In this analysis for Bunkerspot of the provisions and implications for the bunker industry of the recently issued US joint Sanctions Advisory, Daniel Martin and Isabel Phillips of HFW emphasise that with its publication the US is sending a message that ‘the time of pointing fingers and claiming ignorance is over’.
Authors: Daniel Martin, Partner, and Isabel Phillips, Associate, at HFW
Developments over the past few months will have sent a chill down the spine of the most hardened shipping companies, and dispelled any thoughts that it might be business as usual when it comes to maritime sanctions compliance.
In March 2020 David Peyman, the outgoing US Deputy Assistant Secretary of State for Counter Threat Finance and Sanctions, sent up the following warning signal to the industry: ‘ … I really do think there's much more space for improvement in the private sector. It seems like much of the shipping sector is a generational business that has been handed down from generation to generation and business was conducted in a certain way maybe 50 years ago or 30 years ago or even 10 years ago. The world has changed quite dramatically in the last 10 years. The use of US sanctions I think of escalated and I think we've shown that we're ready to undertake strategic targeting.’
Since then, we have seen two stark examples of this escalating use of sanctions. The first is a raft of designations of ships and shipowners in connection with US sanctions against Venezuela. The detail is outside the scope of this article but the message is clear: bunker traders need to continue to carry out due diligence on their customers and the vessels which they supply in order to ensure that they are not dealing with sanctioned companies or vessels.
The second example, which we will consider in this article, is the joint Sanctions Advisory (the Advisory) which was released by the US State Department, Treasury Department and Coast Guard on 14 May 2020 and which targets sanctions evasion and illicit practices in the shipping sector.
The Advisory seeks to persuade shipping market participants not only to adopt their own high standards but also to require the rest of the industry to follow suit.
The Advisory is detailed and sets high standards, but it could have been worse: there is widespread reporting that the Advisory as published is less prescriptive than the initial proposal, which would have set mandatory standards for required actors in the shipping sector to tackle sanctions evasion, rather than being merely advisory.
The Advisory contains only a few specific references to bunkering (and those are specifically in the context of sanctions against Iran and North Korea) but many of the general recommendations are relevant to bunker suppliers.
Deceptive practices within the industry
The Advisory highlights a number of ‘deceptive practices’ which the US authorities say are hallmarks for sanctions evasion. These red flags include:
1. Disabling or manipulating the AIS on vessels
2. Physically altering vessel identification
3. Falsifying cargo and vessel documents (e.g. bills of lading and certificates of origin)
4. STS transfers (particularly in high risk jurisdictions)
5. Voyage irregularities
6. False flags and flag hopping
7. Complex ownership or management
The US's stance on AIS is very clear: ‘AIS transponders that provide the location of vessels should never be turned off.’ Any gaps or manipulated data are seen as a trigger for requiring heightened due diligence.
The Persian Gulf, the UAE, Iraq, Malaysia, Hong Kong and offshore China have been identified as high risk jurisdictions and AIS blackspots where vessels are known to engage in ship-to-ship transfers to evade US sanctions.
Practices to tackle evasion
The guidance in the advisory recommends the following best practices for market participants to consider adopting:
1. Institutionalise sanctions compliance programs
2. Establish AIS best practices and contractual requirements
3. Monitor ships throughout the entire transaction lifecycle
4. Know your customer and counterparty
5. Exercise supply chain due diligence
6. Contractual language
7. Industry information sharing
Further specific methodologies and risks are identified for sanctions regimes targeting Iran, Syria and North Korea.
The guidance also provides recommendations targeted at individual shipping sub-sectors (owners, charterers, traders, marine insurers, financial institutions, class societies, flag registries and crewing companies).
Impact on bunker suppliers
The Advisory addresses the following specific risks in connection with bunkering:
• Provision of bunkering or other services to North Korean vessels if the supplier has information that provides reasonable grounds to believe that such vessels are carrying prohibited items.
• Provision of bunkering services to a vessel that is designated under a North Korea-related Executive Order (E.O.) or that is owned or controlled by a person designated under a North Korea-related E.O. or United Nations Security Council Resolution.
• Knowingly providing certain bunkering services to Iranian vessels or to non-Iranian vessels transporting cargo, including petroleum or petroleum products from Iran, for Iranian persons on the US Specially Designated Nationals List, unless an applicable waiver or exception applies.
In addition, bunker suppliers should be alert to vessels' trading and cargo histories. The Advisory indicates that the US expects a range of market participants (including insurers, flag states, port state control, suppliers and commodity trader charterers) to be alert to AIS gaps or manipulation of AIS data, and this applies equally to bunker suppliers.
In particular, the Advisory includes recommendations that market participants should:
• Monitor AIS transmissions of vessels, especially vessels that have traded in areas determined to be at high-risk for sanctions evasion via ship-to-ship transfers.
• Identify any vessels which, in the past two years, have a pattern of AIS disablement or manipulation.
• Adopt contractual language that incorporates an ‘AIS switch-off’ clause, allowing for contract termination in cases of AIS disablement or manipulation.
Many, including the International Group of P&I Clubs (IG), have commented that the ‘recommendations’ in the Advisory place a heavy burden on industry participants and may conflict with other legislation, including requirements of EU data protection and competition law. The heavy focus on AIS also does not take into account the unreliability of AIS signal in some high density areas and whilst a vessel is in port.
Nonetheless, it seems clear that the US will take non-compliance with the Advisory into account when assessing sanctions breaches, particularly in light of the following indications that the industry is already moving in line with the Advisory:
• Liberia, the Marshall Islands, Palau and Panama have signed the Registry Information Sharing Compact (RISC) pursuant to which they agree to notify each other if they de-register or deny registration to a vessel suspected of a sanctions breach.
• Panama has the un-appealable right to withdraw its flag from any vessel within 24 hours if the vessel has violated sanctions, been used to facilitate terrorism or terrorist financing.
• Panama announced in June 2020 that they will impose penalties, including fines of up to $10,000 and withdrawal of registration, on ships which deliberately deactivate, tamper or alter the operation of their AIS or Long Range Identification and Tracking Equipment (LRIT) systems.
• All clubs in the IG have agreed on a common minimum standard for vessel tracking in high risk areas to help identify if a vessel is calling at ports in sanctioned countries, conducting abnormal navigation, manipulating and/or disabling AIS or conducting STS transactions in high risk areas.
• As Bunkerspot reported on 16 June 2020 , BP Shipping has partnered with Windward, a maritime trade analytics and insights provider, to digitise its business trade practices relating to sanctions compliance, having described the Advisory as ‘a game-changer for the maritime and trade ecosystems regarding compliance requirements’.
HFW recommend that all companies in the maritime sector and related sector actors should immediately take the following steps:
• Review and carefully digest the Advisory.
• Review current sanctions policy and procedures to ensure that these address sanctions risk generally and in light of the specific risks identified in the Advisory.
• Consider whether any counterparties present particular risks in light of the identified deceptive practices and how to mitigate those risks.
Following the publication of the Advisory, the US agencies clearly expect the shipping industry to be aware of sanctions risks and take proactive steps to manage them. Unfortunately, it is likely only to be a matter of time until more shipping companies find themselves in the cross hairs of US enforcement. Make sure it's not you!