A trio of banking, sanctions and shipping organisations has issued practical guidance for lenders facing increasingly tough restrictions on maritime trade, following banking industry concerns over how best to tackle illicit activity.

The guidance, published today by the Association of Certified Sanctions Specialists, the Institute of International Banking Law & Practice (IIBLP) and IHS Markit, comes in response to a landmark advisory from US sanctions authorities.

Issued by the Office of Foreign Assets Control (OFAC) in May 2020, the advisory sets out the regulator’s expectations of how industry participants should detect trade involving sanctioned countries and entities, and includes sector-specific guidance to banks, traders, shipping companies and others.

The advisory has proven highly influential in the trade and trade finance sectors, but according to today’s paper, many banks believe it contains a “lack of actionable data”, can be difficult to apply at scale, and can lead to excessive false positives.

One bank surveyed said OFAC’s demand for an internal risk assessment “is too high-level and not as prescriptive as it could be”, that several potentially useful items are missing, and that the sector-specific guidance for financial institutions “lacks detail when compared with other industries such as brokers, traders and flag states”.

“A lot of the feedback we heard from banks over the last 12 to 18 months has been around the challenges raised in the advisory, such as ship-to-ship transfers, dark activity and so on,” Byron McKinney, product director for trade finance at IHS Markit, tells GTR.

“One key piece of feedback we had is the section within the OFAC advisory that is aimed at financial institutions. It’s one page, a few bullet points, quite high-level, and so doesn’t really give a basis to work from. We wanted to take that section apart and build on it with practical recommendations, tips and hints that could help from an operational point of view.”

One of the paper’s conclusions is that automatic identification system (AIS) transmissions, which vessels are required to use to report their location, can be a highly useful tool in spotting potential illicit activity.

It cites a Danish court case involving a Russian oil tanker that was found to have violated sanctions by delivering fuel to Syria.

The paper notes that the vessel loaded cargoes from Greece, Turkey, Russia and Cyprus, but did not report a port call. However, AIS signals were not transmitted for nearly six days, and by examining the tanker’s route through the Aegean Sea, investigators believed it may have docked in Syria. The technique was allegedly used as many as 33 times.

The paper recommends banks combine AIS data with other information, such as a ship’s flag status, ownership or registered name.

It describes the case of The Courageous, an oil carrier that reported minimal port call activity and frequent AIS outages. Since 2016, the ship changed its flag registration and name multiple times, while there were four corporate entity changes within its ownership structure.

Taken together, the paper says these activities are a likely sign of illicit intentions. The Courageous has since been seized by US authorities, and is accused of transferring oil to a North Korean carrier as well as disguising itself as another vessel.

Another case study draws on IHS Markit data from November 2020, showing a vessel that stopped transmitting its location north of Colombia for nearly a month. When it reappeared, its draught had been updated from ballast to laden, suggesting cargo had been onboarded during that outage.

It then changed its reported destination to China, rather than Colombia, suggesting that was the discharge location. The likelihood the vessel loaded cargo from sanctioned Venezuela is “high”, the paper says.


Technology a must?

Since the OFAC advisory, banks and traders have faced growing pressure to use emerging technology, including artificial intelligence and machine learning, to cut false positives and identify potential red flags.

The paper notes that following the OFAC advisory, one unnamed large bank says it conducted a thorough review of its historical maritime trade activity and “immediately realised that new controls might be required”.

“One of the bank’s core implementation features has been a machine learning model of live ships data,” the paper says. “This model seeks to remove noise from sanctions watch-list vessel checks by only gathering the most suitable items for screening.”

However, for Michael Byrne, chief executive of the IIBLP, that approach is not always feasible for all financial institutions.

“Having sufficient resources to do all of that is a challenge, especially if you’re a smaller or mid-sized bank and your budgets are tight,” he tells GTR. “Your compliance team may be following all the rules, but may not be as technology-focused as you would like.”

McKinney says he had expected real-time tracking to be “a must for all banks”, but was told by many banks that historical transaction data can provide a solid foundation for spotting vessel-related patterns, especially in non-commodity trade.

“Containerised cargo, for example, is often repetitive, following the same routes, and over time you can build up a good picture of normal activity,” he says. “Raw commodity trade is a little different; we tend to see more real-time tracking as well as just the historical data.”

One bank surveyed said its level one team conducts no checks on ship movements, deeming the process too expensive and at odds with an automated approach. Detection was found to be more effective based on a review of a vessel’s historical activity, it said.

That may seem at odds with warnings from maritime intelligence companies that criminals are using ever-more sophisticated methods of evading detection, including by spoofing AIS signals and carrying out “deep” dark activity.

But according to McKinney, those techniques are not necessarily the most immediate sanctions threat to banks and traders.

“I think the number of cases where highly sophisticated techniques have been used are tiny, in terms of global trade,” he says.

“There have been some examples from North Korea, spoofing original vessels and third-party vessels with fake credentials and information to hide further, but there are only so many people willing to go to those lengths. In other sanctioned areas, such as Iranian or Venezuelan petroleum cargoes, a lot of the sanctions evasion has been fairly basic in method.”

Byrne adds: “You’re never going to stop everyone trying to violate sanctions and make money, but not all of them are using sophisticated techniques. That means if you can stop most of them, the size of that pool might drop by 50%, even if the ones left are more advanced.”