Since Russia’s invasion of Ukraine, the aggressive pursuit of trade restrictions by western governments has significantly added to sanctions pressures facing financial institutions, commodity traders and shipping companies. At the same time, illicit actors are showing greater sophistication in their attempts to evade those controls. In this inaugural GTR sanctions roundtable held in October, a group of senior professionals from the intelligence, technology and legal sectors discuss how the sanctions landscape is changing and what companies can do to keep up.
Roundtable participants:
- Ben Arber, chief executive officer, Complidata
- John Basquill, senior reporter, GTR (moderator)
- Mark Lakin, partner, Stephenson Harwood LLP
- Byron McKinney, director trade compliance, S&P Global Market Intelligence
- Eric Orsini, global head of compliance, Lloyd’s List Intelligence
- Sameer Sehgal, chief executive officer, Traydstream
- David Tannenbaum, partner, maritime intelligence, Pole Star Global
GTR: Over the past year or so, what are the most significant developments you’ve seen in the sanctions landscape, and how have expectations of companies involved in trade changed?
Orsini: There has been a sharp rise in deceptive shipping practices. Over the last 12 to 24 months, we’ve seen what I would call an evolution of complexity and sophistication, going from simply turning off the vessels’ automatic identification system (AIS) to AIS spoofing, which is more difficult to capture. We’ve seen that with Russia, Iran and Venezuela trade, and not only are we seeing that on the crude oil side, we’re now seeing it with LNG. The regulators are also a lot more agile in responding to this type of behaviour, trying to keep up with the bad actors. Just over the last month or so, there were around nine to 10 designations of LNG vessels that were engaging in spoofing with Russia’s sanctioned Arctic LNG 2 project. We expect that to continue to expand, both on the LNG side and on the crude side.
Tannenbaum: Vessels still disable their transponders, but now spoofing is the mode, not the exception. I was surprised at how fast US Office of Foreign Assets Control (OFAC) designated those LNG carriers. Usually things will linger on our list for a year and a half before OFAC gets around to them, but this time, within two weeks they were designated. OFAC is now using sanctions designations in real time, designating vessels while the cargo is on the water. Another thing we’re seeing is a convergence of sanctions programmes, so for example, Iran is procuring weapons for Russia, Russia sells stolen grain to Syria. We’re seeing vessels that were dealing in Iranian and Venezuelan crude that are now, all of a sudden, starting to deal in price cap evasion, and in the past six months or so we’ve seen activity move from the Russia side to the Iran side. So not only do compliance departments have to react a bit faster, but these risks are merging together.
Arber: Also, the number of vessels being designated has increased significantly. I saw 23 new vessels designated just in June and July by the UK authorities, which is a much higher rate than in previous months. Then the trend of through-shipment of weapons and weapons parts to Russia, which are being discovered on the battlefield in Ukraine, has also intensified. Obviously the Russian invasion of Ukraine was in February 2022, but it feels like the last 12 months is where understanding and detection of shipments via places like Kazakhstan, Georgia and Azerbaijan has really stepped up.
McKinney: Most significant for me has been the emphasis by regulators on export control. Over the last 12 months, the number of guidelines and advisories issued to both financial institutions and non-financial institutions has been unprecedented. In recent weeks, two important documents have been published by the G 7 and Global Export Control Coalition, and another by the US Department of Commerce, with the latter highlighting the increasing focus of the Bureau of Industry and Security (BIS) on banks – a sector it did not have oversight over in the past.
Recommendations in the area of export control are challenging, not just for banks, but also corporates. This has led to firms really having to get on top of their compliance procedures in this particular area, for example by moving to more behavioural analysis of export control when determining red flags. That includes when the buyer’s firm was established, what is the end usage of the goods, the transhipment possibilities and customer profiling. These are all challenges for compliance teams to manage effectively.
Sehgal: The digitisation element is important. With the digitisation that is happening in all the spaces around trade, it has become more and more difficult to hide. Given the heightened risk environment we are living in at the moment, one can foresee that in the next 24 months there will be a lot more sanctions coming out. From that perspective, this is only a sign of things to come.
That begs the question, with all of this happening at such a blistering pace, how will the banks around the world cope with it? It’s one thing coming out with the laws and the regulations, but making sure that people follow them is a totally different thing. We’re dealing with so many different banks in so many different countries, especially in the non-OECD world, and for them it is a big challenge, because some of the compliance activities or checks that you see on the operating floor are not as sophisticated as the regulations that are coming out.
GTR: What impact have these changes had on trade corridors, and how are companies involved in trade responding to those shifts?
Sehgal: Are these sanctions going to force a more polarised world? Between the US, the UK and the EU, those are the entities which come out with most of the sanctions. Would people start looking at different corridors of trade and different ways of being able to operate, either for legitimate business or illegitimate business? That is a difficult one, especially for banks, which might not have the capacity or the tools and processes to be able to manage these risks.
Arber: The trend of sanctioned countries collaborating to a much greater extent is a genuine one, and you have many trading superpowers who are at best tolerant, and probably sympathetic, to Russia or China, such as India, Turkey and South Africa. They are possibly willing to support the Russia and Chinese governments in currencies other than US dollars from a sanctions evasion perspective, which I think adds to the complexity for international banks that are trading with entities in these locations. Banks are starting to respond and employ increasingly sophisticated technology and expertise to improve detection, whether to better determine ultimate beneficial ownership of counterparties in transactions, monitor vessel movements or other use cases.
Orsini: OFAC has been quite aggressive with secondary sanctions, especially on the Russian side, targeting foreign financial institutions that are doing business with Russia’s military industrial complex. It is quite expansive, and from what I’ve heard in the industry, that has had a significant impact on small Chinese banks that were continuing to facilitate trade in Russia. They’ve now stepped out of that. Not only are we seeing the impact of secondary sanctions on the US side, but now we’re also seeing the UK Office of Financial Sanctions Implementation (OFSI) come out with its own secondary sanctions, and I expect the EU to come out with some sort of secondary sanctions regime too.
While OFAC has come out with guns blazing and flexed its enforcement power significantly over the last few years, with the UK and EU sanctions, there is still a lack of enforcement. The industry views OFAC as the more mature regulator.
Lakin: When the US sanctioned Hennesea shipping company based in Dubai, there was a very tenuous connection to the US, which wasn’t particularly clear from the sanctioning material that came out at the time. But whatever that connection was, they used that to sanction a whole swathe of vessels and a number of companies with very little apparent US nexus. They were willing to do that to target all of these entities they felt were breaching the price cap requirements. OFAC obviously comes with a huge history of having done this heavily during its Iran and Cuba programmes, but it’s been interesting to see OFSI stepping in. Sanctioning Fractal Marine was quite an interesting one, because that was quite a significant player in the Russian market from what I could tell, and I don’t think people were particularly expecting that.
McKinney: Trade corridors can be problematic when determining risk. One of the first FinCEN and BIS joint publications on export control contained a footnote on the most high-risk transhipment countries as of mid-2023. Many of these risks still exist, but since then new ones have emerged. If you look at the common high-priority goods list and the tier-one list of microelectronics, Thailand has emerged as a new Russian trade partner for these particular goods in 2024. This informs us that trade corridor risk is a moving target, and monitoring it requires geopolitical awareness.
GTR: What challenges do banks and commodity traders face when trying to keep up with an ever-changing sanctions landscape?
Sehgal: There are a range of approaches. On the top end, you will see the big banks that can throw in the dollars and recruit in compliance to make sure they have more policing and more oversight. Nothing goes through because they know the regulators are really focused on them. From a smaller bank’s perspective, it is more hit-and-miss. Five transactions go through, five don’t, and it becomes very difficult for them on an expertise basis. The banks that we talk to fully understand this is not their expertise, and they need to rely on help from external partners.
Orsini: Large banks, mid-sized banks and even small financial institutions do have a resourcing issue. Obviously, bigger banks have a larger pot of change to allocate to this, but from a trade perspective, if you break it down to a cost per transaction, the cost of compliance has risen significantly over the last few years. Some big banks are thinking about getting out of documentary trade finance altogether and moving strictly towards open account trade. That’s scary from a financial crime compliance perspective, because if the move is towards open credit with a view on driving operational efficiencies, you introduce more risk into your business.
There needs to be an industry acknowledgement that compliance isn’t cheap, there needs to be investment, and there needs to be resources. However, compliance doesn’t have to be a prohibition on business. It could be business enablement, depending on how you operationalise it. If you’re able to digitalise and automate that, it will allow you to do more business overall.
Arber: Traditionally, most banks, big and small, have lumped in dual-use goods and export controls with their sanctions programme. They’re increasingly realising that this approach is neither effective nor appropriate. Export controls have emerged as maybe the sixth biggest financial crime risk, after sanctions, tax evasion, anti-money laundering, fraud, and bribery and corruption. From a trade finance perspective, there is still a relative unwillingness to rip out and replace sanction screening tools, just because of the risk and the size of the project.
But the complexities and the challenges we’ve mentioned are helping spur more openness to some of the areas where banks can be smarter. On the input side, that could be using large language models to identify goods descriptions and other specific data points more accurately, and on the output side, you see natural language processing or generative AI to try and detect related entities and produce a score with explainability from a risk perspective. There is innovation happening pre- and post-sanctions screening, and a significant focus on improving mitigation of dual-use goods and export controls risk.
Looking to the future, it will be interesting to see whether the appetite is there to change the standard to something more intuitive and intelligent with the technology that is available to banks.
Tannenbaum: It’s almost like there are two tracks of approach happening at the same time. One is this monster of screening, which keeps getting worse and worse. Executives are asking how to minimise the false positives, how to use pre-screening, entity resolution or natural language processing to cut a little bit of that fat off. But the other approach, with productive tools that are much more efficient, has not been getting as much attention.
Not everything is a nail that has to be hit with a hammer; we can act more smartly about things, whether it’s through vessel due diligence or threat intelligence programmes.
McKinney: Regulatory recommendations are often too sophisticated for the compliance processes in place at some organisations. One example we hear from banks is around the oversight required to identify the HS codes for common high-priority goods. Many banks will not receive the HS code directly and it’s unlikely to be given to them by their customer, yet they must decide what the high-risk status is for these goods. Attempting to define a highly standardised and appropriate HS code from a non-standardised goods description can be difficult if you are not a trained customs analyst.
The weight of new regulation is also a strain. The EU’s Russian trade sanctions are into their 14th iteration and have the potential to keep growing. To be fully compliant requires a shift from manual compliance policies to those that at least offer an automated approach, where consistency, explainability and transparency are available. Banks and commodity traders are making this shift and utilising the latest technology.
Lakin: Working with a range of clients in the sector, I’ve noticed banks are particularly good at this and do invest money and time in it. It’s more on the commodity trader side where you have a real variation in how individual companies approach it, and it tends to naturally slide and scale. You have the big oil majors and state oil companies that have pretty comprehensive programmes, almost on a par with the banks, but here in Dubai, you have a real range of trading companies, including really small and medium-sized operators. Some have systems in place, some of this technology we’re talking about, while some are on the lower end of the scale where it’s more of an ad hoc thing. It would help to have something more geared towards them specifically, because they can get a bit lost in this ecosystem.
Of course, there is a difference between the commodity traders that are actively going out there to breach sanctions, that know what they’re doing, and those that are trying to find a space in the market where what they’re doing is lawful but maybe close to the wind, because that’s often where the margins are.
GTR: Are there any emerging sanctions evasion threats or techniques that you have seen over recent months?
Orsini: We’ve seen a lot of GPS jamming with respect to vessels. That’s not necessarily onboard manipulation of AIS signals, but more land-based, often by state or military actors, and we’re seeing that specifically in higher risk areas, such as the Black Sea, near Israel and offshore South Korea. That is very disruptive, because whether you work at a bank, a commodity trader or an insurance company, your compliance professionals are looking at a vessel’s AIS and it is all over the place. It’s really hard for them to get a clear picture of what the vessel is actually doing.
Tannenbaum: When the Israel and Hamas conflict took off a year ago, we started having clients getting alerts that their vessels were in Syria – literally inside Syria – and that was because of jamming. Another thing that adds to the risk is there is an entire ecosystem system that enables this, and that a lot of practitioners just don’t know about. A vessel doesn’t set sail unless it has insurance and safety certificates, but there are small insurers that literally exist to cater to companies engaged in sanctions eviction. There’s one P&I club, for example, that has 24 tankers, and all of them are location spoofing or dealing with Iran. Two are under sanctions.
That also creates environmental and liability risks: if one of these tankers goes down and causes an oil spill, who’s left on the hook? The P&I club isn’t going to cover it, and the owner of the vessel is in, say, Kazakhstan, and we have no clue who he is.
Lakin: The classic documentary forging is still going on quite heavily in the shipping sector as well. It’s very noticeable in this region: you have cargoes that say they’re from Iraq that definitely are not from Iraq, for example. But that goes to show how sophisticated OFAC is in its current approach, because it has started to sanction entities that have been involved not in direct sanctions breaches, but in providing these documents to people who are engaged in sanctions evasion activities. OFAC’s knowledge of what’s going on is quite impressive because, from what I have seen, some of these documents are very good forgeries.
Arber: Our clients are seeing masking of origin through false documents on a regular basis, but on top of that, there are sometimes genuine documents that are complicit in the masking of the original certificate of origin, for parts or finished goods moving through multiple trade corridors. On that level of enablement in the broader community, we’re seeing more focus on the professional services space. There is more scrutiny on insurers, accountants and lawyers, and those actors are also having to put in place sophisticated transaction monitoring and sanction screening on clients.
McKinney: Techniques used to avoid sanctions are similar to those in the past, but evolving. The falsification of the movement of ships and goods, and also attempts to obscure the origin of the goods and commodities, are on the rise. Front and shell companies have always been used to hide the real, underlying owner of a company but this has become much more common in the maritime sector. Vessel managers seeking to circumvent sanctions will set themselves up in light-touch regulation countries and diversify their ships into multiple fleets, so that the relationships between them are not fully transparent. The latter is an interesting tactic; if a single vessel or owner gets sanctioned while operating within a single ship fleet, they may get lucky and only see one part of their holding receive a sanctions designation.
On the commodity side, HS code misclassification does happen, especially with the oil price cap in place and the attestation process underpinning it. There have been documented examples of HS codes being used to obscure the nature of oil cargoes, especially in the Far East.
GTR: What kind of technology can banks and companies use to detect these techniques, and how much progress has been made around adoption within the industry?
Lakin: If you’re evading sanctions or you’re supplying sanctioned cargoes, there are so many ways – and more intelligent ways – to structure that business and those supply chains, so it becomes further away and much harder for people further down the chain to detect what is really happening. You’re going to need this kind of intelligent software that actually looks at how ships have moved, whether there are suspicious patterns that come up over and over again, and people who can read that data and come up with a sensible conclusion. It might be that all the entities involved in a transaction look perfectly acceptable, but when you look at what the vessel was doing over the last three months, that’s all red flags. There needs to be a much more intelligent review of the data than just looking at your counterparties and saying, well, they’re all green, so it’s good to go.
Tannenbaum: From the maritime side, we do talk a lot about what the bad guys are doing. We don’t talk as much about how much it’s evolved on our side. Nowadays we have a host of space-based and cyber-enabled capabilities, and we incorporate satellite imagery every single day when looking at vessels. We’re talking with clients about having more accessible imagery, so it’s simple to see when a vessel says it was at this coordinate, but in reality, it was somewhere else. Then there are a host of other tools, whether it’s gathering intelligence on AIS transmissions, or electronic and radar emissions, that you can use to footprint vessels. There is synthetic aperture radar for when the weather is not good, and we have aggressive data scraping campaigns.
The issue is how to bring that to the client. This is a very specialised task and set of tools, and I think it is probably time that certain high-level compliance officers start learning how to use imagery products on a daily basis to build a picture of what’s really happening. That could be through an easy-to-use dashboard, or we could push the information out as part of watch lists so when they hit on a vessel it would give them this detail. The challenge isn’t that the technology is not there. It’s getting it to the client side that is proving more difficult.
Arber: Large language models are starting to prove their worth in terms of pre-screening. That does help in detection, brings down the number of sanctions hits by introducing greater accuracy, and reduces manual error. There’s almost a leapfrog approach, where banks that had been doing these checks manually, looking at trade documents and typing in details to a sanctions front end, are going straight to a large language model solution rather than an interim technical solution. Machine learning is also helping look at counterparty risk, by taking a broader data lake view of the transactions a certain counterparty has been involved in, and feeding that back into a model for sanctions optimisation and investigation.
Sehgal: I worry about the longer-term impact of this. Most of the banks or corporates that we deal with are not currently sophisticated enough to be able to deal with some of the evasion techniques that have been mentioned. If a system finds an issue, that has to go to a senior person to make a call on whether it’s accurate or a false positive, and it’s just not that easy on the operating floor. When it comes to compliance, people are so worried by the prospect of a fine if something unwittingly goes through, and that has an effect on transaction turnaround times.
Just in the last six to seven months, the turnaround times within some of the banks that we’re talking about have gone up three or fourfold, purely for compliance reasons. They’re using various tools, they’re getting various hits, and then somebody has to pour over those to make a decision. That increases their cost, and at this moment I don’t think they are in a position to renegotiate prices because of competitive pressures with their customers. It’s a difficult position for a bank from a costing or market share perspective, and I could see banks pulling out of spaces because it’s not economically viable for them to operate there.
GTR: In practical terms, how can technology be deployed to identify examples of AIS spoofing or location manipulation, and are there wider legal implications to those practices?
Tannenbaum: There’s spoofing that you can detect through AIS monitoring, such as excessive loitering, where the vessel stays in one place, or displays round digit latitude and longitude. The geographical areas that the bad guys use are pretty well defined at this point, as are many of the actors themselves, but there is spoofing that’s a bit more sophisticated. One thing we look at is the source of the spoofing, and whether that is realistic or whether the receiver is thousands of miles away. We also monitor vessels for suspicious ownership and management changes, and that usually leads us to that kind of conduct as well. However, there is no silver bullet out there.
McKinney: AIS spoofing and location manipulation should be viewed in the wider context of shipping risk, so it also encompasses ownership factors, historical ship movements, ship-to-ship transfer activity, flag state and other indicators of risk. Those vessels engaged in the most highly sophisticated techniques like AIS spoofing will very likely be emitting other high-risk warning signs which compliance teams can use to their advantage.
Orsini: One thing we employ at Lloyd’s List Intelligence is looking at the metadata from our terrestrial AIS receivers to understand whether or not an impossible message is being broadcasted. For example, if a vessel is indicating that it’s off the coast of Angola, but our terrestrial AIS receivers are picking up that signal off the coast of Venezuela, it’s impossible for that vessel to be where it says it is. We trawl that metadata to identify impossible messages. A question for Mark is would satellite imagery hold up in court? Have we seen that yet?
Lakin: I have seen that in a case and there’s no reason why it wouldn’t stand up in court as evidence. There are certainly various groups in the US that have a very keen eye on what tankers are doing in the Gulf and are able to then use that satellite data to support cases where a particular ship is accused of sanctions-busting activities. It can be very effective. But you don’t see that often at the moment, perhaps because that kind of real-time satellite data tends to be more the preserve of governments. Maybe it will become more common.
GTR: Looking at the year ahead, what do you believe should be top of the agenda for financial institutions, shipping companies or even regulators?
McKinney: Regarding sanctions in shipping, LNG will be the new crude oil. Russia most likely will attempt to haul all its capacity from Arctic LNG 2 and other terminals to buyers across the world. To do this Russia will need another shadow fleet and they have the means to build it. This has already become a flashpoint and more sanctions are likely to come in this area. The weight of export controls will also increase, and banks appear to be on the frontline when it comes to monitoring and identifying controlled goods in international trade. The amount of new regulation in this area targeted at banks would suggest enforcement action at some point in 2025.
Sehgal: I would say there are two things to be aware of. The first is the downstream impact of any regulation. There is obviously a lot of pressure to come out with sanctions quickly, because it’s a response to a political scenario, but how that gets implemented is a totally different ball game that banks and other players like ourselves have to live with. The second, as we’ve discussed, is that there are a lot of sophisticated techniques being used to evade sanctions, and I don’t think the banking industry is fully ready for that yet. Some of the things we’ve heard about today are well beyond what I see the banks dealing with. Even some of the technology we’re talking about, such as large language models, could be years before it is 100% perfect from a documentary trade point of view. To my mind, the world is looking a little scary as we run into next year.
Tannenbaum: We don’t know what the next year is going to bring. We’re now on our fourth war in three years. One area we can probably expect OFAC to expand a bit more into is maritime service providers, and there has been talk of designating a flag or two. I don’t think anyone will bat an eye if they designate Eswatini, but if they go after Gabon or Cameroon that might stir things up. And, of course, export controls remain very high on the list, while the price cap and Iranian oil is still in focus.
Lakin: The range of sanctions against Russia in particular has not cooled down at all over the past year, and there’s been more refining of existing sanctions and legislation. In February, for example, we saw various tweaks made to the price cap regime in terms of per-voyage attestations and breaking down itemised costs. What I’d imagine happening over the next year or so is more of that kind of thing, where you have authorities taking steps to ensure sanctions are actually working and having their intended effect. I also expect significantly more enforcement. OFAC will continue to do what it’s doing, and may expand its remit, but we may also see increasing activity from the European and UK regulators, which have so far been quite far behind their American cousins.
Orsini: It’s really important that the industry conducts effective risk assessments. There are all of these novel risk typologies and emerging sanctions risks, but some people are not fully conducting risk assessments the way they should be. There needs to be wider industry adoption of conducting yearly risk assessments, or dynamic risk assessments, to make sure that you really understand the risks you have on your books, because if you don’t have that starting point you can’t have an effective compliance programme.
Arber: I feel like there is the potential for a great leap forward in terms of counterparty risk analysis, including risk scoring with automated explainability at the transaction level. It is also becoming more critical to take a more targeted approach to dual-use goods and export controls. And there needs to be a way of deploying new technology tactically without the need for big spending on multiple resources.
