Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The sanctions imposed on subsidiary ship owners that were part
of the COSCO Shipping family in late 2019 by the Office of Foreign
Asset Control (OFAC) were designed to weaken and push to historic
lows the continuing trade in goods, especially oil, between China
and Iran.
In an article last year, IHS Markit
noted how the sanction restrictions on this trade route had dented
the flow of crude oil between the two countries but had not
completely shut it down.
The chart below outlines the oil flows between the two
countries. The major drop in Iranian exports between April and May
occurred when US sanctions kicked back in and the Joint
Comprehensive Plan of Action (JCPOA) was revoked. In September, the
COSCO sanctions were implemented but still, despite dropping, the
oil flow remains at a stubborn and persistent level. There is no
cliff fall since September 2019.
Therefore, have the COSCO sanctions been successful in their
intended aim. The short answer so far is 'No'. This is further
compounded by an article that states a new,
unreported plan that the US will issue in the coming weeks and
months that will seek to apply pressure to the global trade finance
chain of shippers, insurers, bankers, charterers, bunkerers and
freight forwarders. These trade finance participants will face
greater economic sanctions exposure in order to prevent the oil
moving from Iran to China. Furthermore, the US will seek to
continue to sanction any entity involved in the trade.
The article goes onto mention that the same organisations and
individuals will need to pay much closer 'attention to when
ship transponders are turned on and off, and steer clear of doing
business with vessels with questionable histories.' A further
aim of the US State Department is to reduce or close the
ship-to-ship transfers at sea of crude oil, refined petroleum
products and bulk goods.
Clearly, there will be no let up from the US on shutting down
the oil flow. In 2019, OFAC issued a series of shipping advisories
relating to North Korea, Iran and Syria, seeking to curtail the
flow of goods to and from these countries. These ad-hoc measures
created new pressures on financial institutions who had to
interpret and understand such sanctions prior to introducing them
into pre-existing sanctions policy programmes. Additionally, OFAC
added many vessels to the SDN lists in the same period. There are
nearly 600 vessels on OFACs watch-list, and this will be highly
likely to increase in 2020.
In this context, what could we expect in the next 12
months?
Even more focus on Shipping.
Banks, shippers and others need to ensure that they have no
internal weaknesses or holes in any of their due diligence
procedures when it comes to screening vessels, vessel movements,
vessel ownership and past vessel activities. Any gaps in a bank's
sanctions programme regarding vessel screening requires serious
attention in todays climate. No longer can vessels simply be
evaluated through a search and find approach on a regulators
watch-list.
Enforcement action in 2020 will likely cover
multiple actors and agents within a single
transaction. Most OFAC penalties deal with a single
institutions failure to conform with economic sanctions policies.
This could be adapted and changed so that where goods have been
loaded and shipped on sanctioned transportation, those involved
such as the bank, shipper and insurer for example, could all be
fined. In terms of overall penalty action, 2020 will have more
similarities with 2019 rather than 2018. In 2018 only seven OFAC
enforcements were issued, 2019 by comparison reached 26 actions
with an overall settlement bill touching $1.3 billion. With an
increased emphasis on shipping and other areas in global trade
compliance, similar fines and industries that were targeted in 2019
will again characterize the next 12 months.
Even greater scrutiny on the nature of goods and
their shipment delivery, especially in Asia. The
US-China tech war is probably of greater significance than the
trade war. On the tech front, the ability of both countries wanting
to ensure that their IP is protected, coupled with the US stance on
ensuring that third party technology systems in other countries are
not integrated with Chinese made or Chinese owned hardware, is a
huge issue for trade. The US is also scrutinizing the import of US
technology into China, especially via Hong Kong and other
surrounding countries. Dual-use products of a technical nature will
need to be monitored closely to ensure that export compliance laws
are observed. For banks, the focus will be on understanding the
type of technology and its intended end-use but also the ultimate
end location and possibility of trans-shipment to China. Again this
poses another significant challenge to trade finance banks who
might not know at face value how highly sophisticated equipment in
the semi-conductor industry can be used and in what types of
product. On the other side of the coin and in response to US
actions, China has published a draft version of its Export Control
Law that seeks to restrict technology and other 'country sensitive'
items for export. This draft law will likely restrict the export of
cutting-edge technology, dual-use items and other strategic
resources vital to Chinese technology services.
As due diligence checks get more complex and more
intensive, regulators and government agencies will need to
assist.
Many local regulators such as the Hong Kong Monetary Authority
(HKMA) and the Monetary Authority of Singapore (MAS) have been
involved in initiatives to help banks and fintechs bolster their
KYC and AML checks using AI and other key technologies. One area
missed in the dash to utilise this state-of-the-art technology is
the data and content that can help deliver actual insights. Digital
standards and roadmaps alone can only deliver so much benefit, if
there is a failure to correct the problems with todays trade-based
datasets then the forward march of technology becomes curtailed.
Where datasets are inconsistent or incomplete, they need to be
enhanced. Initiatives to bring together customs data, defence data
and others into the trade finance industry will provide a similar
benefit as trade ecosystems and platforms do on the tech side.
Knowledge of a whole range of dual-use and technology componentry
will be key pieces of information for banks when financing deals in
Asia and across the world.
The challenge of sanctions risk remains a firm item on the
regulators radar and goes beyond the most obvious KYC/AML style
checks that would have sufficed a few years ago. Today, banks and
financial institutions need to be utilizing sophisticated data to
identify and analyse where risk lies and how it can be managed
effectively.
Posted 28 January 2020 by Byron McKinney, Associate Director - Product Management, Maritime & Trade, IHS Markit