Financial sanctions guidance for maritime shipping [Feb 2024]

The following Sanction update:-

• Is guidance from the Office of Financial Sanctions Implementation (OFSI), [Published 28 February 2024], the authority for the implementation of financial sanctions in the UK.
• Provides financial sanctions guidance for entities and individuals that operate in, or with, the maritime shipping sector, especially those involved in areas that may be subject to UK financial sanctions restrictions, including the handling of goods.
• Should be considered supplementary to, and not a replacement for, OFSI’s general guidance.
• https://www.gov.uk/government/publications/financial-sanctions-general-guidance/uk-financial-sanctions-general-guidance

DUE DILIGENCE

Illicit activity could occur across multiple sectors involved in the maritime industry. Organisations that may be particularly exposed to financial sanctions risk are:

• Maritime insurance companies
• Charterers
• Classification societies
• Suppliers of cargo
• Customs and port state controls
• Flag registries
• Ship brokers
• Ship owners
• Bunker suppliers
• Shipyards
• Financial institutions involved in maritime trade finance

You should assess your risks and put due diligence measures in place to manage these risks. OFSI does not mandate specific measures to be taken, but you may use the following good practice recommendations to guide your compliance efforts.

DUE DILIGENCE PRACTICES

If you are conducting activity in, or around, high-risk countries or territories you should seek to have a strong understanding of the sanction regulations in place, including the relevant obligations.

You should always seek independent legal advice where necessary and operate a risk-based approach, conducting enhanced due diligence where appropriate.

STRONG COMPLIANCE PROGRAMME

We recommend that, as appropriate, you should implement a strong sanctions compliance programme proportionate to the risk you face and provide training and resources to your personnel. As part of your programme, you may consider:

• Communicating compliance expectations with counterparties, partners, subsidiaries, and affiliates in line with local regulations
• Developing, implementing, and adhering to written, standardised operational compliance policies, procedures, standards of conduct, and safeguards
• Implementing compliance programmes, which should specify that engagement in sanctionable conduct may result in immediate termination of business or employment, or alternatively, confirm the adoption of controls to mitigate associated risks
• Protecting employees that disclose illicit behaviour from retaliation and establish a confidential mechanism for reporting suspected, actual illicit or sanctionable activity
• 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
• Routinely checking the UK Sanctions List, and the OFSI Consolidated List

In addition to these general recommendations, you should also consider:

1. Improving Know Your Customer (KYC) and Counterparty Checks
2. Organisations across the maritime sector should regularly conduct risk-based due diligence. This involves collecting and maintaining essential information like names, passport IDs, addresses, phone numbers, emails, and photo IDs for the beneficial owner(s) of each customer.
3. For example, when a company wants to register a vessel or obtain insurance or financing, all parties could ask for thorough documentation about the ultimate beneficial owner(s) of the vessel and verify this information using the provided documents. You should tailor the verification process based on the associated risk level.
4. Companies can use subscription-based resources or free online tools to check ownership structures, vessel flag details, home ports, and recent ports visited. Even with limited resources, companies can access this information for initial risk assessment. Companies House checks can also be included in the due diligence process.
5. Monitor Sanctions Information Sharing

For effective sanctions compliance, it’s important to create awareness within the industry about challenges, threats, and ways to reduce risks.

OFSI suggests industry groups take proactive steps to raise awareness of financial sanctions and encourage the sharing of best practices.

Vessel owners and clubs are encouraged to collaborate with the financial industry. This may be with their bank or other financial services provider, involving competent authorities if necessary. Additionally, flag administrations are urged to regularly exchange information with the International Maritime Organisation (IMO) and parties in the Registry Information Sharing Compact. This collaborative approach establishes a strong network for sharing crucial information and collectively enhancing sanctions compliance efforts in the industry.

Any person who deals with funds or economic resources owned, held or controlled by a designated person (DP) or those operating on a DP’s behalf should immediately freeze the assets or funds and report to the appropriate eternal agency .

COMMON EVASION PRACTICES

A variety of techniques are used within the maritime sector to circumvent and evade UK financial sanctions. Understanding these common evasion practices and having proportionate due diligence in place is crucial for building a robust compliance programme. The following chapter provides some examples of common evasion practices you could consider. This list is not exhaustive.

False Flags and Flag Hopping

False flag operations involve the deceptive practice of deliberately misrepresenting the flag under which a vessel operates. This is done to mask the vessel’s true identity and behaviour, often employed by individuals or entities engaged in illicit activities such as smuggling or illegal trade.

Flag hopping is often a strategy employed by individuals or entities seeking to evade detection by repeatedly changing the flag under which a vessel is registered. This practice involves frequent and often rapid shifts in flag registration, making it challenging for authorities to track the vessel’s movements and activities. Although flag hopping is a common and mostly legitimate practice, attention should be given to the frequency of changes and the context of the flag state.

We recommend you report to competent authorities any instances of a vessel owner or manager who continues to use a country’s flag after it has been removed from a registry (i.e. “deregistered”). Also, occurrences of a ship claiming a country flag without proper authorisation, or instances when a vessel has changed flags frequently in a short period in a suspicious manner consistent with flag hopping.

Ship-to-ship Transfers

Ship-to-ship transfers (STS transfers) refer to the process of transferring cargo, goods, or materials directly from one seafaring vessel to another while both are at sea.

STS transfers can be carried out for legitimate purposes, such as:

• Where cargo is being stored in floating storage
• Floating blending
• Moving cargo from a vessel with a large capacity to a small capacity

However, the practice of STS 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.

Irregular Sailing Patterns

Illicit actors may 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, we recommend that you scrutinise routes and destinations that deviate from normal business practices, as appropriate.

Complex Ownership Structures

Global shipping operations are legitimately likely to have complex structures because of the need to balance lawful risk exposures to their assets under regional and international laws, using crew from a global labour pool and operating inherently mobile assets on the high seas and through multiple countries and territories.

Illicit actors attempt to take advantage of this. This can include those involving shell companies and/or multiple levels of ownership and management. This complexity can be used to disguise the ultimate beneficial owner of cargo or commodities to avoid sanctions or other enforcement action, among other reasons.

Actors 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. If you are unable to reasonably identify the real parties of interest in a transaction, you may wish to consider performing enhanced due diligence checks to ensure it is not sanctionable or illicit.

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. Illicit actors 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.

Rotations of Owner and Manager Companies

Illicit actors may strategically rotate shipowner and manager companies to obscure connections to sanctioned activities, frequently cycling through various owner and manager entities.

It is imperative to scrutinise whether a vessel exhibits a pattern of frequent changes in ownership or control. Understanding and monitoring these shifts in ownership and management structures are crucial steps in identifying and addressing potential involvement in sanctions evasion.

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.

Falsifying documents (including customs and export control documents) or obtaining them through fraudulent means is illegal in most countries, and irregularities may provide a basis to hold a shipment until its contents are validated.

You are encouraged to conduct enhanced due diligence, as necessary, on documents that indicate or suggest that cargo is from an area they determine to be at high risk for sanctions evasion. This should also be done for attestation documents for the Russian Maritime Services Ban and Oil Price Cap Exception.

AIS Disablement, Manipulation or Spoofing

An Automatic Identification System (AIS) is an internationally mandated system that transmits a vessel’s identification and navigational positional data via very high frequency (VHF) radio waves and satellites. The International Convention for the Safety of Life at Sea (SOLAS) requires that certain classes of vessels travelling on international voyages operate AIS at all times with few exceptions.

Although safety issues may at times prompt legitimate disablement of AIS transmission, and poor transmission may otherwise occur, vessels engaged in illicit activities may also intentionally disable their AIS transponders (in a practice known as “going dark”) or manipulate the data transmitted to mask their movement. The practice of manipulating AIS data, referred to as “spoofing,” allows ships to broadcast a different name, International Maritime Organisation (IMO) number (a unique, seven-digit vessel identification code), Maritime Mobile Service Identity (MMSI), or other identifying information. This tactic can also conceal a vessel’s next port of call or other information regarding its voyage.

physically Altering Vessel Identification

Passenger ships of 100 Gross Tonnage (GT) or more and cargo ships of 300 GT or more are required to display their name and IMO number in a visible location on the vessel’s hull or superstructure. A vessel’s IMO number is intended to be permanent regardless of a change in a vessel’s ownership or name. Vessels involved in illicit activities have often painted over vessel names and IMO numbers to obscure identities and pass themselves off as different vessels.

Open Registries

It is common practice within the international ship registry system that the owner of a ship may be located in a country other than the State whose flag their ship flies.

Illicit actors also routinely use the flags of other States for their merchant fleet. This allows them to distance the activities of vessels from perceived connections to a sanctioned jurisdiction or entity and, through that, skirt restrictions imposed by sanctions.

Open registries are often commonly used across the sector as they can provide better services than traditional registries and do not require vessel owners to be registered in the registry country. However, some open registries can be particularly vulnerable to such exploitation.

Registries that are particularly open to exploitation by sanctions evaders include all those blacklisted by the Tokyo and the Paris MOUs on Port State Control. These lists are updated on an annual basis. Any ship found not to be non-compliant can be banned from entering a port.

Higher risk countries and territories

Certain countries and territories pose a higher risk to effective compliance with UK financial sanctions and your compliance efforts should be proportionate. This section provides further information on these countries and territories and common evasion practices they are likely to use.

The guidance provided in this chapter is to support your compliance programme and is not exhaustive.

Russia

Russia is subject to significant sanctions measures to encourage it to cease actions which destabilise Ukraine, including actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.

Those conducting activities in this sector that have exposure to this jurisdiction should carefully review the relevant regulations, seeking independent legal advice where necessary.

There is a high risk of common evasion practices being used to circumvent or evade UK financial sanctions. You should refer to the common evasion practices chapter of this guidance and ensure your due diligence practices are proportionate to the higher risks associated with this jurisdiction.

You should also be aware of the guidance for

• the UK Maritime Services Ban and Oil Price Cap  https://assets.publishing.service.gov.uk/media/6582b050ed3c34000d3bfc21/OFSI_OPC_Guidance_-_December_2023.pdf
• the UK ban on Russian oil and oil products. https://www.gov.uk/government/publications/uk-ban-on-russian-oil-and-oil-products/uk-ban-on-russian-oil-and-oil-products#:~:text=The%20ban%20came%20into%20effect,Russian%20oil%20to%20third%20countries.
• the regime page https://www.gov.uk/government/publications/financial-sanctions-ukraine-sovereignty-and-territorial-integrity
• Russia geographic guidance https://www.gov.uk/government/publications/financial-sanctions-ukraine-sovereignty-and-territorial-integrity

Democratic People’s Republic of Korea

The Democratic People’s Republic of Korea is subject to significant sanctions measures imposed by the UN and the UK. They are aimed at countering the proliferation of weapons of mass destruction (WMD) and ballistic missiles.

For further guidance on the Democratic People’s Republic of Korea, you should refer to the regime page. https://www.gov.uk/government/publications/financial-sanctions-north-korea-democratic-peoples-republic-of-korea

Iran

Iran is subject to significant sanctions measures aimed at encouraging the government of Iran to comply with international human rights law, respect human rights, and deter Iran from conducting hostile activity against the UK and other countries. Additionally, these measures encourage Iran to comply with relevant UN obligations, encourage Iran to abandon nuclear weapons programmes, restrict the ability of Iran to develop nuclear weapons and nuclear weapons delivery systems, and they also give effect to the UK’s obligations under United Nations Security Council resolution (UNSCR) 2231 (2015).

There are two regimes in place in relation to Iran:

1. Financial sanctions, Iran
2. Financial sanctions, Iran relating to nuclear weapons

For further guidance, you should refer to the regime page for

• financial sanctions, Iran  https://www.gov.uk/government/publications/financial-sanctions-iran
• Iran, relating to nuclear weapons. https://www.gov.uk/government/publications/financial-sanctions-iran-nuclear-proliferation

Maritime insurance

UK financial sanctions present unique challenges for those engaged in the provision of insurance within the sector. Where financial sanctions are imposed, there may be prohibitions in place preventing financial services from being provided to, procured from, or for the benefit of:

• Designated persons
• Persons connected with a proscribed authority
• A prescribed description of persons connected with a prescribed country

It is important to remember that direct insurance, reinsurance and retrocession, insurance intermediation, and services auxiliary to insurance are considered financial services under UK sanctions regulations.

It is prohibited for frozen funds to be used in exchange for financial services.

You should consider the following:

• Making economic resources indirectly available is also a breach of the regulations. For example, making coverage available to a body corporate where a designated person has indirect, or direct, ownership or control
• Proxy arrangements may also be used to evade or circumvent UK financial sanctions. Proxy arrangements may involve a third person procuring insurance on behalf of a designated person

You should also consider the specific prohibitions on providing insurance and reinsurance services relating to aviation, space goods or aviation and space technologies under Regulation 29A of the Russia (Sanctions)(EU Exit) Regulations 2019.

There are also specific prohibitions relating to providing insurance for shipments of Russian oil or diamonds into the UK.

Ownership and control & 50% test

As set out in the UK financial sanctions general guidance, an entity is owned or controlled directly or indirectly by another person in any of the following circumstances:

• The person holds (directly or indirectly) more than 50% of the shares or voting rights in an entity
• The person has the right (directly or indirectly) to appoint or remove a majority of the board of directors of the entity, or
• It is reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person’s wishes

UK financial sanctions general guidance,

• https://www.gov.uk/government/publications/financial-sanctions-general-guidance/uk-financial-sanctions-general-guidance

Due to the complex relationships present in the maritime shipping sector, you may also consider the ultimate beneficial ownership of the following when making determinations of ownership and control:

• Ports
• Terminal operators
• Charterers
• Operators
• Cargo owners
• Suppliers

Source

https://www.gov.uk/government/publications/financial-sanctions-guidance-for-maritime-shipping/financial-sanctions-guidance-for-maritime-shipping