Overview
On April 2, 2024, HM Treasury’s Office of Financial Sanctions Implementation (OFSI) published a blog post addressing financial sanctions compliance in the maritime sector. Maritime businesses currently are a particular area of focus for UK sanctions regulators and law enforcement due to the direct and multi-faceted impact of the UK’s Russia financial, trade, and transport sanctions on the maritime sector, as well as sustained efforts to curb sanctions circumvention touching the sector. Given the complexity of the maritime shipping sector, OFSI recommends that shipping companies, port operators, insurers, financial institutions, and other maritime businesses should adopt a proactive and comprehensive approach to ensuring their compliance with UK financial sanctions that includes elements such as due diligence, thoughtful use of technology, and increased collaboration. The OFSI blog post sets out a range of recommended compliance best practices and techniques reflecting those themes to assist the compliance efforts of maritime businesses.
The OFSI Blog
The OFSI blog is the latest in a series of publications by OFSI focused on the maritime sector, including OFSI’s recently published financial sanctions guidance for maritime shipping. The complex, international nature of the maritime sector, coupled with the increased use of deceptive shipping practices by those seeking to evade and circumvent the unprecedented package of sanctions imposed in response to Russia’s invasion of Ukraine, has placed a renewed focus on the sector’s management and mitigation of sanctions risk.
The OFSI blog recommends six key steps that maritime businesses should incorporate into their compliance programmes to ensure compliance with UK financial sanctions.
1. Customer Due Diligence
The OFSI blog identifies understanding who directly or indirectly owns and controls counterparties as a fundamental building block for UK financial sanctions compliance. OFSI expects maritime businesses to conduct thorough due diligence that verifies the identity of customers, partners, and intermediaries before entering into a business transaction. For example, OFSI has suggested that it may be prudent to consider the ultimate beneficial ownership of any involved ports, terminal operators, charterers, operators, cargo owners, and suppliers when conducting due diligence on a potential business transaction.
To satisfy this obligation, maritime businesses should consider collecting and maintaining key information on those they wish to do business with (and their beneficial owners) such as names, addresses, phone numbers, email addresses, and photo IDs. This information can be used to assess and interpret the results of sanctions screening efforts against applicable sanctions lists such as the UK Sanctions List and OFSI’s Consolidated List of Financial Sanctions Targets in the UK, which details designations made in relation to a range of UK financial sanctions measures. Maritime businesses may wish to consider performing further due diligence checks using free online tools or subscription-based resources.
The extent of due diligence efforts should be calibrated to the level of risk posed by the proposed business transaction. In that regard, OFSI previously has identified certain actors in the maritime sector as being particularly exposed to financial sanctions risk, including maritime insurance companies, charterers, classification societies, suppliers of cargo, customs and port state controls, flag registries, ship brokers, ship owners, bunker suppliers, shipyards, and financial institutions involved in maritime trade finance. Maritime businesses should ensure that their customer due diligence efforts are appropriately tailored to the risk profile of their particular activities.
2. Compliance Policies and Procedures
OFSI expects maritime businesses to establish and implement robust compliance policies and procedures that are tailored to the sanctions risks faced by the maritime industry in general, as well as the particular maritime business by virtue of the nature of its business activities. The policies and procedures should provide clear guidelines for identifying, assessing, and mitigating sanctions-related risks across all aspects of a company’s activities, including, for example, vessel chartering, cargo handling, financial transactions, and supply chain management. Businesses may wish to consider implementing some of the following measures as part of their sanctions compliance programmes:
- communicating compliance expectations with counterparties, partners, subsidiaries, and affiliates;
- developing, implementing, and adhering to written compliance policies, procedures, and controls;
- establishing disciplinary consequences for engaging in conduct prohibited by sanctions;
- protecting employees that disclose illicit behavior from retaliation and establishing a confidential mechanism for reporting suspected or actual illicit activity or sanctions violations; and/or
- conducting periodic auditing of the efficacy of the sanctions policies, procedures, and controls that have been implemented.
3. Screening Tools
The use of advanced technology and screening tools can enhance the effectiveness and efficiency of sanctions compliance efforts. Automated screening systems can aid in the identification of potential matches against sanctions lists, flag potentially suspicious activities, and allow for the real-time monitoring of transactions and counterparties. However, OFSI also cautions maritime businesses that they bear the ultimate responsibility for managing their sanctions risk, even if they make use of third-party technology and screening tools to assist their compliance efforts. It is therefore good practice for maritime businesses to have a firm understanding of the search parameters and other rules applied by their third-party providers to ensure that their tools are appropriate to the needs of, and risks associated with, their business.
4. Training and Awareness
Regular training sessions that educate employees of maritime businesses on applicable sanctions regulations, the importance of vigilance, and their compliance obligations, should form a key pillar of a robust sanctions compliance programme. In addition to the provision of sanctions training during the onboarding process, consideration also should be given to providing periodic refresher training and implementing additional awareness raising initiatives when new types of sanctions or new geographic sanctions regimes are introduced. Regular communications of this kind can help to promote a culture of compliance within an organisation and encourage employees to identify and report suspicious activities and warning flags, as well as respond appropriately to compliance challenges they encounter in the course of their work.
5. Remaining Alert to Change
To accommodate the ever-evolving nature of UK financial sanctions prohibitions and their targets, OFSI counsels maritime businesses to keep abreast of changes relevant to their activities such as the introduction of new sanctions, regulatory developments impacting the implementation or enforcement of existing sanctions, and key takeaways from sanctions enforcement actions relevant to their businesses. This can be achieved in a number of ways, for example, by subscribing to relevant alerts and publications issued by sanctions authorities, engaging with compliance experts, and participating in industry forums. OFSI also notes that maritime businesses must ensure that their compliance programmes and risk mitigation strategies remain fit for purpose by adapting them to respond to changing requirements in a timely manner.
6. Information Sharing and Collaboration
The OFSI blog identifies collaboration and information sharing between industry, sanctions regulators, and law enforcement as an increasingly important tool to combat sanctions evasion and illicit activity in the maritime sector. In particular, OFSI suggests that maritime businesses may wish to participate in information sharing initiatives, industry associations, or other public-private partnerships that create awareness of challenges particular to the maritime sector and encourage the sharing of best practices for reducing risks, as well as intelligence and insights that better enable maritime businesses to strengthen their collective efforts against sanctions breaches. For example, vessel owners and clubs may wish to share information with banks or other financial services providers, or flag administrations could engage in regular exchanges of information with the International Maritime Organisation and parties in the Registry Information Sharing Compact.
Conclusion
The compliance efforts of maritime businesses are an area of current focus for UK sanctions regulators. To best prepare for possible future scrutiny, affected businesses should: (i) ensure that their sanctions risk assessment is up to date; (ii) benchmark their existing sanctions policies, procedures, and controls against the best practices identified in OFSI’s blog post, and maritime sector guidance recently issued by OFSI; and (iii) consider whether any adjustments or enhancement to those controls are necessary. For more information on these developments, contact the authors of this post, Alexandra Melia or Elliot Letts, in Steptoe’s Economic Sanctions team in London.
