By David Loeser, Senior Director of Product Strategy, Accuity
Deceptive shipping activity is on the increase and is gaining the attention of US Department of the Treasury’s Office of Foreign Assets Control (OFAC). The office is responsible for issuing and enforcing sanctions based on US foreign policy, and recently updated its advisory documentation to raise the alertness of the industry to some of the deceptive shipping practices deployed specifically by North Korea to get goods into the country.
Throughout 2019, the media has reported several stories relating to shipping sanctions that have either been issued or evaded. The US has sanctioned four shipping companies and nine ships with ties to Venezuela, part of a strategy to step up pressure on President Maduro’s regime. Moreover, UniCredit has agreed a $1.3bn settlement over allegations it violated several US programmes. These violations included helping Iran’s national shipping company, Islamic Republic of Iran Shipping Lines, to escape detection and sanctions.
Battling the sanctions busters
The trade finance community is a vital link in the global supply chain, and compliance with international regulations is essential in averting commodities reaching embargoed countries.
However, more work is needed to raise awareness of the issues surrounding sanctions and illicit shipping activity, something which can affect the entire network of businesses and individuals involved in global trade.
This is the reason why OFAC has published its latest advisory documents. The goal is to make businesses financing and insuring shipments, the operating ports, and other key players in the supply chain aware of nefarious practices, and to “implement appropriate controls to ensure compliance with their legal requirements.” On March 21 it also released an updated advisory notice.
OFAC’s documents really reiterate the importance that they have on sanctions and enforcement in the trade finance area. They also highlighted the radiated effect from the financial institutions. Insurers, shippers, port operators, other shipping related businesses are all firms that have not been in the eye historically of these regulatory bodies.
The second advisory in the matter of a year highlights the fact that OFAC is fixed not only on the financial decisions of other businesses that are in shipping-related industries, but that its scope has increased over the past year.
The guidance demonstrates that OFAC’s mandate is not only focused on the implementation and enforcement of sanctions programs, but also the promotion of good sanctions compliance and risk management practices. It does so by inviting the shipping industry to account for three types of risk: high-risk areas, suspicious practices and high-risk vessels.
While OFAC makes it clear that the vessels named in this guidance are not automatically subject to sanctions, many of those highlighted are included in the Specially Designated Nationals and Blocked Persons list (SDN list).
Shipping industry professionals must account for the high risk of doing business with the vessels identified in these advisories, by thoroughly assessing and mitigating any attempt to evade sanctions.
Mitigating risk effectively
When it comes to risk, rapid identification is the preliminary step to any method of mitigation. Yet considering the risk factors mentioned above, detecting sanctions risks within a multifaceted international shipping environment can prove extremely problematic.
Robust due diligence and screening processes are required in trade finance to detect potential sanctions risks. However, trade compliance screening can involve several complexities:
- Trade finance transactions often involve many counterparties that all must undergo KYC checks;
- Much of the data and documentation used in trade finance is still paper-based or in an unstructured format, making it difficult to digitalize the process; and,
- There are numerous international reference lists to manage to ensure the screening process is as accurate and up to date as possible.
There are a lot of initiatives to digitize the trade industry. Some of the solutions Accuity provides do that by offering a single application to stream all the trade-related documents. If you compare it to financial institutions or insurance companies, shipping’s data management practices are still maturing.
To identify and avoid risk during the trade lifecycle, it is critical for the organisations involved to have the right data and software in place. Trade compliance screening technology can help to identify vessels that are owned, operated, or managed by sanctioned entities (such as North Korea), as well as check ships’ historical journeys to determine whether they have visited any sanctioned ports.
Registering risks in real time
Trade compliance technology can also help organizations to keep current about any changes in vessel names as they occur, something which can be a common deceptive practice and difficult to detect manually. If they sit and wait for new advisory notices to come out, organisations can become exposed to the potential risks that occur in real time. To protect their business and its reputation, it is vital for them to be proactive in spotting red flags themselves.
Sophisticated trade compliance software can spot these activities and alert the organization to the risk, sometimes even if the regulator does not. The risk patterns which OFAC has called out suggest that a more prudent approach to identifying risks related to trade is still needed.
This goes beyond the complex due diligence that must be conducted prior to agreeing to finance a transaction, and requires ongoing caution to identify other red flags, such as when a ship approaches a sanctioned or high-risk port or when they turn off their AIS tracker.
For trades, Accuity offers a number of solutions. For any trade document we provide a number of screening capabilities. Not only identifying sanctioned individuals or companies, but also sanctioned vessels and companies operating in sanctioned countries.
Accuity is able to identify if a vessel has changed its name – a factor OFAC has highlighted as increasingly important. Being able to link a name to a sanctioned entity is critical. Being able to monitor ship movements, for example if a ship is entering port in a sanctioned country that is a red flag. So being able to monitor historical journeys to determine if a ship has visited a sanctioned port is something that we also provide.
The challenge of mitigating sanctions risks in trade finance transactions is firmly on OFAC’s radar. Organizations involved in trade must be proactive to stay ahead of the risks.