Maritime Sanctions: Tips for Due Diligence

In recent years, regulators have been paying increased attention to sanctions enforcement in the maritime sector. Since 2018, the US government has published six maritime advisories, the last of which received the most attention – the so-called Global Maritime Advisory issued in May 2020. The UK’s Office of Financial Sanctions Implementation followed suit, publishing its own Maritime Guidance in December of that year. It is crucial for companies in the maritime sector to understand how sanctions apply to them, how evaders try to circumvent them, and how to conduct the sort of due diligence capable of catching it.

Let’s use one recent case study, involving the North Korean vessel Wise Honest, to draw out some practical tips for maritime due diligence.

Wise Honest

In 2016-2018, Songi Trading Company, a company controlled by the North Korean regime, used the vessel Wise Honest to deliver UN-sanctioned North Korean coal to foreign buyers. In March 2018, the ship set off on what was to be its final voyage: from the North Korean port of Nampo to Indonesia. Before it could transfer its illicit cargo to another vessel, however, the Wise Honest was detained by Indonesian authorities and subsequently handed over to the United States. Because some payments related to the ship’s operations passed through the US financial system, the US government was able to assert jurisdiction and take ownership of the vessel through civil asset forfeiture.

Shell companies

The registered owner of the Wise Honest was Korea Songi Shipping Company, an affiliate of Korea Songi General Trading Corporation. While the North Korea connection was obvious because the ship sailed under the North Korean flag, the use of Korea Songi Shipping Company as the nominal vessel owner also obscured its real control – by the OFAC-sanctioned Korea Songi General Trading Corporation.

Tip: Information that appears incomplete, inconsistent, or contradictory may suggest illicit activity, and offers useful hints to pursue further. In this case, some of the communication sent by the Korea Songi Shipping Company representative actually came on the letterhead of Korea Songi General Trading Corporation. The two companies also share the same address in Pyongyang, North Korea.

Tip: North Korean companies, including those registered abroad, often follow a particular naming convention: the word ‘Korea’, a Romanized Korean word (e.g., ‘Songi’), and a variation of ‘Shipping Company’, ‘Trading Corporation’, ‘General Trading’, etc.

Front companies

Hong Kong Nova International Trade Company was named in the contract as the seller of cargo onboard the Wise Honest. Wittingly or unwittingly, it acted as a front for illicit North Korean business.

Tip: Conduct Know Your Customer (‘KYC’) checks on all parties to the transaction, and be on alert for any inconsistencies. In this case, the cargo’s buyer may have questioned why a company whose normal business was trade in cigarette manufacturing equipment was selling it coal. In addition to establishing the company’s normal line of business, also verify its online presence, its contact and address information, and banking information.

Tip: Reports published twice annually by the Panel of Experts on North Korea are a great source of information. While some of their investigations may not result in a sanctions designation at the UN level, often for political reasons, the high evidentiary standard of these reports makes the information provided in them highly valuable for due diligence.

Foreign facilitators

Sanctions evaders also utilize foreign facilitators to further obscure ties to sanctioned entities or jurisdictions. In this case, the transaction was brokered by an Indonesian individual, brought into the scheme by the president of the OFAC-designated North Korean bank, Jinmyong Joint Bank, to whom he was introduced by diplomats at the North Korean embassy in Jakarta. The broker used a Hong Kong-based company to charter the receiving vessel for the ship-to-ship transfer, the Ken Orchid.

Tip: While checks on the Indonesian broker may not have revealed links to North Korea, details of the transaction for which he planned to use the chartered vessel would have done so. Wise Honest was a North-Korea-flagged vessel, which means that any ship-to-ship transfers with it were prohibited by UN sanctions.

Flag hopping, fraudulent flag use, unknown flag

The Wise Honest was seized with two sets of registration documents onboard – one from North Korea and one from Sierra Leone, where it was registered until 2016; it also at one point claimed registration with Tanzania, which had deregistered it in 2016 for links to North Korea. Following this period of changing flags, apparently unable to find registration elsewhere, the ship then took on the North Korean flag.

Tip: Verify information transmitted via AIS with official IMO records, and vice versa; these are available in the official IMO database, the Global Integrated Shipping Information System (GISIS), or through the European Union-run Equasis. The IMO has also introduced a new flag marker for instances of fraudulent flag use (e.g., ‘Micronesia FALSE’).

Tip: Efforts in recent years have led to many North Korea-linked vessels being deregistered by open registries. Some of them have published lists of such deregistered ships or included them in their implementation reports submitted to the UN Security Council (e.g., Tanzania, Togo, Panama). There may also be media reports about such instances. Some of those ships have taken the North Korean flag; others sail without any flag whatsoever – a red flag in its own right.

Ship-to-ship transfers

While ship-to-ship transfers may be conducted for legitimate reasons (e.g., wanting to avoid port fees, or the vessel being too big for a particular terminal), they can also serve to obscure the origin or destination of cargo.

Tip: Depending on the sanctions regime they are intended to bypass, ship-to-ship transfers often happen in a particular set of locations. For sanctions targeting North Korea, see the map included in OFAC’s March 2019 advisory). For sanctions concerning Iran and Venezuela be on alert for activities taking place off the UAE port of Fujairah, various locations off the African coast, Malaysia, Indonesia, and the Caribbean.

Tip: Monitoring vessel activity in these location can be helpful. For instance, AIS may be disabled for a few days in a known ship-to-ship transfer zone. Or a vessel repeatedly leaves and returns to the same port within a short period of time, or appears to be shuttling between a port and a known ship-to-ship transfer zone. This may be accompanied by draft changes.

AIS gaps and manipulation

The AIS onboard the Wise Honest had been off since August 2017, hiding its illicit activities. Had the Indonesian authorities not detained the Wise Honest, its ship-to-ship transfer with the Ken Orchid almost certainly would have happened in an AIS blackout as well.

Tip: While AIS gaps can happen for legitimate reasons (e.g., signal interruptions due to particularly dense traffic, fears of piracy), repeated, prolonged, and unexplained gaps in particularly sensitive locations, as well as unusual transmissions, should be cause for further investigation. They will need to be judged on a case-by-case basis, taking into account vessel type, its area of operations, its cargo, and any other red flags present in the transaction.

Voyage irregularities & falsified cargo documents

The Wise Honest’s route through Indonesia was meant to obscure the cargo’s origin; cargo documents prepared for the Ken Orchid listed Balikpapan, Indonesia, as the coal’s port of loading. The certificate of origin for the coal found on board the Wise Honest, in turn, claimed that the cargo originated in Russia, and a contract mentioned in the forfeiture complaint reportedly included a provision stating that "the shipowner shall take the ship through one safe port in Russia.”

Tip: Voyage irregularities, including economically unjustifiable detours and loitering, are a red flag. North Korean vessels are also known to transfer coal to Russian or Chinese ports, where foreign-flagged vessels then pick it up to deliver it to the ultimate destination, while claiming its origin in those countries.

Tip: For sensitive goods and commodities, particularly those restricted by sanctions, do not rely on cargo documentation, and independently verify the cargo’s origin and destination.

For the latter, the case of Trafigura vividly demonstrates why. In October 2017, the ship Lighthouse Winmore conducted a prohibited ship-to-ship transfer of petroleum products with a North Korea-flagged vessel. The ship had been chartered just a month earlier by Oceanic Enterprise Ltd., a Marshall Islands company controlled by a Taiwanese national. The ship was subsequently detained by South Korean authorities and during the investigation Trafigura was identified as the cargo’s shipper. As it later transpired (not before the company was forced to issue statements denying its involvement in sanctioned activities), Trafigura had sold the fuel to a Hong Kong-based trader on a free-on-board basis. The trader subsequently sold the oil to Oceanic Enterprise Ltd., the company that chartered the Lighthouse Winmore.

Tip: At the Panel’s recommendation, Trafigura adopted additional contractual clauses in its risk management framework, including requiring proof of the cargo’s final discharge and a requirement that buyers themselves require continuous AIS transmission.

Mitigating sanctions risk

Vessel risk profiles are not constant over time, and should be reviewed periodically after the initial due diligence. One recent example of why this is so important concerns the vessel Courageous, the latest target of US civil asset forfeiture. In a pattern that will by now be familiar, in July 2019, the Courageous was sold to a new owner, a company registered China, through a Singaporean broker. Shortly thereafter, the ship switched off its AIS and began making oil deliveries to North Korea, both directly and through ship-to-ship transfers. The ship was expelled from Taiwan in February 2020 and detained in Cambodia shortly thereafter. In addition to the civil asset forfeiture complaint, the US government also filed charges against the Singaporean broker, who appears to have ties to another ship making illicit deliveries to North Korea. (Of note, both vessels had been investigated by the UN Panel of Experts, with details laid out in periodic reports.)

Sanctions risk also includes a very real possibility of direct asset loss. In February 2018, the ship Wan Heng 11 was detected engaging in a ship-to-ship transfer with a North Korean tanker while under a bareboat charter. When the vessel was deregistered by its flag state as a result of this incident, the owner tried to activate the charterparty’s illegal trading clause and recover the vessel – unsuccessfully. The vessel switched off its AIS and shortly thereafter took on the North Korean flag.

Cases like these are a good reminder of the importance of taking risk mitigation measures, including comprehensive due diligence. Detecting sanctions evasion is not an easy task, but having a good understanding of it and employing appropriate tools make it that much more feasible.

Paulina Izewicz is a Senior Research Associate at the James Martin Center for Nonproliferation Studies (CNS) (part of the Middlebury Institute of International Studies at Monterey). Her work focuses on maritime sanctions and North Korea’s sanctions evasion, particularly in the maritime domain, and in that role, she has provided training to a wide range of maritime stakeholders globally.

Cristina Rotaru is a Researcher in VERTIC’s Compliance Mechanisms and Measures Program, where she focuses on issues related to the implementation of UN sanctions against North Korea. Previously, Cristina worked in various positions in the area of nuclear non-proliferation, export controls and sanctions. Her academic background is in international conflict regulation and security.

This article appears courtesy of the James Martin Center for Nonproliferation Studies, and it is reproduced here in an abbreviated form. The full article first appeared in Financial Institutions Sanctions Compliance Journal, Issue 03 (September/October), and it can be found in its original form - including footnotes and a list of due diligence resources - at this link.