Shippers, operators and charterers urgently need to upgrade their compliance screening capabilities now the United States, the United Kingdom and the European Union are targeting Russia with severe sanctions, says Simon Ring, Global Head of Maritime & Trade Technologies & ESG, Pole Star.
The increasing severity of international sanctions against Russia is creating a constantly shifting set of stringent demands that compliance departments need to address urgently.
Forwarders and carriers, exporters, importers and their banks – all must be ready for rapid and complex changes and extensions to sanctions imposed by the US, EU, UK and their allies after Russia’s invasion of Ukraine. Failure in these tense times risks heavy penalties, including long-term blacklisting and significant reputational damage. This is not a short-term set of sanctions requirements, because whether the war in Ukraine is over quickly or is prolonged, the effect on trade is likely to be long-lasting.
For a start, the removal of selected Russian banks from the Swift international payments system will have significant consequences on what the country can import and export. The US had already banned Sberbank and its subsidiaries, (handling nearly a third of Russia’s banking) from the US financial system and now more banks have also been subjected to restrictions, asset freezes or outright blocks.
The proscription of Russian oligarchs will have yet further ramifications, since most have business empires that sprawl across many sectors including commodities, construction, infrastructure, banking and transport, including shipping.
The EU and US are already targeting the Russian shipping sector, by banning companies from transacting with SCF and its fleet of 133 vessels, for example. The EU has also proscribed Novorossiysk Commercial Sea Port, headquartered in the Black Sea, but with ports in the Baltic. The UK also has banned Russian vessels from its ports.
A taste of what may be in store from these measures was served up in the detention mid-voyage of the car transporter, Baltic Leader, on February 26 by the French authorities, as it was heading for St Petersburg. The US Treasury imposed blocking sanctions on the vessel, believing it to be owned by sanctioned bank PSB, although this is denied.
The shipping industry should be prepared for even tighter sanctions
Yet tough sanctions have not entirely come out of the blue. Operators and charterers should already have been familiar with the SSI and SDN sanctions tools the authorities are using to hit the Russians. The US Treasury’s OFAC (Office of Foreign Assets Control), uses the SSI (Sectoral Sanctions Identifications) list to restrict trading in equity, along with payments and processing activity for identified organisations. The Specially Designated Nationals (SDN) list is far more severe and freezes assets of named entities and bans transactions with them.
The reality is that all organisations in global trade must keep abreast of sanctions as the ratchet tightens on Russia. There is, for example, the possibility that the US and EU will impose comprehensive sanctions of the kind directed at Cuba, Iran and Venezuela. If this level of action is taken, all trade with Russia would be off the table, even at the cost of ending a major source of gas and oil for many countries in Europe.
Banks, trading groups and commodity companies would all be hugely affected, with significant consequences for the shipping industry. Should this happen vessel operators and charterers would have to become even more vigilant and diligent to ensure they were not unwittingly breaching the new rules.
The major consequences of compliance failure
Infringement of US sanctions could result in punitive financial penalties, criminal proceedings, seizure of assets and the addition of individuals’ names to the SDN list. Since OFAC’s toughened stance on sanctions, announced in May, 2020, the entire supply chain supporting such a transaction, including bank, charterer, forwarder and carrier could be held liable and fined heavily. In June 2020, for example, OFAC took action against a Panamanian-flagged crude oil tanker owner after the vessel reportedly delivered 515,000 barrels of Venezuelan oil to Qingdao and engaged in illicit ship-to-ship transfer of oil near Malaysia.
In December 2020, OFAC designated six companies and four vessels for violating UN sanctions through participation in the prohibited North Korean coal trade. Last year the organisation placed 14 entities and six vessels on the SDN list for involvement in trade with Venezuela.
The repercussions of being blacklisted by OFAC, the UK’s Office of Financial Sanctions Implementation or the UN Security Council are very damaging. Vessels can be banned, seized, grounded or even destroyed.
The non-negotiable requirement for due diligence and overhauled screening and monitoring
While the shipping industry may choose to avoid Russian ports and entities, nobody can afford to relax, especially during such a tense crisis in Europe. Every organisation involved in trade needs to constantly monitor what could be rapidly-changing sets of requirements and update their processes accordingly. There has never been a greater imperative to conduct due diligence with maximum thoroughness and to prepare for the possibility of more burdensome compliance.
Even a system of licensed trade in certain areas with Russia will involve intense scrutiny from the sanctions regulators, requiring the ability to demonstrate compliance on the part of shipping operators and charterers. The overall monitoring and screening demands on the trade ecosystem will increase. Carriers will need to show their vessels are compliant and have an unblemished history, while charterers and banks must at least have the ability to show they have made best efforts to conduct due diligence checks.
Technology to screen and monitor for a wide range of warning signs
All parties to a transaction must be able to see whether a vessel’s identity is genuine, noting its characteristics and identifying it from its unique IMO number. Charterers, banks and forwarders need to know if a vessel has previously visited sanctioned ports or has spent a suspicious length of time in areas of known sanctions-busting or dark activity. Ownership, often opaque for tax reasons, needs to be laid bare as easily as possible, along with management. Banks and port authorities should screen bills of lading for forgery or inconsistency and have the capability to spot when AIS is manipulated or disabled during a voyage or when a vessel deviates from the planned route.
Hybrid monitoring technology must become more widely implemented to include alternative satellite data such as Inmarsat in case AIS transceivers are switched off or malfunction. This can prove a vessel was where it claimed to be, even if its AIS identity is spoofed by another vessel undertaking illegal activities. For further reassurance, organisations can monitor the draught of a vessel using satellite images to show whether a suspicious cargo transfer has occurred during a dark period.
As we voyage into a new level of sanctions against Russia, operators, charterers, banks and insurers all need to upgrade their monitoring and screening technology to match the stringency of evolving requirements. Effective compliance means having a single solution approach to highly complex aggregation of multiple data sources, including watchlist information, EU, OFAC and UN databases and 24-hour vigilance. This is well-nigh impossible using manual methods or without the right technology. But this is the world we are in for the foreseeable future and with potential areas of international friction, such as the Baltic states and Taiwan on the horizon, everyone involved in the global trade ecosystem must up their game in sanctions compliance and monitoring.
Author of the article: Simon Ring, Global Head of Maritime Trade Technologies & ESG, Pole Star
Simon heads up Pole Star’s global regulatory technologies and PurpleTRAC systems, working with trade financing banks, commodity trading companies, maritime insurers, flag administrations and governments with sanctions and sustainability regulatory exposures in maritime trade and its supply chains. Under Simon’s leadership, PurpleTRAC has developed into an end-to-end solution covering the full spectrum of risk intelligence across sanctions, compliance, and sustainability in global maritime trade, and has been awarded for RegTech innovation by MAS, GTR, Citi Bank, and Microsoft.
Prior to joining Pole Star in 2010, Simon worked in financial services, acting as Divisional Managing Director of Derivatives at Tullett Prebon in London, and spending 8 years in Geneva as Managing Director of Cedef Capital Markets.