Banks may struggle to detect fraud and comply with sanctions regulations, risking heavy fines and losses, due to a sudden inability to track thousands of vessels in Chinese waters over the last month.

In late October, vessel tracking firms began registering a drop-off in data transmitted through receivers on the ground in China. The receivers relay information from vessels, such as their name, speed, weight and destination, through an automatic identification system (AIS).

The loss of signal accelerated again in early November, according to vessel tracking solutions provider Windward, which has noted a drop in traffic data of between 70% and 80%, although this includes a large number of small vessels and those in inland waters.

Shipping sources speaking to Reuters last month laid blame on a new data privacy law in China, which came into force on November 1. Despite the law not mentioning shipping data, analysts say it has prompted operators of ground-based receivers to stop the flow of AIS data out of the country in fear of running afoul of the new rules.

China’s ministry of foreign affairs has said all receivers are operating normally. The state-run Global Times newspaper said “speculation over China’s AIS transmitting problems is an excuse used by certain countries to shift their responsibility for global supply chain mess onto China”.

AIS data is captured by public platforms such as VesselFinder and MarineTraffic and by providers that offer in-depth solutions to commercial clients. Banks and traders use vessel tracking information to verify that a ship is where it is supposed to be and to examine its past journeys, in order to root out fraud and comply with economic sanctions on countries such as Iran and North Korea.

The loss of data from Chinese coastal waters has sparked fears that banks and traders could be more vulnerable to fraud, and even that fraudsters will grasp the opportunity to hoodwink financiers.

“A consequence of [the data loss] is the ambiguity. When you don’t have transparency of vessel movements it creates a breeding ground for documentary fraud,” says Charles Ike, regional head of financial markets compliance at Pole Star, which offers vessel tracking products.

Ike tells GTR without the ability to verify that a ship was loaded in the port listed on a bill of lading, and on the date written on the same document, “that leaves the bank vulnerable to fraud, where they could be confirming a phantom shipment”.

It could also trigger more fraud attempts, he suggests. “When you know that there’s difficulty verifying all shipments that originate from China, then that makes it easy for [fraudsters] to identify places that they can claim goods are originating from when they’re making false documentation.”

This is likely to be a bigger worry for financial institutions than the impact on compliance with sanctions regulations because documentary fraud is more common and trade volumes going through Chinese waters are so high.

It may also make it more difficult for government and unofficial watchdogs to monitor vessel movements to and from North Korea, which sits just across the Yellow Sea from China’s busy northern ports.

The US Office of Foreign Assets Control, which monitors compliance with US sanctions laws, and the United Nations, maintain extensive lists of sanctioned vessels and companies they say are involved in illicit trade such as attempts to circumvent UN limits on North Korea’s oil imports and coal exports.

A May 2020 advisory issued by the US government on best practices to detect “deceptive shipping practices” used to evade sanctions is widely used by financial institutions and traders. The UK’s Office of Financial Sanctions Implementation followed suit a few months later with its own guidance on red flags.

One of the main tools used by sailors on vessels who are trying to evade sanctions is by “going dark”, or turning off their ship’s AIS transmitter.

The loss of data on the Chinese coast could make it difficult to determine which ships have deliberately turned off their AIS or are simply out of range of a coastal receiver, Ike says.

Vessel operators intent on avoiding detection have also used more sophisticated techniques to disguise their identities, including fraudulently obtaining registration numbers. Firms targeted by enforcement action over sanctions violations risk hefty penalties and legal bills.

Satellites still working

The loss of ground-based AIS coverage in China is the most far-reaching and long-lasting outage in recent memory, according to Windward’s chief product and data officer Ory Yassur.

There has been a “dramatic” slump in available ground-based data, with signals dropping first on 26-27 October and then further around 3-5 November, and there are not yet any signs of a recovery, Yassur tells GTR.

AIS data is also transmitted through satellites, and in limited cases through dedicated vessels that carry receivers in important waters, including the South China Sea. Data from these two sources is largely unaffected, according to both Windward and Pole Star.

Yassur says the company’s tracking of larger vessels with International Maritime Organization numbers – which includes almost all vessels used in international trade – remains at normal levels due to in-built redundancies in Windward’s sources of AIS data.

Ike also says Pole Star’s solutions have been largely unaffected by the outage, but that banks relying on manual tracking through publicly available sources will face an “immediate challenge”, given that a large amount of business conducted using letters of credit in Asia involves containerised goods exported from China and its importation of commodities and manufacturing inputs.

“Anyone who wants to transact diligently, wants to stay on the right side of the regulators, needs the position data,” he says.