New Sanctions Advisory Highlights Compliance Risks for Shipping Industry

The U.S. Department of State, U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) and the U.S. Coast Guard (USCG) on May 14, 2020, issued a 35-page Sanctions Advisory that focuses on sanctions compliance for the shipping industry. The Sanctions Advisory, which reportedly had been in the works for some time, is much more detailed than past OFAC maritime advisories that focused on specific trade with Iran, Syria and North Korea.

Sanctions Spotlight on the Shipping Industry

The advisory should dispel any doubt that the U.S. government is focused on the shipping industry as a means to enforce U.S. primary and secondary sanctions.

• OFAC and the State Department have been ramping up pressure on the maritime industry through closed-door meetings with marine insurers and foreign registries, targeted sanctions of vessels and operators thought to be engaged in sanctionable activity and tracking of vessel operating in sanctions risk areas (e.g., the Persian Gulf and the waters off of Syria, North Korea and Venezuela).
• The shipping industry is now in the uncomfortable position that banks have been for some years: i.e., OFAC in effect has conscripted industry players, such as ship registries and insurers, as its deputies to enforce U.S. primary and secondary sanctions while still leaving those industry players at risk of sanctions.
• Interestingly, the U.S. government did not publish or republish the names of vessels and parties thought to have engaged in sanctionable trading, perhaps because of the "legal limbo" that such "name and shame" lists have caused for shipowners and operators identified. However, it is believed that the U.S. government continues to pass on such information to ship registries.

U.S. Expects Shipping Companies to Implement Substantially More Detailed Compliance Policies and Procedures

While the U.S. government does not mandate that companies (other than U.S. financial institutions) have formal compliance procedures, the Sanctions Advisory identifies in substantial detail what it considers appropriate procedures:

• Formal sanctions compliance program. For U.S. companies involved in international trade, having a formal compliance programs is a de facto requirement. The Sanctions Advisory makes clear there is an expectation that non-U.S. companies will also adopt such programs. Such programs would typically include, among other things: formal written policies and procedures, in particular for conducting due diligence on counterparties, appointment and empowerment of compliance officials, periodic training and internal review of programs.
• AIS monitoring. The Sanctions Advisory recommends not only that parties such as marine insurers and shipowners monitor ship location and automatic identification system (AIS) history but implies that charterers should assess the AIS history of a vessel prior to chartering (i.e., to see if there has been AIS manipulation).
• Expansion of Entities Covered. Although prior advisories identified shipping companies, vessels owners, managers, operators and insurers that trade in certain areas, the Sanctions Advisory also states that vessel captains, crewing companies, classification societies, commodity traders and others should be conducting diligence in transactions. The Sanctions Advisory provides separate annexes for each as to the types of diligence the U.S. government believes is necessary.
• The New Sanctions Clause(s). The Sanctions Advisory provides detailed guidance on the types of sanctions-related contract provisions that the U.S. would view as best practices, including clauses related to AIS manipulation or transfers of cargo to vessels with a history of AIS manipulation. Some charterers in the petroleum industry already require, for example, that a vessel has not called on Venezuela in the previous 12 months. Hence, expect to see new/revised clauses populate shipping documents that may include representations regarding past trading activity, AIS manipulation and even regarding the counterparty's own compliance program. To be clear, while the U.S. government expects to see robust sanctions clauses, such clauses alone are no safe harbor and do not obviate the need for adequate and ongoing due diligence.

What Should My Company Do to Address the Sanctions Advisory?

Although many companies will need to make substantial improvements to their compliance policies and procedures, it is suggested that this be done in a reasonable and practical way to address identified risks without causing undue burden on low-risk trading. The first step is a risk assessment that would look at:

• External Risks. Does the company trade in high-risk geographic areas, as well as with counterparties or products that involve a higher risk?
• Internal Controls. What internal controls does the company currently have and how effective are they? Do they focus on the key external risks?
• Residential Risk Assessment. While robust internal controls can reduce risk, certain areas of trade will continue to have residual risk, and the company will need to assess the risk/benefits of continuing such activity.

Based on that assessment, the company can then implement improvements to internal controls and in certain circumstances make changes in how it does business.

In the current sanctions environment, shipping companies need to strongly consider the steps needed to mitigate against sanctions risk. Not only is there a risk that a company (or vessel) could be designated by OFAC as a Specially Designated National (SDN) for alleged sanctions violations, but there is a much larger practical risk, highlighted by this Sanctions Advisory, that banks, ship registries, insurers or counterparties may refuse to do business with a company or vessel that is suspected of having engaged in past sanctionable conduct.

For more information on the implications of the Sanctions Advisory or assistance in conducting a risk assessment or development of compliance policies and procedures, please contact the author.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.