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OFSI issues new ‘Maritime Guidance’

  • United Kingdom
  • Crypto assets
  • Financial services and markets regulation
  • Privacy, data protection and cybersecurity
  • Sanctions
  • Shipping

29-07-2020

Background

On 27 July 2020 the UK Office of Financial Sanctions Implementation (“OFSI”) issued its ‘Maritime Guidance’ which provides guidance for entities and individuals operating within the maritime shipping sector.

The prevention of sanctions evasion in the maritime sector has been a topical subject for a number of years. The UN has previously investigated deceptive shipping practices in the context of evading and circumventing sanctions against North Korea. In recent months, the maritime sector has had a number of key updates stemming from concerns with deceptive shipping practices, including:

  • on 14 May 2020, the US Department of the Treasury, Department of State and US Coast Guard issued a long-awaited ‘Sanctions Advisory for the Maritime Industry, Energy and Metals Sector, and Related Communities’ providing ‘Guidance to Address Illicit Shipping Practices and Sanctions Evasion Practices’ (the “Enhanced Advisory”). To date, the deceptive shipping practices agenda has, largely, been driven by the US sanctions regulator, the Office for Foreign Asset Control (“OFAC”); and
  • in response to the Enhanced Advisory, the Panama Maritime Authority issued a ‘Merchant Marine Notice’ warning that Panamanian flag ships that deliberately de-activate their Long Range Identification and Tracking Equipment (“LRIT”) or Automatic Identification System (“AIS”) will face penalties. Such penalties could range from $10,000 fines to the de-registration of the relevant vessel.

The issuance of this Maritime Guidance by OFSI is just the latest step in a long line of guidance, advice and measures targeted at deceptive shipping practices in the maritime sector.

Summary of OFSI Maritime Guidance

The deceptive shipping practices (and the sanctions risks that they pose) identified in the Maritime Guidance are as follows:

Ship-to-ship (“STS”) transfers

While there are legitimate reasons to carry out STS transfers, and they are regularly utilised throughout the industry, this type of transaction makes it difficult to track the origin and nature of the cargo being transferred. The concern is that STS transfers may be used to transfer sanctioned coal, crude oil and/or petroleum products.

Automatic Identification System (AIS) manipulation

AIS allows maritime actors and authorities to track and monitor vessel movements and is required by International Maritime Organisation’s International Convention for the Safety of Life at Sea (“SOLAS”) to be fitted on board vessels of a certain size and to be continuously transmitting. However, there are a variety of reasons that AIS may be switched-off in accordance with SOLAS, such as when passing through an area at high risk of piracy. Vessels engaging in illicit transactions have been manipulating AIS data and switching-off transponders in order to conceal the fact that the vessel has called in a sanctioned location or has been close to another sanctioned vessel.

Cyber activity

The following cyber activity of North Korea has given rise to two concerns in the maritime sector: (i) a blockchain platform start-up company registered in Hong Kong was identified as having North Korean ‘backing’. The concern was that this company could circumvent sanctions by obscuring the ownership of a vessel; and (ii) attempts have been made via cyber-attacks to acquire foreign currency in order to circumvent asset freezes.

Crypto assets

The use of crypto assets to circumvent sanctions has been widely reported. OFSI has clarified that crypto assets fall within the definition of “funds” or “economic resources” for sanctions purposes and are, therefore, caught by financial sanctions restrictions.

Financial system abuse

Bank accounts are established for the purpose of concealing illicit activities.

Document falsification

Documentation that accompanies any vessel or cargo may be falsified in order to obscure the previous location of the vessel or its origin, the origin of the cargo on board, the destination of the vessel and even the legitimacy of the vessel. Falsified documents could include, bills of lading, invoices and insurance paperwork.

Concealment

This concerns the physical concealment of illicit cargo on board a vessel. This is done to hide illicit cargo during a legitimate scheduled inspection and even as a precautionary measure if an unscheduled inspection is made.

On the basis of the above deceptive shipping practices outlined in the Maritime Guidance, OFSI appears to have taken a broader interpretation of ‘deceptive shipping practices’ than OFAC, as it has included activities that can be used to generate an income or circumvent an asset freeze, the proceeds of which can then be used to facilitate a more ‘obvious’ deceptive shipping practice.

While the scope of the deceptive shipping practices appears to be wider, OFSI has not made any targeted recommendations as to how actors in the maritime sector should combat such deceptive shipping practices, other than exercising due diligence in this respect.

However, OFSI has provided some detailed guidance in respect of what ‘due diligence looks like’. The Maritime Guidance is clear that OFSI has not mandated any specific measures that should be implemented. Any measures implemented by an organisation should be done on the basis of a risk-based approach, determined in accordance with an assessment by the relevant organisation of its own risks. The general guidance in respect of due diligence measures provided by OFSI is as follows:

  • companies conducting activity in, or around, high risk jurisdictions should have a robust understanding of the relevant sanctions regimes in place and its obligations thereunder;
  • operate a risk-based approach conducting enhanced due diligence to understand the full range of activities, the persons involved in the activities and the relevant supply chains;
  • consider the benefits of AIS screening and the inclusion of AIS ‘switch off’ clauses in contracts. Where a vessel has switched off its AIS, due diligence measures may include:
    • (i) contacting the vessel to understand why;
    • (ii) noting the instances of switch off; and
    • (iii) reviewing any switch off trends. Such due diligence measures imply that the AIS will be continually tracked. It is unclear whether this recommendation is targeted at all instances of AIS switch off by a vessel in its lifetime, or only those instances that occur throughout the lifecycle of a transaction to which the company is connected. AIS monitoring has been specifically mentioned as something to consider for shipowners, charterers, insurers, flag registries and port state control entities;
  • consider accessing a subscription-based resource which collates information on:
    • (i) ownership structures;
    • (ii) vessel flag information;
    • (iii) details of home ports; and
    • (iv) recently visited ports. In addition, checks of the relevant registrar of companies could be utilised when undertaking activities with counterparties; and
  • prior to agreement, the validity of insurance documents, bills of lading, cargo lists and the clauses of any letter of credit, loans or other financial instruments should be checked. Given the nature of certain transactions related to the maritime sector, e.g. the sale or purchase of cargo, certain documents (such as the bill of lading) may not be available prior to the transaction being agreed. Where this is the case, OFSI’s recommendation is clearly intended to encourage the checking of relevant documents at the earliest availability of such documents (including with the relevant issuing institution to confirm their validity, where relevant).

Conclusion

The OFSI Maritime Guidance does not recommend any specific measures to mitigate the deceptive shipping practices risk for actors in or connected to the maritime sector. Instead, the Maritime Guidance merely raises awareness of the deceptive shipping practices and advocates the use of due diligence procedures to take account of them, with some guidance on what those due diligence measures may include.

Some actors in the maritime sector will not be adversely affected by the recommendation to take account of deceptive shipping practices through due diligence, as such practices will be well embedded in the business already e.g. P&I insurers already conduct significant due diligence, including vessel tracking measures.

However, some industry actors will need to conduct a significant review of their business organisation in order to determine what can be done to ensure that they have sufficient due diligence measures in place to identify all of the deceptive shipping practices highlighted. Some maritime industry actors have already been considering their position in light of OFAC’s Enhanced Advisory and will have to determine whether to account for the additional OFSI deceptive practices. To date, there is no indication as to whether OFSI intends to update the Maritime Guidance to recommend more targeted measures, in a similar way to the Enhanced Advisory.

As a number of maritime sector actors operate globally, it appears that an ‘easy win’ may be to implement enhanced due diligence practices in relation to at least the products being traded (e.g. certificate of origin reviews) and the entities associated with such transaction (e.g. a vessel owner and operator). In addition, revisions  to contractual clauses to ensure that they offer protection against the deceptive shipping practices, such as AIS-disablement provisions (recognising that AIS may be disabled for legitimate reasons), corresponding termination rights to regulate vessel behaviour in active transactions, as well as representations and/or warranties in respect of the vessel’s past transactions, would also go some way to addressing the risks posed by deceptive shipping practices.

While to some industries such enhanced due diligence practices and robust contractual protections are the norm, it remains to be seen whether this approach will be widely adopted in the maritime sector. However, in light of the continued pressure on this sector, it is likely that, generally, industry standards and expectations in this space will increase.

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