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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

OFSI issues Maritime Financial Sanctions Guidance

Over the summer, the UK Office of Financial Sanctions Implementation ("OFSI"), issued new sanctions compliance guidance for entities and individuals operating within the maritime shipping sector.

Split into two parts, the OFSI Maritime Guidance comprises:

1. Advice about certain practices indicating that sanctions restrictions are being evaded; and
2. Guidance about the due diligence those in the shipping industry should consider to mitigate the risk of any sanctions breach.

This is the first time that OFSI has tried to give participants in this sector a list of red flags to watch out for, and to suggest what they might do to help minimise their level of risk exposure.

Potential Red Flags

Broadly consistent with guidance issued by the UN and (to a lesser extent) by OFAC (OFSI's US counterpart), the OFSI Maritime Guidance includes a list of illicit or suspicious shipping practices.  These red flags include:

  • ship-to-ship transfers, concealing the origin and nature of cargo;
  • intentional disabling of Automatic Identification Systems ("AIS"), obscuring a vessel's whereabouts when conducting illicit trade;
  • cyber-attacks, used to force illegally the transfer of funds in circumvention of financial sanctions;
  • payment via crypto-assets, avoiding detection in the context of sanctions evasion;
  • use of front or shell companies, disguising the ultimate destination of goods, funds or services or facilitating illicit shipping practices;
  • falsified documents, e.g. bills of lading, invoices and insurance paperwork, obscuring the origin of a vessel, its goods, its destination or even the legitimacy of the vessel itself; and
  • physical concealment of illicit cargo on board a vessel.

Though not necessarily breaches of financial sanctions regulations themselves, the Guidance suggests that underlying transactions relating to these practices, or behaviours underpinning these practices, could be.

Due Diligence

Secondly, the OFSI Maritime Guidance goes on to offer some general guidance about the level of due diligence that "organisations operating in the maritime sector may wish to consider".

Specific due diligence requirements are not expressly mandated, with the onus very much remaining on organisations to ensure that they put in place sufficient measures to ensure that they do not breach financial sanctions.  

The following five key aspects of due diligence are noted:

1. Adopting a risk-based approach: "companies conducting activity in, or around high-risk jurisdictions should seek to have a robust understanding of the sanctions regulations in place, including the relevant obligations. Companies should always seek independent legal advice where necessary and operate a risk-based approach".

The Guidance further adds that "specific regions may present a high risk with respect to financial sanctions compliance.  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".

2. AIS screening: whether AIS screening will be appropriate will depend on the specific nature of a company's activities. The Guidance states that "due diligence could be enhanced through contacting vessels that have ‘gone dark’ by switching off their AIS. This is to better understand the cause of disconnection, noting such instances, and reviewing for trends. This could be considered by ship owners, charterers, insurers, flag registries and port state control entities".

3. Researching counterparties: "Companies may have access to subscription-based resources which allow for checks on ownership structures, vessel flag information, details of home ports and recently visited ports. This information is also readily available online".

4. Checking document validity: 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.

5. Contractual clauses: clauses within letters of credit, loans and other types of financial instruments should be assessed prior to agreement, as should the validity of insurance documents, bills of lading and cargo lists.  Although the Guidance does not expressly recommend including sanctions compliance clauses, it does suggest that parties consider including ‘AIS switch off’ clauses in their contracts.

Conclusion

OFSI has expressly stated that this new Guidance is not binding.  However, this does not mean that it can simply be ignored.  In the unfortunate event of a party, within OFSI's jurisdiction, becoming embroiled in a breach of UK sanctions, it is likely that OFSI will take into account whether this Guidance was followed in determining whether to impose a penalty, or to refer the case to the criminal authorities for prosecution.

Unlike US sanctions, the UK does not impose comprehensive embargoes on any jurisdiction and so the risks in relation to maritime-related evasion may generally be less extensive than those faced in the context of US sanctions. Entities subject to UK sanctions (e.g. those operating within UK waters, or flying the UK flag), will nevertheless need to consider carefully whether they should update their policies, procedures and contracts in light of this new Guidance.