On October 31, 2024, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) issued scenario-based guidance specific to the maritime shipping industry. This most recent industry guidance follows prior publications coordinated between several U.S. government agencies, including Departments of Commerce, Treasury, Justice, State, and Homeland Security, released in January of this year.
The maritime industry, both within the United States and abroad, can be subject to significant legal repercussions for running afoul of OFAC sanctions. All U.S. persons, as defined in the OFAC regulations, are bound to comply with OFAC sanctions. Additionally, foreign entities that are subject to U.S. jurisdiction, or that conduct business within the United States, with U.S. person counterparties, or using U.S.-origin goods or services, may be subject to OFAC enforcement or secondary sanctions for transgressing OFAC sanctions programs, including for causing U.S. persons to violate U.S. sanctions, or for evading, or conspiring to violate, U.S. sanctions.
The Maritime Scenarios
The guidance tracks five hypothetical scenarios depicting common sanctions evasion schemes encountered in the maritime industry. In these scenarios, certain stakeholders are left without contractual recourse, and therefore suffer related financial losses or incur legal exposure, after failing to identify sanctions risks early enough:
- Deceptive shipping practices to conceal sanctions nexus. In this scenario, a charterer obscures the provenance of Iranian-origin crude oil. The Europe-based vessel owner learns of the falsified documentation after the ship incurs damage in a collision. As a result of the sanctions exposure that was revealed through follow-up diligence and audit, including prior illicit ship-to-ship (STS) transfers and shipment of Iranian crude in violation of OFAC regulations, the ship's insurer rejects a claim pursuant to the sanctions exclusions clause in the parties' protection and indemnity (P&I) agreement.
- Identification of Specially Designated National [SDN] on trade documentation. The foreign-based affiliate of a U.S. ship management company enters into a one-year contract with a Europe-based iron ore buyer. During due diligence on an iron ore purchase transaction, the foreign affiliate discovers that the freight forwarder that is intended to carry the commodities is named on the OFAC SDN List. After the foreign affiliate sought clarification on the potential SDN involvement, their customer merely submitted new documentation swapping in an alternate freight forwarding company's details. But, suspiciously, the new forwarder was only recently formed and had no previous involvement in cargo shipment. As a result, the U.S. company terminates the contract, institutes an enhanced sanctions compliance protocol, and files a voluntary self-disclosure with OFAC. A European bank was also involved in the transaction: it had issued a letter of credit to the iron ore buyer. When the European bank's diligence subsequently reveals the SDN's involvement, it terminates its financial agreement with the iron ore buyer in light of potential U.S. secondary sanctions risk.
- Policy or registration renewals for vessels with obscured or complex ownership structures. A non-U.S. ship management company secures an annual policy for hull and marine insurance coverage through a United Kingdom-based insurer. Despite the ship management company being only two years old and registered in a country not typically used as a maritime registration jurisdiction, it passes the underwriters' due diligence. The UK insurer subsequently cedes this portion of its portfolio to a U.S. reinsurance broker, which implements an industry-standard sanctions clause in its contract. When the ship management company files an insurance claim for vessel damage, the U.S. broker's diligence reveals that the ultimate owner of the ship is a Russian state-owned enterprise that is blocked pursuant to OFAC's Russian sanctions regulations. As a result, the U.S. broker refuses to participate in the claim, pursuant to its sanctions exclusion clause.
- Mid-voyage notification of sanctions risk. Sometimes it is not until after a vessel is under way or a voyage is completed that stakeholders learn of potential sanctionable activity by their counterparties. In this scenario, it is revealed only after an oil tanker vessel embarks on a voyage that it had manipulated its location data to hide illegal STS transfer to receive Iranian-origin condensate crude oil. As a result, its insurers (U.S. subsidiaries of global insurance companies) revoke their policies pursuant to sanctions exclusion clauses. When the vessel attempts to dock and unload at a South Asian port, the port authority blocks the vessel from unloading. The flag state authority subsequently deflags the vessel after the vessel's registered owners do not to respond to diligence inquiries.
- Opaque ownership information of proposed oil tanker purchaser. A prospective buyer attempts to acquire crude oil tankers at resale from a ship broker. The buyer refuses to provide standard information to the broker in connection with the transaction. Furthermore, the buyer is a special-purpose vehicle (SPV) with no history of involvement in the maritime oil industry. The ship broker declines the deal and flags the potential buyer in its internal customer tracking database. Nine months later, a purportedly new buyer attempts to purchase a tanker from the ship broker. Internal customer diligence reveals that the new buyer has the same ultimate beneficial owner as the previously rejected buyer. Further investigation reveals that the new prospective buyer has a property interest in several other vessels identified as blocked property by OFAC six months prior for transport of Iranian-origin oil.
Key Takeaways for Stakeholders
With the maritime scenarios described above, OFAC offers key takeaways to avoid the various hazards identified in the guidance:
- Voyage Documentation and Data Manipulation: Scrutinize trade documentation for shipments transiting high-risk areas known for sanctions evasion. Watch out for vessel location manipulation—for example, "spoofing," which manipulates a ship's automatic identification system (AIS) location data. Other indicators of obfuscation include misclassification of vessel and class of trade, extended periods of time without location transmission, and abnormal voyage patterns.
- Concealing Blocked Person Involvement: Be aware of common red flags for sanctions evasion, including modifications to original documentation to hide or remove nexus to sanctionable activity, sudden changes to shipping instructions out of line with normal business practice, and refusals to provide additional information in response to reasonable, industry-standard requests.
- Sanctions-Specific Clauses: Maritime stakeholders should include sanctions exclusion clauses in their agreements and policies so that they may readily and contractually exit or terminate agreements that would violate U.S. sanctions law. Stakeholders should also require their counterparties to comply with U.S. sanctions regulations.
- Public Reporting of Sanctions Violations: Stakeholders should conduct diligence before commencing business relationships, and during the course of a relationship if red flags arise—including through media reports. If sanctions exposure surfaces mid-voyage, parties may consider applying for a specific license with OFAC related to the continued provision or wind-down of services to the exposed party.
- Opaque Vessel Ownership: Be vigilant for risk indicators of attempts to conceal the ultimate beneficial owners of vessels. Pay attention to complex ownership and management structures, shell companies, intermediaries, and escrow agents that could be used to conceal the ultimate end use of the vessel.
Conclusion
Maritime sector stakeholders—including freight forwarders, common carriers, commodities brokers, insurers, ship management service providers, shipbroking companies, and port authorities—as well as the financial institutions that serve them should adopt robust internal sanctions compliance controls to ensure they are not violating U.S. sanctions regulations themselves or causing or facilitating other persons to engage in activities that violate OFAC's laws. Venable's International Trade and Logistics Group is available to assist your business in evaluating its maritime sanctions risks and developing risk-based compliance controls, and to advise on and assist with the submission of voluntary self-disclosures and/or license requests.