The international shipping industry transports nearly 90% of global trade. A map of global shipping routes shows how goods, be they coal, iron ore, grain, oil or woven baskets, flow around the world like the lifeblood of the planet. There are over 50,000 merchant ships trading internationally, registered in over 150 nations, and manned by over a million mariners of virtually every nationality.
For all this to happen, the ships need to be designed, built, docked, crewed, maintained and insured, and the deals will likely need financing with guarantees, letters of credit or various other financial products.
A slew of individuals and businesses come together to generate trillions of dollars of trade and naturally this provides opportunity and incentives for those practicing the dark arts. As well as keeping an eye out for fraudsters and money launderers, banks and other financial institutions need to consider the ever-increasing sanctions that are imposed on some of the countries involved in importing and exporting and also on the vessels carrying the goods.
In the last year, the Trump administration has used new sanctions on dozens of vessels to target oil supplies to or from both Venezuela and Iran and this has contributed to some significant increases in the overall numbers of sanctioned vessels. The chart below shows how the total number of OFAC sanctioned vessel names went from 265 in December 2015 down to 77 in December 2017 (with Obama’s lifting of the Iran sanctions) and back up to a huge 547 vessel names by November 2019.
All this means that banks and other businesses need to make sure their exposure to these risks is understood and managed.
In September 2019, OFAC issued an ‘Advisory to the Maritime Petroleum Shipping Community’ which reminded us, if we needed reminding, of the sanctions environment relating to Iran and the consequences of any breaches. It also outlines some “Deceptive Shipping Practices” to be aware of. These include:
- Document falsification
- Ship to ship transfers – where goods are transferred from one ship to another at sea to avoid any inspections or documentation while in port.
- Disabling the Automatic Identification System (AIS), a system originally designed to prevent collisions, but which buyers, sellers, authorities and anyone else also use to see where their goods are – or at least where they are meant to be.
- Changing vessel names in an attempt to hide the origin of ships or their goods – although it is harder to obfuscate the International Maritime Organisation (IMO) Number that uniquely identifies each ship.
Other nefarious methods, not included in OFAC’s advisory include:
- Concealment of illicit goods with genuine goods – Try finding a stash of guns under a few thousand tons of iron ore.
- False declaration of origin of goods
- The use of front companies to conceal a sanctioned shipping company or agent.
The complexity of the commercial relationships, the reliance on old-fashioned paperwork and the stringent sanctions environment mean that banks need to take extra care to manage their risk.
Critically, banks should ensure that they build a solid understanding of their exposure and their customers’ exposure to the risks explained in the OFAC advisory. With this in mind, there needs to be an effective controls environment that addresses these risks in line with the bank’s risk appetite.
For example, many banks will avoid – or take extra precaution with – any business involving high-risk countries and customers, over and above those on the OFAC SDN list. There will also be differing views on the risk relating to transhipment – the transfer of goods from one vessel to another between origin and destination. How would you feel if you were financing goods that were transferred from one ship to another while docked in Bandar Abbas, Iran’s busiest port? The Bankers Association for Finance and Trade (BAFT) advised in 2017 that in some circumstances, this should not necessarily result in a sanctions violation, but not everyone would be happy defending that position. The Working Group goes so far as to suggest that “the tracking of vessels carrying cargo related to underlying financial transactions is neither necessary nor a useful practice, given that movement in territorial waters, or port calls do not involve blocked property when there are no SDN instrumentalities”. Any bank involved in, or considering entering into trade finance will need to consider this and other thorny questions to balance their commercial intentions with the risk of breaching financial crime regulation.
As well as making sure that screening engines are appropriately tuned, calibrated and assured, banks should consider the requirement for additional research tools. Thankfully there are a range of tools and services out there to help organisations find out where the ships have been, where they are heading and what’s happening in between.
At SQA Consulting we can not only give you hints and tips on screening effectively and data management, we are leaders in measuring the effectiveness and efficiency of screening. Please contact us to find out more about this article or download our brochure here.