The UK's sanctions authority, the Office of Financial Sanctions Implementation (OFSI), published guidance for operators in the maritime industry, including shipping and maritime insurance, which are significant sectors in the UK economy. This guidance follows similar guidance issued by US authorities in May (see previous post here).
Sanctions Evasion Indicators in Maritime Activity
OFSI cites UN reports on North Korea which identify illicit and suspicious shipping practices, stating that sanctions evaders use a variety of tactics to confuse or conceal the identities of vessels, cargo, routes and ports. These tactics include:
- Ship-to-ship transfers - i.e. the transfer of cargo between vessels positioned alongside each other at sea, either in anchor or underway.
- Intentionally disabling AIS (automatic identification systems).
- Cyber activity such as cyber attacks to forcibly transfer funds from banks or cryptocurrency exchanges. OFSI notes that crypto assets are included in the definition of funds or other economic resources, falling under the scope of sanctions prohibitions.
- Use of false documentation, including for example, in setting up front bank accounts, or otherwise disguising origin or nature of goods.
- Physical concealment of goods.
How does this breach sanctions?
OFSI states that these factors are not themselves breaches of sanctions and that there are legitimate reasons for example, why ship-to-ship transfers would be used, or for AIS to be turned off. However, OFSI expects maritime operators and banks to take these suspicious activity indicators into account to evaluate sanctions risk.
Most financial sanctions regulations include an obligation that funds and economic resources which are owned, held or controlled by designated entities or individuals must be frozen. Additionally, most financial sanctions regulations state that making funds and economic resources available to, or for the benefit of, these entities or individuals, directly or indirectly, is prohibited in the absence of a license.
OFSI notes that specific regimes may present a high risk with respect to financial sanctions compliance and suggests that when dealing with such regions, or when passing through or near waters where non-compliant actors are known to operate, enhanced due diligence should be considered. High profile sanctions regimes include:
- North Korea
How to Comply with Sanctions
Companies operating in the UK in the maritime sector should be aware of particular sanctions risks where they operate and apply a risk-based approach, particularly in conducting enhanced due diligence where sanctions risks may be greater. According to OFSI, "Companies should always seek independent legal advice where necessary and operate a risk-based approach conducting enhanced due diligence to understand: the full range of activity, the persons involved in supply chains, etc."
Companies such as ship owners, charterers, insurers, flag registries and port state control entities may also consider including contractual clauses to prohibit or allow review of counterparty's reasons for switching off AIS.
OFSI also states that companies should make use of public or subscription-based resources to check on ownership structures, vessel flag information, details of home ports and recently visited ports.
Suspected fraudulent letters of credit, bills of lading, loans and other types of financial instruments should always be checked with the relevant institution for validity.
Overall, while the guidance does not contain "new" examples of evasion tactics or best practice, it signals the UK regulator's expectations and enforcement approach in this space.
Although not an element of sanctions compliance, the guidance also directs ship captains to report suspicious behavior to this form, which may result in NATO interdiction.
OFSI has today published new guidance for the maritime sector. It provides financial sanctions guidance for entities and individuals which operate in, or with, the maritime shipping sector, especially those involved in areas that may be subject to UK financial sanctions restrictions. This should be considered supplementary to, and not a replacement for, OFSI’s general guidance document.