Posted: 01 Dec. 2022 5 min. read

Sanctions Risks: Deceptive Shipping Practices

Sanctions risks are a constant and evolving threat to the maritime sector, reflecting the ever-changing sanctions environment and the tactics used by sanctions evaders to circumvent restrictions. The latest wave of Russian sanctions restrictions has brought this in to focus and there is increased pressure on maritime sector participants to identify, assess and mitigate maritime sanctions risks, including deceptive shipping practices previously flagged by regulators.

Through insight gained from our work with clients and recent roundtable discussions, it is clear that market participants across the maritime sector face numerous challenges. Firstly, understanding the complex risk profile of their maritime business operations and secondly, implementing a proportionate maritime sanctions controls framework.

This blog series is of relevance to any entities operating in the energy, metals, commodities, and other sectors involved in maritime-based trade and transactions.

The current maritime sector sanctions environment

In May 2020, the United States’ (“US”) Department of State, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), and the US Coast Guard issued their ‘Guidance to Address Illicit Shipping Sanctions Evasion Practices’.[1] This was followed in December 2020 by the United Kingdom with His Majesty’s Treasury’s Office of Financial Sanctions Implementation (“OFSI”) issuing its own ‘Maritime Guidance’.[2]

These advisories highlight:

  1. The common techniques used by sanctions evaders operating in the maritime sector and associated red flags, which entities should use to assess against their control frameworks and identify gaps.
  2. The importance of entities undertaking appropriate measures to proactively detect and prevent sanctions evasion through deceptive shipping practices.

More recently, the series of Russia-related sanctions implemented by the UK, US, EU and others, such as the UK’s ban on any Russian vessels at UK ports, have had a significant impact on the maritime sector. This has highlighted the importance of the OFAC and OFSI advisories and entities’ corresponding maritime sanctions controls frameworks.

However, given these advisories were not specifically written in response to  Russia-related sanctions evasion (the advisories’ focus being Iran, Syria and North Korea), entities should consider the efficacy of their existing control frameworks. Their framework must be able to identify, assess and mitigate the sanctions risk of any potential Russian exposure. Russia’s role as a key participant in the international commodities markets and in the maritime sector must also be taken into consideration

In certain instances, maritime industry organisations, such as energy companies, have taken internal policy decisions to self-sanction against Russia-related business, i.e. applying restrictive risk-appetites to curtail business with a Russian nexus, even where such activity is legally permitted under the relevant sanctions restrictions. This requires robust detection and prevention processes and controls, finely tuned to the entity’s risk appetite and tolerances. Additionally, organisations pursuing a self-sanctioning approach have implemented rigorous governance processes for dealing with the identification, escalation, and evaluation of Russian-related trades and transactions, together with clear documentation of decisions and audit trails.

What are deceptive shipping practices?

The advisories identify several practices used to circumvent sanctions and avoid detection of illicit activity. Vessels often use a combination of these tactics to obscure or falsify information, such as their location or a cargo’s origin or destination. OFAC’s maritime guidance lists out seven common deceptive practices:

  1. Disabling or manipulating the Automatic Identification System (“AIS”)
  2. Physically altering vessel identification
  3. Falsifying cargo and vessel documents
  4. Ship-to-ship transfers (“STS”)
  5. Voyage irregularities
  6. False flags and flag hopping
  7. Complex ownership and management

In practice, sanctions evaders are likely to undertake multiple deceptive practices within a single cargo movement to enhance their concealment efforts. For example, combining falsified documents with AIS manipulation and illicit STS activities.

To illustrate this, consider the following example – A crude oil tanker (the ‘mother’) switches off its AIS (known as ‘dark activity’) prior to entering Iranian waters and conducting an STS transfer with a vessel carrying Iranian crude. Once loaded, the tanker sails into Iraqi waters to a known, legitimate STS region, turning its AIS back on and leaving only a small window of AIS dark activity. A third, colluding tanker (the ‘daughter’) loads the Iranian crude from the mother vessel and falsifies the cargo documents to state that the crude is of Iraqi origin. To any subsequent purchasers of this cargo, only a detailed inspection of the mother vessel’s historical AIS activity would highlight the potential sanctions risks, not that of the daughter vessel delivering the crude.

What are the challenges?

Our clients have shared that the key challenges facing entities seeking to identify, assess and mitigate their maritime sanctions risk exposure include:

  • Risk assessment and risk appetite –  Given that vessels engaging in deceptive practices are not necessarily sanctioned, entities must have the capability to interpret the potential risks and evaluate this against an agreed and clearly defined risk appetite to support with daily decision making.
  • Technology and tools – Technology is a means to an end (not the end in itself) therefore identifying the right vendors and tools, understanding their outputs, and considering the limitations of the technology and data are crucial to establishing an effective maritime sanctions response.
  • Controls – Defining appropriate processes and embedding these into the business with sufficient resources and necessary specialist skillsets can, in the short term, be a costly, and time-consuming exercise, but if implemented appropriately can lead to efficiency gains.

As the impact of deceptive shipping practices on sanctions risks continues to grow, and in light of the more recent Russia-related sanctions packages, we have found that our clients want to understand their exposure and proactively strengthen their maritime sanctions risk management capabilities.

Our team has used their extensive experience to support commodities clients in creating and implementing a thorough approach to sanctions risk management. If you would like to discuss this topic in detail, please reach out to a member of our team: Katie Jackson, Rawad Halawi, Pablo Sapiains, and Alex MacDonald.

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[1] OFAC Guidance to Address Illicit Shipping and Sanctions Evasion Practices

[2] OFSI_Guidance_-_Maritime_.pdf (publishing.service.gov.uk)

Key contacts

Katie Jackson

Katie Jackson

Partner

Katie is the Partner in charge of Deloitte’s UK Forensic practice. With over 23 years’ experience working in the Financial Services industry and more recently in the energy and commodities trading sector, Katie has significant experience in Financial Crime, regulatory investigations, and transformation programmes. Katie sits on the firm’s FS Women in Leadership Council and is passionate about supporting diversity and inclusion at work and was a previous winner of the UK Timewise Power Part-Time list in 2014.  

Rawad Halawi

Rawad Halawi

Partner, Financial Advisory

Rawad is a Partner with Deloitte UK Financial Crime practice specialised in leading financial crime change and transformation programmes and solutions in the regulated sector, with particular focus on capital markets, commodities and energy trading. Specialism in Financial Crime (FC), Anti-Money Laundering (AML), Counter-Terrorist Financing (CTF) and Sanctions. Experience across Governance, Policy, Process, Operating Model Design/Delivery, Change Management, Digital Transformation and Automation. Strong combination of change management and technical experience across Financial Crime disciplines. Excellent track record in leading and delivering major complex Financial Crime Change Programmes Solid international network in Financial Crime Strong track record of operating independently and being successful and credible at senior management level Proven ability to lead large teams and a role model for talent Strong track record in risk management and ensuring high quality of delivery

Key Contacts

Pablo Sapiains

Pablo Sapiains

Assistant Director

Pablo is an Assistant Director in Deloitte’s Forensic team with over eight years’ experience of working within the Financial Crime space. His time with Forensic has involved him working on a number of client projects focused on delivering technical output, including leading in the design, development, and execution of a Financial Crime Risk Assessment. More recently Pablo has been seconded to the Trade Compliance function at the trading arm of a European energy major, which involved acting as interim team lead and providing sanctions advice to key stakeholders in the business on varied aspects of the lifecycle of a deal. Pablo has worked with a number of clients across a number of different sectors, including Financial Services Institutions, energy and shipping and public sector.

Alex MacDonald

Alex MacDonald

Manager

Alex is a Manager in Deloitte’s Forensic team based in London with over four years of experience in the energy sector, working on multiple areas of a large-scale financial crime transformation programme for a global energy supermajor. Alex has expertise across a number of areas including programme management and delivery, organisational design and implementation, as well as financial crime technical work, including writing policies, conducting risk assessments, and designing and implementing sanctions controls and processes in the shipping and maritime space.