Sanctions risk... you have been warned!

Common risks and the importance of implementing and maintaining an effective sanctions compliance policy

In response to the Russian Federation's ongoing conflict with Ukraine, the United Kingdom and the European Union have introduced extensive financial and trade sanctions designed to limit the Russian government's ability to finance its war operations. As a result:

There has been an increase in the deployment of sophisticated techniques (or "typologies") designed to circumvent these measures by persons who are subject to financial sanctions ("Designated Persons") or by those intent on engaging in prohibited activities (together, "Sanctions Evaders"); and
There is a heightened risk that companies and individuals operating within the UK and European Union could inadvertently facilitate prohibited activities by Sanctions Evaders.

The consequences of facilitating prohibited activities by Sanctions Evaders are severe, particularly where the party responsible is deemed to have had inadequate policies in place to identify, monitor for and report potential sanctions circumvention. In this article, we consider:

The common sanctions evasion typologies employed by Sanctions Evaders in the maritime and offshore industries;
The potential consequences of breaching or facilitating a breach of sanctions; and
The policies those operating in the maritime and offshore industries should implement to mitigate their risk of: (i) breaching or facilitating a breach of sanctions; and (ii) facing enforcement action and substantial monetary penalties in the event of a breach.

Common sanctions evasion typologies

The development of global financial and trade sanctions regimes and the techniques used to circumvent them share a symbiotic relationship; as new sanctions are introduced, Sanctions Evaders employ new strategies to evade them. The imposition of the UK's and EU's trade and financial sanctions on the Russian Federation in response to its war with Ukraine has followed this trend, leading to the exponential growth of a "dark fleet" of vessels involved in the illicit transport of sanctioned goods.

The most common typologies employed by the vessels comprising the "dark fleet" (and the Sanctions Evaders involved in their ownership) when seeking to circumvent the UK's and EU's sanctions regimes are set out below:

Typology 1: False Flags/Deregistration

False flag operations involve the deliberate misrepresentation of the flag under which a vessel operates to mask its true ownership and (potentially illicit) behaviour. When onboarding new business or monitoring existing client relationships, it is important to look for any indication that:

A vessel is flying the flag of a country in which it is not registered;
A vessel owner or manager continues to fly a country's flag after the vessel has been removed from that country's registry; or
A flag state or insurer has terminated services to a vessel, owner or ship manager.

Typology 2: Flag Hopping

Flag hopping is another common practice deployed by Sanctions Evaders to obfuscate the ownership and identity of a vessel and avoid detection for sanctions evasion. This practice involves frequent and often rapid shifts in flag registration, making it challenging for authorities to track the vessel's movements and activities. When providing services to a vessel, attention must be paid to the registration history of the vessel and the frequency with which it has changed flags, particularly in relation to flag-of-convenience states; if a vessel has changed flags frequently in a short period, this should be a cause for suspicion.

Typology 3: Complex ownership structures

Complex ownership structures (often involving shell companies and/or multiple levels of ownership and management) can be used to disguise the ultimate beneficial ownership of a vessel, cargo or commodities to avoid sanctions. Sanctions Evaders seeking to evade or circumvent sanctions may also engage in a pattern of changes in the ownership or management of companies or the International Safety Management Code (ISM) management companies used.

Typology 4: AIS disablement, manipulation or spoofing

To disguise their location or the provenance or destination of the goods they are carrying, vessels involved in sanctions evasion may intentionally disable their AIS transponders or manipulate the data transmitted by them (i.e., spoofing). It is essential to have sufficient procedures in place to identify and record as suspicious any instances of vessels:

"Going dark" (i.e., disabling their AIS transponders), particularly in high-risk areas; and/or
Travelling improbable distances in short periods of time (an indication that an illegitimate vessel is falsifying its AIS data by adopting the Maritime Mobile Service Identity and International Maritime Organisation number of a legitimate vessel).

Typology 5: Irregular sailing patterns

Sanctions Evaders may also attempt to disguise the ultimate destination or origin of cargo or recipients by using indirect routing, unscheduled detours, or transit or transhipment of cargo through third countries. Although transit and transhipment are common in the global movement of goods, routes and destinations that deviate from normal business practices should be scrutinised, in particular transit through countries or territories known as "circumvention hubs".

Typology 6: Ship to ship transfers

The practice of ship to ship transfers, particularly during the night or in areas identified as high-risk for sanctions evasion or other illicit activities, is often exploited. This method is commonly employed to circumvent sanctions by masking the true origin or destination of covertly transferred commodities.

Typology 7: Rotations of owner and manager companies

Sanctions Evaders may strategically rotate shipowner and manager companies to obscure connections to sanctioned activities. It is essential that sufficient procedures are in place to monitor and detect a vessel exhibiting a pattern of frequent changes in ownership or control.

Typology 8: Open registries

Open registries are vulnerable to Sanctions Evaders using their flags to distance the activities of vessels from perceived connections to a sanctioned jurisdiction or entity. Registries which are particularly vulnerable to exploitation include the following:

Gabon, Dominica, Mongolia, Togo, Sierra Leone, Tanzania, Comoros, Vanuatu, Albania, Algeria, Moldova and Cameroon.

In addition, the following registries are reportedly the top five flags for "dark" and "grey" fleets from sanctioned countries:

Panama, Liberia, Marshall Island, Malta and Russia.

Typology 9: New vessel acquisitions

The acquisition of new vessels as a tactic to evade sanctions involves the deliberate procurement of additional ships to navigate around or mitigate the impact of imposed sanctions. Sanctions Evaders may use the acquisition of new vessels to obscure their ownership or control. By registering the vessels under different names or through intermediary entities they can reduce the risk of detection.

Typology 10: False or fraudulent documentation

Complete and accurate shipping documentation is critical to ensure all parties to a transaction understand the entities, recipients, goods, and vessels involved in a given shipment. Bills of lading, certificates of origin, invoices, packing lists, proof of insurance, attestations, seafarer documentation, and lists of last ports of call are examples of documentation that typically accompanies a shipping transaction.

It is imperative that procedures are in place to identify and respond to suspected falsification of documents by a customer.

Consequences of breaching or facilitating a breach of the UK's financial or trade sanctions

It is a serious criminal offence, punishable upon conviction by up to 7 years in prison, to enable or facilitate the contravention of the UK's financial sanctions legislation where there was reasonable cause to suspect a breach. Any breach of the UK's trade sanctions regime may carry a maximum penalty of ten years' imprisonment.

There is also strict civil liability for breaching these sanctions. Under English law, the Office of Financial Sanctions Implementation ("OFSI") has the power to impose monetary penalties on an organisation (and its officers if the breach is attributable to any neglect on their part) which has breached or failed to comply with an obligation under financial sanctions legislation up to the greater of:

£1,000,000; or
Where the breach or failure relates to particular funds or economic resources and it is possible to estimate their value, 50% of that value.

When deciding whether to take enforcement action and the level of monetary penalty to impose upon an organisation involved in facilitating a breach of sanctions, OFSI will consider as aggravating factors:

The failure of an organisation or its personnel to exhibit the knowledge of financial sanctions expected by those involved in an industry with a heightened risk of sanctions exposure;
A failure to carry out appropriate due diligence on the ownership and control of a customer (whether existing or potential); and
The implementation, monitoring and auditing of a comprehensive sanctions compliance policy.

To mitigate these risks, we set out below some essential procedures which organisations within the maritime and offshore industries should implement to guide their compliance efforts.

Mitigating sanctions risk

OFSI guidance provides that organisations involved in a range of maritime and offshore sectors[1] are "particularly exposed to sanctions risk". Organisations working within these sectors are required to assess their risk of sanctions exposure and implement sufficient procedures to manage these risks. These procedures should include as a minimum:

Due diligence: Initial and ongoing risk assessment

The implementation of: (i) continuous sanctions education to provide employees with a strong understanding of relevant sanctions regimes; and (ii) robust and ongoing due diligence in relation to new and existing customers.

Any such due diligence process should include:

The collection and maintenance of essential information like names, passport IDs, addresses, phone numbers, emails, and photo IDs for the beneficial owner(s) of each customer and an overview of the full corporate or ownership structure of each customer;
Screening of all entities and stakeholders involved in a transaction against available sanctions lists;[2]
The use of subscription-based resources or free online tools to check ownership structures, vessel flag details, home ports, and recent ports visited; and
Risk-based enhanced due diligence where there is any indication that a customer (whether existing or potential) may be involved in actions consistent with the sanctions evasion typologies identified in this article or otherwise engaged in the circumvention or evasion of existing sanctions regimes.

A strong sanctions compliance programme

The adoption of a comprehensive sanctions compliance programme proportionate to the heightened risk of sanctions exposure faced by organisations within the maritime and offshore industries. In particular, OFSI highlights the importance of:

Developing, implementing, and adhering to written, standardised operational compliance policies, procedures, standards of conduct, and safeguards to offset the risk of sanctions circumvention; and
Ensuring that your sanctions compliance programme is routinely audited by qualified third parties to ensure both continuous improvement and effectiveness of your measures and controls.

Conclusion

A failure to implement sufficient measures (including those listed above) to manage an organisation's sanctions exposure:

Increases the likelihood that an organisation will inadvertently facilitate sanctions evasion; and
Will be considered an aggravating factor by OFSI when determining whether to take enforcement action and the level of monetary penalty to impose on an organisation or its officers.

Given the evolving nature of international trade and financial sanctions regimes, it is therefore imperative that organisations review and update their existing sanctions compliance policies and ensure that they are regularly audited by qualified third parties.

[1] For example, maritime insurance; charterers; classification societies; suppliers of cargo; customs and port state controls; flag registries; ship brokers; ship owners; bunker suppliers; shipyards; and financial institutions involved in maritime trade finance.

[2] I.e., the Office of Foreign Assets Control sanctions search list, OFSI consolidated search list and the EU consolidated list of persons, groups and entities subject to EU financial sanctions.

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