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How Can Businesses Comply with US Sanctions on Vessels?
Introduction
With the emergence of Pax Americana, the United States began using a new set of tools for foreign policy which includes using economic sanctions to influence the foreign policies of various entities (such as states, organizations, and individuals) and deal with different international crises. Targeting the ships and aircraft of sanctioned nations, such as Iran, North Korea, Cuba, Russia, and others, is one tactic in the toolbox of economic sanctions.
Export control enforcement has similar obstacles to compliance, including complex chains of custody, opaque ownership structures, frequent institutional changes, and reliance on less stringent measures.
Financial institutions have constructed internal compliance architectures to detect such schemes, thanks to established regulatory frameworks during the previous two decades. Banks have access to the necessary information and resources to trace trade in export-controlled goods, though modifications to the legal framework and internal procedures may be necessary to apply existing AML/CFT regulations to sanctions.
The Office of Foreign Asset Control (OFAC) of the U.S. the Treasury Department keeps track of blacklists of ships, airplanes, tankers, and other modes of transportation especially from sanctioned countries. The OFAC publishes a list of banned ships and vessels and provides information on identifying details including their names and kind of the vessel, its name as well as their International Maritime Organization (IMO) number. However, the tricky part is when the sanctioned ships and vessels hide their identity number or IMO number.
These sanction lists cover a wide range of ships, including crude tankers and general cargo, which facilitate the transit of millions of gallons of crude oil and other commodities subject to export controls. The sheer association of such ships to sanctioned countries raises red flags for regulatory authorities. As a result, ships and vessels transporting goods and raw materials to and from sanctioned countries such as Russia, North Korea, Venezuela, Iran, Syria, Belarus, Myanmar, and Cuba are intercepted by regulatory authorities, even if the ships are not state-owned, but their affiliation with a sanctioned country increases the likelihood of violating international sanctions. Compliance with sanctions on vessels becomes challenging becuase their flag country is likely to be different.
In case of the recent OFAC sanctions targeting vessels facilitating trade of commodities for Iran, most of the vessels carried flags of other countries.
Economic sanctions are not permanent, and the U.S. will lift them as long as the targeted countries take satisfactory measures to restore representative form of government and combat widespread corruption. For example, as in the case of Myanmar (Burma) , the USA apparently imposed sanctions on Myanmar due to its dictatorial form of government and human rights abuses by the country’s military establishment. However, in 2011, the gradual transition of power from the military establishment to the civilian government along with many democratic reforms introduced by the President Thein Sein set off the United States to allow trade and investment easing all the past sanctions in this East Asian country.
This policy shift relfects that sanctions compliance requirements change in response to evolving geo-political dynamics. Financial and trading companies bound to comply with these sanctions must ensure that their sanctions screening tools are reflecting these shifts by updating the data in real times.
Sanctions on Vessels Related to Houthi Rebels
Sanctions against aircraft and vessels are also employed as part of counter-terrorism efforts. They aim to disrupt the activities of designated terrorist organizations by restricting their access to transportation networks, financing, and logistical support.
For instance, sanction compliance related to the Houthi rebels, an armed political movement in Yemen, significantly impacted the maritime and aviation industries, leading to heightened scrutiny and stricter enforcement measures for vessels and aircraft operating in the region. The United Nations, United States, and European Union have imposed a series of sanctions targeting the Houthis, aimed at curbing their access to resources that could fuel the ongoing conflict in Yemen. These sanctions necessitate comprehensive compliance programs for companies involved in shipping and aviation to avoid engaging in transactions that could benefit the Houthis directly or indirectly. As a result, shipping companies and airlines have had to implement rigorous due diligence processes to ensure that their operations do not violate international sanctions. This includes enhanced screening of cargo, stricter documentation checks, and close monitoring of vessel and aircraft movements to ensure they do not interact with ports or airfields under Houthi control or those used by entities associated with the group.
Complying with sanctions related to rebel and terrorist groups can be challenging because there may be no blanket sanctions on the country of operations. Regulatory bodies may need to thoroughly distinguish whether vessels subject to sanctions are being used for relevant rebel or terrorist groups and not for transporting commodities for the civilian population.
How Sanctions Impact International Trade?
US sanctions against aircraft and vessels encompass several key areas, including: the US imposes restrictions on the export, re-export, and transfer of certain aircraft and vessel-related goods, technologies, and services to targeted countries or entities. These include components, spare parts, navigation systems, engines, and specialized equipment used in aviation and maritime industries.
Sanctions can restrict access to financing and insurance services for aircraft and vessels engaged in prohibited activities or owned by designated individuals, entities, or countries. This hinders their ability to secure necessary financial resources and insurance coverage for operations, maintenance, and trade.
Sanctions may limit or prohibit the access of targeted vessels to US ports or the use of specific maritime services, such as refueling, repairs, or logistics support. These measures restrict the vessel's ability to engage in international trade and impede their operations and mobility.
The US maintains lists of designated aircraft and vessels, including entities or individuals associated with them. Engaging in transactions or business dealings with these designated entities or vessels can result in penalties, asset freezes, or legal consequences under US law.
US sanctions targeting aircraft and vessels may be motivated by concerns related to non-proliferation of weapons of mass destruction (WMD) and their delivery systems. The goal is to prevent the transfer or acquisition of sensitive technologies, components, or systems that could contribute to the proliferation of WMD or disrupt regional stability.
The complexity of these compliance requirements has led to increased operational costs and delays, as vessels and aircraft must often reroute or undergo additional inspections to verify compliance with sanctions.
The maritime industry, in particular, has faced challenges in ensuring that no prohibited goods, such as weapons or dual-use items, are transported to Yemen, necessitating collaboration with international regulatory bodies and intelligence agencies to track and intercept suspicious shipments.
Challenges of Sanctions Compliance with Vessels
The ability to swiftly recognize and evaluate patterns of high-risk behavior and activity is essential for recognizing maritime compliance risk. Ideally, this should be done as soon as the activity starts and before it gets out of hand.
Sanctions-skirting vessels may occasionally start engaging in illegal activity after many years of what appears to be a routine operation. For compliance experts and regulators, this is a difficult task to identify the change from normal to aberrant behavior before it develops into a pattern of substantial risk.
A vessel registered with high-risk country such Iran, North-Korea, or Russia may not imply that it is sanctioned or it is necessarily facilitating the transport of commodities subject to export controls. This is mainly because of the Flag of Convinience arrangement. A vessel or shipping tanker could be owned in by individual or entity in one country but could be registered in jurisdiction with lax jurisdictions.
Below have a look at the top jurisdictions with Shipping Oil Tanker registrations. While the list has many oil producing nations, the top countries are financial hubs with little to no links to oil production.
What Can Obliged Sectors Do?
Before engaging in any contracts, participants are highly advised to research the past, present, and ongoing information and activities of a vessel and/or counterparty. The above-mentioned deceitful tactics and warning signs may make it easier for parties to spot any suspicious behavior at an early stage. If any issues are found, they must be brought up internally and looked into as quickly as feasible.
While sanctions on land receive a lot of media attention, businesses also need to be aware of the possible risks posed by naval vessels. The first line of defense against suspected violations should be a rigorous due diligence procedure that routinely checks the OFAC sanctions lists for sanctioned vessels. Frequent vessel identification and screening are two other initiatives.
Obliged sectors such as shipping companies, financial businesses involved in maritime trade financing, maritime insurance companies, customs and port state controls, suppliers of cargo should do the due-diligence regarding ships’s AIS, flag registration, IMO numbers, vessels ownership and management.
Verify the data: Check IMO numbers and relevant reports outlining maritime routes and operators against ship registrations. These databases frequently contain decades' worth of information about vessel ownership, management, and names.
Sectors associated with Maritime trade in any capacity must realize that vessels due diligence for sanctions compliance is a challenging task and it requires evaluation on diverse parameters.
Any vessel’s link to the sanctioned country is not the only red flag. As seen in case of Iran, a vessel may be sanctioned for its links to facilitating transport of commodities and military goods in a sanctioned country but it could be flag registered in an other countries. Therefore, authorities such as maritime customs organizations and financial institutes such as insurance companies, brokers, maritime trade finance businesses must broadly identify sanctioned ships by using AML screening tools that have comprehensive information on latest sanctioned vessels including IMOs, country of flag and company owning and managing the vessel.
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