Closing the Sanctions Due Diligence Gap for the Shipping Industry


The US Treasury has started enforcing sanctions against Iran, Venezuela, and North Korea, penalizing shipowners and operators (File image courtesy of the National Iranian Tanker Company)

Posted on August 24, 2021 at 8:17 PM by

Friend Daniel

In May 2020, the US Treasury Department’s Office of Foreign Assets Control (OFAC) and the US Coast Guard released a groundbreaking advisory on sanctions compliance. In short, they set the regulatory bar very high, forcing all stakeholders in the shipping and trade industry to meet enhanced due diligence standards. These new, stricter standards have highlighted the need to move beyond list matching and towards a more dynamic behavioral approach to assessing maritime risk.

The UK OFSI followed suit very quickly with a similar advice. Suddenly, terms like “dark activity” (meaning the intentional disabling of AIS transmissions) and ship-to-ship transfers have become common terms for compliance analysts around the world. From a geopolitical point of view, there was a loophole in shipping and trade, which strained the effective application of sanctions.

One size does not fit all

In response to this new regulatory environment, market leaders, including major energy companies and financial institutions, have started implementing AI as a tool to meet new global compliance requirements.

However, regulators have not leveled the playing field for every stakeholder. In fact, the unique structure of the maritime transport market has not been taken into account. The impact? Shipowners are subject to the same compliance measures while operating in a complex environment unlike that of their counterparts. To put this into perspective, it’s important to first understand what shipping compliance processes look like today. Once a trader in a trading room identifies a cargo to buy and sell, he contacts the team’s charterers and requests a ship to move the cargo. Charterers on this team usually contact brokers and receive proposals for vessels with suitable location and availability for the layman, along with price proposals. Before moving forward, the proposed vessels must pass rigorous compliance checks.

This is where things get complicated: the largest pools of tankers have some 250 ships out of the 100,000 ships in the global fleet. At this capacity, owners would most likely have the means to implement powerful technologies to streamline the clearance of vessels. However, many small shipowners are not yet part of this market. However, that does not mean that the compliance standards are lower. Regardless of the size of your fleet of ships, there’s a good chance that third parties will control each of your ships using AI. This applies whenever a vessel is reviewed for charters, spot charters, ship-to-ship transfers, ship sales or financing, or renewals in P&I clubs.

Within reason, the potential benefits can be costly. Unfortunately, many shipowners work in the dark because they do not receive enough information about their exposure to the risk of non-compliance. This can lead to losses on major charter contracts. Good players, who make up the vast majority of the industry, shouldn’t run out of business due to regulations meant to deter bad players. In addition, most shipowners do not have the data, budgets or resources of major oil companies or global financial institutions. To what extent can they rely on risk management providers rather than developing the capacity of the data system themselves? How can we, as an industry, do more to ensure that all stakeholders benefit from an effective due diligence process?

Reduce the burden of compliance

In terms of compliance, the stakes are high. For example, when US sanctions hit Greek shipowners last summer, Chevron’s oil shipment got tangled up in US sanctions. In another case, PB Tankers went bankrupt when it was blacklisted by OFAC to trade with Venezuela. The bottom line? Failed regulations can cost a shipowner hundreds of thousands of dollars in charter contracts.

This is particularly relevant in light of recent charter-party clauses introduced by BIMCO, specifically referring to vessels disabling transmissions. Shipowners are essential players in the maritime ecosystem and should not have to take on the regulations without a solid partner. To ease the burden of compliance, shipowners need a solution to pull together information in a single report with compliance scores, allowing them to easily spot risks and opportunities and take immediate action.

The idea of ​​instant compliance scores is not that far removed from credit scores in the United States. Credit scores assess your credit risk. And because credit scores have a direct impact on your interest rate and your financial situation, they’re easily accessible by reporting companies. It’s time for the shipping industry to take a similar step – with a focus on democratizing data and transparency for sanctions compliance.

Sanctions compliance came into effect to prevent dealing with certain sanctioned entities. It was never intended to disrupt the roughly 70,000 businesses that are crucial to the global economy and the maritime trade market. Now more than ever, shipowners need to find a long-term partner who collects their belongings and can help them meet all the challenges that the future holds.

Ami Daniel is the co-founder and CEO of the maritime risk management and intelligence firm Windward.

The opinions expressed here are those of the author and not necessarily those of The Maritime Executive.


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