OFAC Related Notices April and May 2019

There has been a flurry of sanctions related penalties issued by US authorities in April and May 2019, continuing the overall theme so far of substantial and hefty fines.

The total settlement bill for the first half of the year on the Department of Treasury website already exceeds $1.2 billion. This is likely to rise throughout the course of the year as new actions are concluded.

The three recent settlements of note affecting those involved in the trade finance and supply chain industries are:

• The seizure of vessel Wise Honest (IMO:8905490) in Indonesia when it was involved in the illicit shipping of coal and heavy machinery to North Korea
• A $870K fine for the cargo and logistics company Mid-Ship for transporting goods on vessels connected to Iran
• A significant fine totalling $620M was issued to UniCredit and its subsidiaries for operating on behalf of the Islamic Republic of Iran Shipping Lines company and for incorrectly screening letters of credit where goods ultimately ended up being discharged in Iran

The case of the vessel Wise Honest uncovers a network of criminal activity connected to North Korea including the use of ship-to-ship transfers, multiple flags, sanctioned owners and operators and 'dark' activity whereby vessels switch off their AIS transponder so their movements can go undetected.

The Wise Honest had numerous red flag warning signs such as a complete lack of AIS detection activity from August 2017 right up until its seizure in March 2019. To evade sanctions North Korea has used vessels such as the Wise Honest in a fleet of 'ghost ships' which use false names, false identification numbers and always engage in ship-to-ship transfers to discharge their cargo away from prying eyes based at ports and berths.

In this context, OFACs attention in 2019 will remain focused on illegal shipping practices and their relationship with global supply chains and trade finance. Therefore, it is hugely important that those active in these industries are aware of OFAC's current statements and intentions.

OFAC's shipping advisory from March 2019 regarding North Korea illustrated several important areas that trade practitioners should be aware of when managing sanctions compliance:

• Research a ships history for AIS manipulation - has your chartered vessel any suspicious gaps in its movement history?
• Monitor for AIS disablement - has the vessels transponder been switched off, for example, in the Gulf of Tonkin or the East China Sea?
• Promote due diligence on counterparties and who they do business with - can you be sure there are no links to North Korea in your transactions network?
• Be aware of potential ship-to-ship transfers in high risk locations - ensure that no manipulation of IMO numbers, call-signs or vessel names appear in the vessels history
• Review all shipping documentation - documents should be checked for accuracy including the voyage details, the cargo, origin, destination and parties involved in the transaction
• Leverage third party resources to help in the identification of the above measures - utilise the best shipping data available for the identification of ship movement, ownership, registration and location

Applying the above as a minimum set of standards in order to mitigate trade-based risk is vital. For banks and financial institutions this is an important but not an easy task. Trade finance alone generates vast numbers of documents that need to be scanned, investigated and screened for potential red flags. Getting the information such as vessel ownership, vessel movement and previous instances of suspicious ship activity out of these documents requires sophisticated software and technology.

Therefore, to manage the large volumes of trade transactions that banks and FIs (Financial Institutions) deal with the software that works best in these instances are those of a passive nature. Software that can perform the heavy lifting and alert you when instances of importance such as an unscheduled ship-to-ship transfer or a vessel unexpectedly goes 'dark' are key to successful monitoring.

OFAC's emphasis on shipping and trade practices is very extensive and fast moving, banks and FIs need to be vigilant and proactive to keep pace.

Posted by Byron McKinney, Associate Director Maritime & Trade Product Management, IHS Markit