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U.S. Releases guidance addressing sanctions evasion practices in maritime, energy and metal trading sectors

Robert Shapiro Jonathan Benner Tyler Black May 18, 2020


On May 14, the U.S. Department of State, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the U.S. Coast Guard issued a sanctions advisory for the maritime industry, the energy and metals sectors and related business communities to provide guidance regarding illicit shipping and sanctions evasion practices (hereafter, the “Advisory”). The Advisory focuses on practices to combat sanctions evasion, smuggling and criminal activity, facilitation of terrorism and proliferation of weapons of mass destruction (“WMD”), particularly in the context of activities involving Iran, North Korea and Syria.

The Advisory does not expand existing primary or sanctions, but does provide important information about its awareness of common deceptive shipping practices and resets U.S. sanctions compliance expectations in the maritime industry for transactions involving the energy and metal sectors.

The Advisory defines the energy and metals sectors to include “trade in crude oil, refined petroleum, petrochemicals, steel, iron, aluminum, copper, sand, and coal”), and the affected stakeholders 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.”

The Advisory states that it provides “updated information on the deceptive practices used to evade sanctions” and practices that stakeholders “may wish to consider adopting as a part of a risk-based sanctions compliance program.” In light of previous advisories listing vessels deemed to have engaged in sanctionable conduct and blocking sanctions imposed on numerous maritime companies and vessels, maritime industry participants should understand these expectations, evaluate them against current risk-based sanctions compliance practices and consider prompt implementation where appropriate.

Deceptive shipping practices

The Advisory summarizes a non-exhaustive list of “tactics” used by persons to facilitate illegal maritime trade or conduct. It recommends the maritime sector continue to be vigilant against these tactics to limit the risk of being involved in sanctionable or illicit conduct and to exercise heightened due diligence with respect to shipments that transit areas that present high risk. The tactics include:

  • Disabling or Manipulating the Automatic Identification System (“AIS”) on Vessels

  • Physically Altering Vessel Identification

  • Falsifying Cargo and Vessel Documents

  • Ship-to-Ship (“STS”) Transfers

  • Voyage Irregularities

  • False Flags and Flag Hopping

  • Complex Ownership or Management

None of these tactics is entirely new. However, the list should be viewed as a consolidated “red flags” checklist that U.S. authorities are likely to expect parties to observe (or uncover through “heightened due diligence”) in particular in higher risk transactions. Conversely, failure to detect deceptive practices as a result of not implementing guidance provided in the Advisory may serve as a basis for regulatory scrutiny and adverse action. Thus, the Advisory effectively puts all stakeholders on notice that heightened vigilance is required to avoid inadvertent illegal activity when one or more of these factors is present, especially in the context of a transaction that may directly or indirectly involve Iran, Syria or North Korea.

Best practices to identify sanctions evasion

The Advisory details seven practices “that may assist in more effectively identifying potential sanctions evasion.” Those practices, which the Advisory warns are not intended to be comprehensive, are as follows:

  1. Institutionalize Sanctions Compliance Programs. The Advisory recommends companies conduct a risk assessment and develop “adequate and appropriate compliance policies that respond to [the] internal risk assessments” and provides specific guidance on how that may be accomplished. This includes but is not limited to implementing sanctions compliance and due diligence programs and the provision of training and resources needed to execute those programs. It also provides guidance suggesting that companies communicate their compliance policies and expectations to affiliates, partners and various counterparts in a manner “consistent with local requirements,” which may include so-called blocking regulations.

  2. Establish AIS Best Practices and Contractual Requirements. The Advisory encourages “maritime industry participants, flag registries, and other private sector entities to include insurers and financial institutions that conduct business with ship owners, charterers, and managers” to promote continuous broadcasting of AIS as a carriage requirement (consistent with the International Convention for Safety of Life at Sea (“SOLAS”)), particularly in high risk areas. Additionally, the Advisory encourages companies to investigate whether there has been a prior history of AIS transponder manipulation before engaging in a transaction and consider amending contracts to include termination language if AIS location is not continuously broadcast or cargos are transferred illicitly.

  3. Monitor Ships Throughout the Entire Transaction Lifecycle. The Advisory encourages ship owners, managers, and charter companies to monitor their vessels to ensure continuous AIS broadcasting and whether any STS transfers are undertaken where appropriate based on risk. In addition, prior to STS transfers, vessel operators are advised to consider verifying the other vessel’s name, IMO number, and flag, and checking that it is currently broadcasting AIS. Industry actors are also encouraged to “look[] for situations where ownership of a vessel” has recently changed hands without alteration of the ultimate beneficial owner.

  4. Know Your Customer and Counterparty. The Advisory encourages stakeholders such as “[f]lag registry administrations, insurers, financial institutions, managers, and charterers” to conduct “appropriate” risk-based due diligence. The advisory suggests due diligence practices such as reviewing the “names, passport ID numbers, address(es), phone number(s), email address(es), and copies of photo identification of each customer’s beneficial owner(s).”

  5. Exercise Supply Chain Due Diligence. The Advisory encourages companies “across the maritime supply chain” to review recipients and counterparties to a transaction to ensure the commodities being handled are not subject to sanctions (e.g., Iranian petroleum or North Korea-origin coal). It also suggests implanting verification-of-origin and recipient checks for ships that conduct STS transfers, particularly in high-risk areas. Companies are encouraged to review complete, accurate shipping documentation (including bills of lading that describe cargo origin and destination and export licenses where applicable), and other voyage details, to be combined with the overall risk assessment of a transaction’s parties, vessel, cargo and route.

  6. Contractual Language. The Advisory encourages Marine industry actors to incorporate these best practices into their industry-related contracts.

  7. Industry Information Sharing. The Advisory encourages broad sharing of information by industry groups and their members, consistent with local laws and regulations, to foster industry-wide awareness of challenges, threats (e.g., new tactics) and risk mitigation measures.

Although these practices are not legal requirements, nor do they necessarily provide safe harbor if observed, companies in the international maritime industry should ensure that these practices are appropriately considered and implemented where appropriate because they should be assumed represent U.S. Government expectations, including those of OFAC and the State Department, in appropriate circumstances.

Stakeholder specific guidance

Annex A of the Advisory provides guidance specifically tailored for the following stakeholders: maritime insurance companies; flag registry managers; port state control authorities; shipping industry associations; regional and global commodity trading, supplier, and brokering companies; financial institutions; ship owners, operators, and charterers; classification societies; vessel captains; and crewing companies.

The industry-specific guidance is tailored to address what the U.S. Government presumably views as the most prominent risks in each stakeholder field. For example, maritime insurance companies are encouraged to consider implementing ten different diligence practices in order to assess and mitigate sanctions risks, while the guidance for shipping industry associations contains just two. These industry-specific guidance points should be understood to reflect an attempt by the U.S. government to adjust the standard practices of those in each stakeholder field to collectively discourage sanctions evasion and other illicit conduct. Accordingly, each participant in a maritime transaction, especially persons subject to U.S. jurisdiction or foreign persons potentially operating in a sector targeted by U.S. secondary sanctions, should evaluate its own practices and compliance programs to assess vulnerabilities.

Information about North Korea, Iran and Syria sanctions

Annex B of the Advisory provides a detailed description of conduct involving these countries that is prohibited by U.S. primary sanctions or sanctionable under U.S. secondary sanctions. It also provides country specific information about deceptive shipping practices.

Implications for non-U.S. Persons

U.S. secondary sanctions involving Iran, North Korea and Syria, which are described in Annex B, expose non-U.S. Persons to serious adverse consequences involving denial of access to the U.S, economy, including possible designation as a SDN. OFAC’s shipping advisories that listed vessels believed to be engaged in were able to inflict serious harm on ship owners and operators without taking any direct adverse action. Accordingly, understanding the expectations of the U.S. Government should be viewed as a necessary component of maritime industry business. If appropriately implemented, the guidance may lessen the risk that sanctionable conduct occurs or, where it does occur, it may mitigate the risk of enforcement. It bears noting that similar risks may exist in connection with transactions involving shipments to or from Venezuela or involving Venezuelan resources such as crude oil.

We have extensive experience in advising the maritime and insurance industry on these complex matters. If you have any questions regarding this recent sanctions development, please contact one of the members of the Thompson Coburn International Commerce practice group.