US sanctions regulators are instructing financial institutions and traders to pay closer attention to ship behaviour and supply chains in the energy and metals sectors, warning that they could be exposed to illicit maritime trade with Iran, North Korea or Syria.

The Office of Foreign Assets Control (OFAC), which sits within the US Department of the Treasury and supervises companies’ compliance with the country’s infamously tough sanctions regime, made the demands in a long-awaited advisory on maritime trade issued on May 14.

The content of the advisory is not unexpected, following briefings by authorities and analysis by GTR ahead of its release. However, legal experts say institutions that do not follow the new requirements could be on the receiving end of one of the world’s toughest enforcement agencies.

OFAC says it is “critical” companies adhere to its new guidance, singling out firms “involved in the supply chains of trade in the energy and metals sectors, including trade in crude oil, refined petroleum, petrochemicals, steel, iron, aluminium, copper, sand, and coal”.

According to the regulator, around 90% of global trade is believed to involve maritime transportation.

“Exporters and entities across the maritime supply chain are encouraged to conduct appropriate due diligence as relevant to ensure that recipients and counterparties to a transaction are not sending or receiving commodities that may trigger sanctions, such as Iranian petroleum or North Korea-origin coal.”

The advisory gives several examples of potential red flags for companies involved – directly or indirectly – in seaborne trade, that could indicate illicit transactions are taking place.

They include disabling or manipulating automatic identification system (AIS) signals, which transmit information about the location and movement of a ship. Vessels over a certain size are expected to transmit at all times, and though signals can easily be lost in crowded seas, patterns of “dark” activity can be indicators of illicit activity.

The advisory suggests companies could introduce contractual clauses prohibiting transfers of cargo to ships where AIS are not broadcasting, or where there are indications of lost signals for illegitimate reasons.

Included as other potential red flags are ship-to-ship transfers, irregularities in a ship’s movements, frequent changes in the country it is affiliated with, complex ownership structures, and even efforts to paint over or disguise a vessel’s name or identification number.

OFAC also issues a detailed warning about falsified trade documents. It cautions: “Authorities have found that sanctions evaders have falsified shipping documentation pertaining to petrochemicals, petroleum, petroleum products, or metals (steel, iron) or sand in order to disguise their origin.”

Banks and traders should ensure “complete and accurate shipping documentation” is provided, including any bills of lading, certificates of origin, invoices, packing lists, proof of insurance and lists of recent port calls.


Trade finance banks “on notice”

The regulator also issues targeted advice to various sectors involved in maritime trade.

For those providing financing, its guidance centres on a recommendation that their risk assessments analyse the commodities being traded, the corridors being used and the general activity of any new client. Financiers should also examine the extent to which clients use ship-to-ship transfers, it says.

Abigail Cotterill, of counsel in Kirkland & Ellis’ international trade and national security group in Washington, DC, describes the advisory as a step forward that “puts financial institutions on notice that OFAC considers the risk associated with blocked vessels to be one that financial institutions should seek to actively detect through customer due diligence”.

“Financial institutions’ customer diligence reviews may not have traditionally included client sales or purchases of vessels, or identification of client dealings in commodities or trade routes known for transhipment or ship-to-ship transfer risks,” Cotterill tells GTR.

“The advisory makes clear that OFAC now considers these steps as best practices to mitigate sanctions risks associated with maritime trade.”

New York-based lawyer Andrew Jacobson, an associate at Seward & Kissel, adds that the advisory is “not substantially different from industry best practices and prior regulatory expectations”, but shows “a renewed focus on maritime industry customers that do business in risky jurisdictions and transact in trade corridors susceptible to ship-to-ship transfers”.

Jacobson adds that while not binding, the guidance could still service as the basis of an OFAC investigation or enforcement action. In that scenario, a weak compliance programme “could be viewed by OFAC as an aggravating factor”, he tells GTR.

Under the authority’s secondary sanctions regime, enforcement action can be taken against non-US institutions that breach US sanctions, as long as the transaction in some way involves the US financial system – for instance by use of the dollar.


Iranian oil and North Korean coal

Technology firms have long argued that monitoring a ship’s activity can help identify illicit activity that might otherwise go undetected.

According to Windward Maritime Analytics, a Tel Aviv-based company that carries out behavioural analysis on ships, there are real-life examples of sanctions evasion that were not detected by “standard” sanctions screening.

In a June 2019 case study provided to GTR, Windward says a Chinese oil importer asked its bank to open a letter of credit in favour of a Malaysian oil trading firm. The transaction involved a US$140mn purchase of crude oil.

Two rounds of screening by both the applicant and beneficiary banks found no sanctions hits against the exporter, ports involved, cargo itself or any other aspect of the trade. However, it emerged in October the same year that the ship had met an Iranian oil tanker at sea and was then sitting deeper in the water, suggesting it had taken on new cargo.

Windward says analysis of the ship’s movements would “likely reveal [it] was involved in the dark Iranian crude trade well before this incident”. The ship was found to have entered waters close to Iran’s Kharg Island oil terminal and switched off its AIS transponder, before reappearing and turning around without openly visiting a port.

In a second study, a Vietnamese energy producer asked a local lender to open a letter of credit in favour of a firm exporting coal from Russia worth US$2.7mn.

Again, two rounds of screening by both banks resulted in no sanctions hits. However, the UN Security Council subsequently found the ship to instead be carrying sanctioned coal from North Korea, after satellite footage showed at least two examples of trade with the rogue state.

Windward says behavioural analysis of the vessel would have shown its AIS signal was lost for 359 days out of the previous 635, an unusually high figure, and that no port calls were detected. It adds that every voyage to Vietnam started with a period of dark activity close to North Korean waters.