On May 14, 2020, the U.S. Department of the Treasury, Office for Foreign Assets Control (OFAC), U.S. Department of State, and United States Coast Guard (USCG) published an advisory addressing illicit shipping and sanctions evasion practices (the Advisory). The Advisory is intended to provide those involved in the maritime industry with guidance to counter illicit shipping and sanctions evasion. The audience for the interagency Advisory includes not only those directly involved in the maritime industry – such as ship owners, managers, operators, brokers, ship chandlers, flag registries, port operators, shipping companies, freight forwarders, classification service providers, commodity traders, insurance companies, and financial institutions, among others – but also entities within the supply chains for important energy and metals sectors, including trade in crude oil, refined petroleum, petrochemicals, steel, iron, aluminum, copper, sand, and coal.
Deceptive Practices in Maritime Shipping
The interagency guidance emphasizes that entities operating in various maritime sectors should remain wary of deceptive practices used to evade sanctions. The guidance describes various practices and methods by which parties in the maritime shipping and transportation industry have sought to evade sanctions, or engage in smuggling, criminal activity, facilitation of terrorist activity, and WMD proliferation – with a focus on illicit trade linked to Iran, North Korea, and Syria. These practices include the following:
- Disabling or manipulating the automatic identification system (AIS) on vessels in violation of the requirement under SOLAS, to mask ship movements or to conceal a vessel's voyage information;
- Physically altering vessel identification by, for example, painting over a vessel's name to pass them it as a different vessel;
- Falsifying cargo and vessel documents, including bills of lading, certificates of origin, packing lists, proof of insurance, and lists of last ports of call, particularly pertaining to petrochemicals, petroleum, petroleum products, or metals (steel, iron) or sand in order to disguise their origin;
- Conducting Ship-to-Ship (STS) transfers illegitimately to conceal the origin or destination of surreptitiously transferred petroleum, coal, and other materials;
- Engaging or coursing irregular voyages, such as indirect routing, taking unscheduled detours, or transshipping cargo through third countries to disguise the ultimate destination or origin of cargo or recipients;
- Falsifying flags and "flag hopping," or repeatedly registering new flag states; and
- Using complex ownership or management, including shell companies or multiple levels of ownership and management, to disguise the ultimate beneficial owner of cargo or commodities.
The Advisory recommends that stakeholders consider adopting, as appropriate, certain recommended policies and procedures as part of a risk-based sanctions compliance program and to update these practices based on red flags or other indications of illicit or sanctionable behavior. Recommendations include the following:
- Creating institutionalized sanctions compliance programs that include such components as training, standards of conduct, and communicating with counterparts, including ship owners and managers, about their compliance expectations;
- Establishing AIS best practices and contractual requirements, which may, for example, permit a party to review a ship's history to identify AIS manipulation or prohibit a ship owner from manipulating AIS illegitimately or transferring cargo to client vessels that have a history of manipulating AIS;
- Monitoring ships throughout the entire transaction life cycle;
- Conducting risk-based "Know your customer and counterparty" due diligence;
- Exercising supply chain due diligence, which may include checking to ensure that recipients and counterparties to a transaction are not sending or receiving commodities that may trigger sanctions, or verifying shipping documentation;
- Incorporating best practice into contracts related to commercial trade, finance, or other business relationships in the maritime industry; and
- Engaging in industry-wide information-sharing activities.
Additional Guidance and Recommendations for Certain Sectors
In addition to the general recommendations provided to maritime industry players more broadly, the second section of the Advisory (Annex A) provides guidance directed at specific categories of the maritime industry in formulating risk-based compliance programs.
Finally, the third section of the Advisory (Annex B) includes information on the sanctions programs applicable to North Korea, Syria, and Iran that is most relevant for the maritime industry. The section includes an overview of the prohibited activities related to these countries, describes the bases on which persons could be subject to sanctions, and provides more detailed information about deceptive shipping practices observed in relation to these sanctioned countries.
With this comprehensive advisory on sanctions risks now released and parties on notice, we can expect that enforcement will soon follow. We continue to monitor the sanctions enforcement landscape closely. If you have any questions regarding this advisory and its implications for your business, please reach out to Venable's International Trade Group.