Closing the Sanctions Due Diligence Gap for the Shipping Industry

In May 2020, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) and the U.S. Coast Guard came out with a revolutionary advisory on sanctions compliance. In short, they set the regulatory bar very high, requiring all stakeholders in the shipping and trading industry to meet enhanced due diligence standards. These new, tougher standards underscored the need to go beyond list matching and towards a more dynamic, behavioral approach for evaluating maritime risk. 

The U.K.’s OFSI followed suit very quickly with a similar advisory. Suddenly terms like “dark activity” (i.e., intentional disabling of AIS transmissions) and ship-to-ship transfers became common terms for compliance analysts worldwide. From a geopolitical perspective, there was a loophole in shipping and trading, which strained the efficient enforcement of sanctions. 

One size doesn’t fit all

In response to this new regulatory environment, market leaders, including major energy companies and financial institutions, have started to implement AI as a tool to meet new global compliance requirements.

However, regulators didn’t level the playing field for every stakeholder. In fact, the unique structure of the shipping market went unaccounted for. The impact? Shipowners are subject to the same compliance measures while operating in a complex environment that looks nothing like their counterparts’. To put this into perspective, it’s important to first understand what shipping compliance processes look like today. Once a trader on a trading floor identifies a cargo to buy and sell, they approach the charterers on the team and ask for a vessel to move the cargo. The charterers on this team usually reach out to brokers and receive proposals for vessels with appropriate location and availability for the laycan, as well as pricing proposals. Before moving forward, the proposed vessels must pass rigorous compliance checks.

Here’s where it gets complicated: The largest tanker pools have some 250 vessels out of the 100,000 vessels in the global fleet. At this capacity, owners would most likely have the means to implement strong technologies to streamline vessel clearance. However, many of the smaller shipowners aren’t yet part of this market. Nevertheless, it doesn’t mean that compliance standards are any less. No matter your vessel fleet size, there is a good possibility that third parties are screening each of your vessels using AI. This applies every time a vessel is screened for charters, spot charters, ship-to-ship transfers, vessel sales or financing, or renewals at P&I clubs. 

Within reason, the potential fallout can be costly. Unfortunately, many shipowners are working in the dark because they don’t receive enough information about their exposure to compliance risk. This can result in losing out on major chartering deals. Good actors, who represent the vast majority of the industry, shouldn’t have to miss out on business on account of regulations meant to deter bad actors. Plus, most shipowners don’t have the data, budgets, or resources of oil majors or global financial institutions. To what extent can they lean on risk management providers rather than build data system capabilities themselves? How can we as an industry do more to ensure that all stakeholders are benefiting from an efficient due diligence process? 

Easing the compliance burden

When it comes to compliance, the stakes are high. For example, when U.S. sanctions hit Greek shipowners last summer, Chevron’s oil cargo got tangled in U.S. sanctions. In another case, PB Tankers faced bankruptcy when it landed on OFAC’s blacklist for trading with Venezuela. The bottom line? Regulations that go unmet can cost a shipowner hundreds of thousands of dollars in chartering deals.  

This is especially relevant in light of the recent charter party clauses introduced by BIMCO, referring specifically to vessels turning off transmissions. Shipowners are essential players in the maritime ecosystem and shouldn’t have to take on regulations without a strong partner. To ease the burden of compliance, shipowners need a solution to gather insights in one report with compliance scores, allowing them to easily spot risks and opportunities and take immediate action. 

The idea for instant compliance scores is not that far off from credit ratings in the U.S. Credit scores rate your credit risk. And because credit ratings directly impact your interest rate and financial standing, they are made readily available by reporting companies. It’s time for the shipping industry to make a similar move - emphasizing data democratization and transparency for sanctions compliance.

Sanctions compliance came into effect to prevent dealing with select sanctioned entities. It was never meant to disrupt the estimated 70,000 companies that are crucial to the global economy and maritime trade market. Now more than ever, shipowners need to find a partner for the long-term who gets their business and can help them take on whatever challenges the future holds.

Ami Daniel is the co-founder and CEO of the maritime risk management and intelligence company Windward.