‘The entire ecosystem has to understand where the risks lie’

When it comes to maritime sanctions, “the entire ecosystem has to understand where the risks lie”. That’s the view of Juan Zarate, Chairman and Co-Founder of the Financial Integrity Network (FIN).

“What you’ve had in the post 9/11 environment,” says the former Assistant Secretary of the Treasury for Terrorist Financing and Financial Crimes, “is a broadening and deepening of the use of financial and commercial sanctions in a much more targeted and aggressive way.”

Shipping in the crosshairs
Zarate was speaking during the “Steering Clear of Sanctions Evasion” webinar on July 31. Hugh Griffiths, the former Coordinator of the United Nations Security Council Panel of Experts on North Korea, was also a headline speaker. He says shipping is now very much in the crosshairs of enforcement agencies – and with good reason. “Maritime transportation is the principle means of transporting sanctioned commodities: arms, dual-use goods that may be used for weapons of mass destruction, oil, and illegal narcotics.”

During previous rounds of sanctions, evaders and enforcers appeared to find an equilibrium in which they could both claim success. But thanks to multilateral and unilateral sanctions that were introduced from 2017 onwards, says Griffiths, there’s been a “dramatic” increase in the potential exposure for blue-chip vessel owners, operators, insurers, reinsurers, commodity traders, bunkering organizations, companies, and associated financial institutions.

Indeed, says Zarate, the shipping industry is now coming under the same sort of pressure – in terms of sanctions risk, money laundering risk and financial crime risk – that banks have been subject to for the past 20 years.

AIS Monitoring
Pressure, though, doesn’t equate to preparation. And as Griffiths notes, it’s “all too easy” to unwittingly falling foul of new and ever-evolving sanctions. One solution his UN panel recommended, in the context of North Korean sanctions, was that people start monitoring the Automatic Identification System (AIS) of the ships and goods they deal with. But not everyone was paying attention. “For the last few years,” he recalls, “ it was very evident during our investigations how many insurers, reinsurers were getting caught time and time again, but also commodity traders as well. And when we wrote to many of them we found that they weren’t monitoring the AIS of the vessels and cargoes they were legally associated with. And it gets a bit dispiriting after a while to keep writing to the same people and same organizations again.”

Demander Banks
With that in mind, Zarate urged webinar attendees to “think long and hard” about how they’re managing their risk and the technologies they’re using. Specifically, he identified three areas for improvement:

  1. More transparency in the supply chain with respect to shipments and transport.
  2. To use their heft to demand more information from – or about – counterparties, including vessel ownership, history of flag registry, understanding port calls and vessel behavior.
  3. Open communication with clients, counterparties and regulators.

“Financial institutions,” says Zarate, “have to have a very clear set of expectations and rules with the regulators to then understand how they can adapt their systems, how they can monitor better, and how they meet the regulatory demands where they’re operating.”

Griffiths concurred, noting that one of the recommendations his team made in the last UN report on North Korean sanctions was that banks insist on including an AIS monitoring and screening clause in relevant contracts, for things like ship-to-ship transfers and letters-of-credit. “Banks can play a very powerful role there as the demander but also on what level they are exposed, because they are financing many of the trades – the small proportion that end up in the wrong hands.”

Steering Clear of Sanctions Evasion
With OFAC, the UN, and even the EU getting tougher with sanctions enforcement, organizations face the risk of punitive penalties, but that’s not all: “They’ll have to pay the fine and then remediate to the tune of hundreds of millions of dollars if not more, to rectify what they’ve done, often in the face of monitors and greater scrutiny from prosecutors and regulators around the world. And so it opens up other enforcement actions as a result. You then have the reputational damage that is not just about affecting stock price or bottom line value of the company, but also its ability to operate in the marketplace.”

And although major European banks have already been caught out, other lenders, whether by accident or by design, are likely to suffer the same fate.

“You kick a stone in the sanctions business,” says Griffiths, “and you’ll find a global bank – at least the correspondent banking part of it – involved. The truth of the matter is a lot of people are now looking at AIS. There are bloggers looking at AIS now and if bloggers are pointing out suspect activity, why can’t the banks?”

Elliott Gotkine is Windward’s Director of Communications