called out port operators, indicating that he expects them to use long range identification and tracking radar (LRIT) to pick up ship-to-ship transfers.


Flag registry information sharing

In Peyman’s speech, he also announced the launch of the registry information sharing compact (RISC), an agreement signed by major flag registries Panama, the Marshall Islands, Liberia, St Kitts and Nevis, Comoros, Honduras and Palau to share information about bad actors. “If Panama or Liberia decided to de-flag a ship for violating sanctions, they will tell the other parties in the RISC about that de-flagging action to ensure that bad actor doesn’t flag hop [a practice where vessels repeatedly register with new flag states to dodge detection],” said Peyman, adding that further countries are also in negotiations to sign on to the RISC.

“This element of the flag state sharing information is a very interesting one,” says Sear. “IHS Markit is mandated on behalf of the IMO to collate and record every vessel in the world, and for the last 12 months, we have been creating a database of falsely flagged vessels, ie those that claim to have moved between registries but haven’t actually moved between them. This is a growing problem. My concern is that if registries are only sharing this information between themselves under RISC it is never going to get downstream to the people who are able to make a decision on whether to perform a trade with that vessel. That is the key problem if all the due diligence and regulatory burden is being pushed down onto commercial operators, and companies and stakeholders interacting with those vessels in the terms of transactions. There needs to be a greater industry dissemination of that data or an industry standard for what that is going to look like so that people can use it.”


Belt and braces

Regardless of how onerous or how complex the new guidance will be to implement, the US regulator shows little sign of softening its stance. “The maritime industry is the key artery for sanctions evasion globally for multiple policy areas, including our sanctions against North Korea, our sanctions against Venezuela, and our sanctions against Iran and Syria as well,” said Peyman, adding that simply being compliant with the letter of the law will no longer be enough. This means that, like the financial services industry before it, the maritime industry will have to come to terms with new added costs of compliance.

“The advisory now is all-encompassing,” says Pole Star’s Ring. “It is no longer the requirement for banks. It is shipping companies, insurers, port agencies. It is anyone in supply chains. The US is widening its focus in this advisory to anybody and everything around maritime transportation. The general remit from my understanding is, ‘you are all in focus’.”

As this new world dawns upon the maritime industry, it can take lessons from the financial sector on how to successfully manage the burden of increased regulatory scrutiny while maintaining viability, says Sear. “All of that best practice is already out there. People need to arm themselves with the tools and show that they have due diligence and processes in place. When I started working in the maritime industry about 20 years ago, there was still that adage of: ‘A ship sails over the horizon and disappears for 14 weeks and then reappears on radio signal.’ That is not acceptable any more. There is a realisation that there is easy and accessible information and technology to help people and they have just got to accept that it is coming, because the regulators are forcing it, and they are forcing it because they have valid reasons, and they want to stop the problem cases rather than carry out broad-brush punishments.”

“Our message really is if you’re in high-risk jurisdictions with high-risk commodities, you need belt and braces. Throw what you can at the issue,” adds Ring.

While the upcoming advisory does not indicate any change in law, but rather a warning of a new, more comprehensive approach to the enforcement of sanctions by the US, Winston & Strawn’s Stinebower believes all actors should take careful note of what the US state department will be looking out for. “With an advisory like this, if there is a court case, the courts are going to look to see what kind of guidance is out there and use that as a floor,” she says, warning that those falling foul of the laundry list of requirements will have little recourse against measures such as OFAC designation.