At Large: OFAC creates titanic problem for compliance chiefs

Amid the coming post-Covid-19 resizing wave, when chief compliance officers request bigger budgets, don’t laugh, and don’t blame them. This time, it’s OFAC’s fault.

Last week, OFAC — the Treasury Department’s Office of Foreign Assets Control — published a 35-page “advisory,” along with the State Department and U.S. Coast Guard. The advisory “reflects the U.S. government’s commitment to work with the private sector to prevent sanctions evasion . . . with a focus on Iran, North Korea, and Syria.”

The problem is this: Ninety percent of the global supply chain moves on the seas, OFAC said. In the maritime transport industry, certain “malign actors” (aka smugglers) know all the old ways to cheat, and have learned some new ways too. Under OFAC’s sanctions regime, it’s up to those who work in or serve the maritime sector to spot the cheating and report it, or at least avoid it. Yikes.

Who’s most at risk? Financial institutions, insurance companies, commodity traders, ship owners, captains, managers, operators, brokers, ship chandlers, flag registries, port operators, shipping companies, freight forwarders, classification service providers.

OFAC described some (but not all) of the tricks bad actors use to evade the Iran, North Korea, and Syria sanctions. As you read on, you may wonder, like I did, how a compliance department with normal resources is supposed to deal with all this? Good question. Ships move, and the oceans are vast. Technology can’t change that.

Here’s OFAC’s list:

Fresh paint. Big ships have to display their International Maritime Organization number on the hull. IMO numbers are intended to be permanent regardless of a change in a vessel’s ownership or name. Vessels involved in illegal trade “have often painted over vessel names and IMO numbers to obscure their identities and pass themselves off as different vessels,” OFAC said.

Cloaking and spoofing. Most ocean-going vessels must transmit their identification and location via high-frequency radio waves. The idea is mainly to keep crews safe. Some bad actors are disabling their AIS (Automatic Identification System) transponders. Others are spoofing the AIS data — broadcasting a different name, vessel ID number, or other identifying information.

Counterfeit documents. Maritime trade generates a pile of paperwork. Bills of lading, certificates of origin, invoices, packing lists, proof of insurance, and lists of last ports of call, among others. It’s illegal to falsify the documents. But . . . sanction evaders have used phony shipping documents to hide the sources of petrochemicals, petroleum, petroleum products, metals (steel, iron), and sand, OFAC said.

Ship-to-ship transfers at sea, especially at night, are a favorite technique of sanction evaders. “As appropriate, consistent with their risk assessments, ship owners, managers, and charter companies are encouraged to continuously monitor vessels, including those leased to third parties,” OFAC said, with my italics.

Unknown UBOs. Sanction violators use anonymous companies and “multiple levels of ownership and management” to disguise ultimate beneficial owners of cargo.

Indirect routing. Today’s smugglers may try to disguise the real destination or origin of cargo, or its ultimate recipients. The techniques include indirect routing, unscheduled detours, or transit or transshipment of cargo through third countries, OFAC said.

False flags and flag hopping. Sanction evaders may falsify the flag of their vessels to mask illegal trade, OFAC said. They may also repeatedly register with new flag states (flag hopping) to stay ahead of the Coast Guard and other enforcement agencies.

With bad actors putting others in legal jeopardy of sanctions violations, what’s ahead for the maritime transport industry? OFAC said the response needs to be more “risk based” compliance, and a smarter use of enhanced due diligence.

It starts with risk assessments, OFAC said. That way, the private sector can “continually adopt business practices to address red flags and other anomalies that may indicate illicit or sanctionable behavior.” And there are specific compliance recommendations for those with legitimate roles in the maritime transport industry — bankers, insurers, brokers, shippers, freight forwarders, etc. The OFAC advisory is long and dense, but worth careful reading.

A final note about the advisory. It promotes collective action: “The Department of State, OFAC, and the U.S. Coast Guard recommend that industry groups encourage members to provide relevant information and share it broadly with partners, other members, and colleagues consistent with applicable laws and regulations.” That’s something new(ish) for America.

So, don’t blame chief compliance officers who say they need more resources. Compliance really is getting harder. Just ask OFAC.