Increased Sanctions Risk on the High Seas Demands an All Hands on Deck Attitude to Due Diligence
12 April 2021 02:30
- Nexis Diligence™
- Risk Management
- Sanctions & Watchlists
- Reputation Management
- Supply Chain
- Due Diligence
- Ultimate Beneficial Ownership
Sanctions evasions tactics have increased substantially in the shipping industry. This trend of capitalizing from illicit shipping practices harbours many dangers for companies invested in and connected to the global shipping industry. How can a data driven approach to due diligence mitigate maritime sanctions risk?
In April 2020, the U.S. Departments of State and Treasury, along with the U.S. Coast Guard, issued a global advisory regarding deceptive shipping practices and sanctions evasions tactics with a particular regional focus on Iran, North Korea, and Syria. Following suit, the UK’s Office of Financial Sanctions Implementation (OFSI) published updated guidance for businesses directly or indirectly involved in the shipping industry and warned about the rise in illicit practices used to bypass international sanctions.
A recent investigation conducted by the New York Times discloses how North Korea facilitates oil imports by taking advantage of clandestine ship-to-ship transfers and obscure ownership structures, despite a strict international sanctions regime being in place. An increasing variety of deceptive shipping practices are being used to circumvent sanctions, including:
- Physically altering the vessel identification
- Disabling or manipulating the automatic identification system (AIS) on ships
- Falsifying documents
- Cargo and voyage irregularities.
Both the U.S. and UK notices recommend a best practices framework on how to mitigate sanctions risk exposure with enhanced due diligence.
Sanctions compliance demands a data-driven process
The two latest maritime advisories are merely the tip of the iceberg when it comes to the growing regulatory framework on compliance for shipping. Organisations face increased reputational risks when they are caught bypassing international sanctions, which are often based on human rights violations and other pressing issues. Navigating these risks—and the subsequent financial fallout from failures to do so—requires a more robust approach to due diligence.
- Take an analytical approach to risk management: Check-the-box list matching is no longer adequate, given the many deceptive practices being used. This is especially true for organisations working in or near high-risk countries. Compliance Week further notes, “Companies and individuals involved in the supply chains of trade in the energy and metals sectors—including trade in crude oil, refined petroleum, petrochemicals, steel, iron, aluminium, copper, sand, and coal—are also encouraged to review the advisory and take appropriate action as deemed necessary or advisable.”Instead, organisations need to embrace more comprehensive Know Your Vessel (KYV) screening and due diligence processes.
- Look beyond Tier 1 relationships: Sanctions risks and potential financial, regulatory, and reputational fallouts do not stop with shipping companies. Other third parties, including banks and insurance companies, are involved in the complex dynamics that make up the global sea trade. Resolving issues such as sanctions evasions and illicit shipping demands cooperation between all stakeholders to work together and mitigate potential sanctions violations. In addition to implementing risk-aligned third party due diligence and ongoing monitoring , organisations must make it clear—with appropriate contracts and training—that suppliers and other business partners must have appropriate risk management processes in place as well.
- Comprehensive data supports informed decisions: Access to up to date information on entities, vessels and ports are essential for establishing a robust due diligence process. Historical ship locations, the ship registry and ship flagging can support mitigating sanctions while operating in rough seas. But organisations shouldn’t stop there. As we’ve seen in the headlines, beneficial ownership is often used to hide a multitude of corrupt activities. Access to ultimate beneficial ownership data can keep organisations alert to possible PEPs or sanctions risks that might otherwise be left in the shadows.
While guidelines are not legally binding, they help regulatory bodies evaluate the adequacy of an organisation’s risk management process, which can be a consideration in the event of a compliance failure. Would your current process hold up to scrutiny?
Discover how the news, regulatory lists, and company information - including IHS Maritime Shipping data - available in Nexis Diligence™ empowers organisations to identify potential sanctions risks on the high seas.
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