Project Alpha is pleased to introduce Alpha-TMD : a new tool to help monitor corporate exposure to restricted dual-use goods.
Global sanctions measures against countries like Iran and North Korea make it essential for firms to monitor their exposure to trade involving dual-use goods and technology: those items that can be used for legitimate industrial purposes, but could also contribute to building weapons of mass destruction (WMD). Ignoring international restrictions on the supply and brokering of dual-use goods can lead to hefty penalties, not to mention the reputational damage that comes from assisting WMD proliferation.
But monitoring trade and financial systems for dual-use technology of WMD concern is not easy. The technology control lists mandated by multilateral organisations like the Nuclear Suppliers Group are fragmented, highly-technical in nature and often unstructured. Moreover, they are not easily compatible with systems used in the anti-money laundering and due diligence context.
To help companies overcome these hurdles, Project Alpha has created Alpha-TMD (Trade Monitoring Database), a structured database of controlled dual-use technology. Alpha-TMD has collated all of the chemicals, materials and technologies controlled under the main dual-use technology export control regimes (the Nuclear Suppliers Group, the Missile Technology Control Regime, the Chemical Weapons Convention, and the Australia Group) – more than 600 dual-use items in total.
Each dual-use item in Alpha-TMD is listed with the following information:
- Control regime status;
- Item description or rationale for control;
- Keywords to identify controlled technology, each developed by Project Alpha experts;
- ‘Not’ keywords and Boolean search terms to reduce false positives;
- Chemical Abstracts Service (CAS) reference numbers for chemicals and metals;
- A qualitative assessment of each item’s broader industrial utility beyond the WMD context (low, medium or high), to help companies decide whether to regulate or block trade in these items.
We believe that Alpha-TMD can help companies working in the trade, shipping and financial space maintain their compliance obligations with respect to trade in dual-use goods, and would be pleased to discuss its pricing and availability.
The transportation sector provides vital services for the furtherance of economic prosperity, and as a result, international peace and security. There is a real risk that the sector could be misused by proliferators in order to transfer sensitive commodities. In order to counter this risk and ensure that the business community is prevented from contributing to activities that could threaten international peace and security, the UN often relies on the imposition of so-called “targeted sanctions” (or “smart sanctions”) on designated individuals, entities or States, which the Security Council has reason to believe are involved in the proliferation of weapons of mass destruction, human rights abuses or terrorist activities that may threaten international security.
A few relevant considerations for industry involved in the maritime transportation sector are outlined below, alongside a short set of guidelines meant to aid such companies in establishing effective practices for compliance with sanctions.
A short breakdown of UN Sanctions
A. Sanctions related to goods and services require States to do one or both of the following:
While such controls are primarily aimed at the sellers or purchasers of the sanctioned goods, in some cases the Security Council specifically requires States to prevent the provision of “assistance” to any trade that is prohibited under the sanctions regime. “Assistance” is generally given an open ended meaning (often in terms of “financial or other assistance related to the supply, sale or transfer of the sanctioned good), and are thus relevant to freight forwarding firms, maritime transport firms and insurers.
B. Targeted financial sanctions (“asset freezes”) directed against designated persons and entities, require States to do both of the following:
• freeze the funds, other financial assets and economic resources which are on their territories at the date the measure is applied or at any time thereafter, that are owned or controlled by designated persons or entities, or by persons or entities acting on their behalf or at their direction, or by entities owned or controlled by them, including through illicit means;
• ensure that any funds, financial assets or economic resources are prevented from being made available by their nationals or by any persons or entities within their territories, to or for the benefit of these persons and entities.
Risks posed by non-compliance
They include but are not limited to: enforcement action by State authorities; the delay or diversion of vessels; interruption of the movement of licit goods on the same vessel or in the same container as the suspected illicit cargo; legal liability; adjacent costs; damage to reputation; and even physical danger to the vessel and crew when transporting hazardous goods.
How UN sanctions requirements can be met in practice
1. Freight forwarders and carriers
Freight forwarders and carriers must comply with the obligation not to assist with the sale, supply or transfer of a good to (or from) a country for which that good is banned under a sanctions regime. The issue for freight forwarders is the degree to which they can rely upon the client exporter (consignor) / importer (consignee) to have its own compliance arrangements in place. In order to do so, freight forwarders may look at compliance risk indicators (country of destination, the good itself) when facilitating trade with a country subject to sanctions.
Good practice compliance for freight forwarders means:
Knowing which goods are prohibited (or require authorisation) for supply to which country;
Obtaining sufficient information from the consignor in order to determine whether the consigned good is prohibited or restricted for the country to which it is consigned;
Asking clients to provide information on the control status of the goods that they are shipping and to confirm that any appropriate export licence has been granted (including asking for a licence reference number);
Obtaining a signed compliance statement from the customer;
Taking steps to ensure that consignors have appropriately declared the content of their packages;
Saving all relevant data stores for ex post facto “suspicious transaction” analysis.
2. 2. Financial service providers
Many of the same principles that apply to compliance by freight forwarders and carriers also apply to financial service providers. However, while freight forwarders can verify the accuracy of client-provided information through physical inspection of the goods themselves, financial service providers will often rely on other indicators, including whether the client’s instructions on the transfer of funds matches the client’s description of the destination of the goods.
Since insurers also have a role in helping set the risk landscape for business, they should:
Not issue policies where the activity is unlawful;
Not self-blind as to the nature of the activity being undertaken under the protection of the policy they provide;
Put in place processes to ensure that they detect any designation of an entity that they already insure;
Consider inclusion of a contractual clause to ensure that the sanctions status of a client and sanctions status of transaction can be taken into account from a contractual perspective.
3. 3. Port operators
Port operators are responsible for the loading and unloading of cargoes at a port. In relation to sanctions compliance, they have a responsibility to:
Ensure no assistance is provided to the supply or transfer of goods subject to sanctions;
Ensure no bunkering services are provided to vessels for which there are reasonable grounds to believe the vessel is carrying sanctioned cargo;
Consider taking the lead of Panama in adopting vessel tracking and sanctions checking solutions;
Consider whether vessels entering their jurisdiction have appropriate liability insurance.
Designated Persons or Entities
Entity screening systems that automatically screen parties to a business transaction against lists of designated persons and entities, and highlight matches or potential matches for closer examination are problematic in that they cannot overcome challenges arising out of technical faults (including the transliteration, misspelling and duplication of names, as well as the lack of bio-data. In the event of a positive screening match or any uncertainty, the business should make formal contact with the relevant competent authority in its jurisdiction.
The accuracy of documentation and full data elements from the shipper of the commodities is a critical factor in supporting the transportation company in making an informed decision as to whether a particular export may give rise to sanctions compliance issues and otherwise demonstrating prior due diligence. Companies will encounter four categories of transactions: those that are prohibited absolutely, those that are permitted, those that are ambiguous and those that are suspicious.
Client due diligence
Does the client have a sanctions compliance process?
Does the client deal with countries to which sanctions apply?
Is the client based in a country to which sanctions apply?
Information Collection and Sharing
When companies detect suspicious activities or transactions, they are encouraged to report this information to their national authorities.
Due diligence efforts to identify whether there is any indication that the vessel is involved in non-compliance include:
- Establishing whether the vessel has previous activity that indicates a risk of sanctions non-compliance;
- Ensuring that vessels or vessel owners and operators are not designated persons or entities;
- Ensuring that ships flagged or owned in countries with enabling environments for sanctions evasion do not carry prohibited cargoes;
- Checking not only vessel names, but also IMO numbers;
- Ensuring that ships of any flag calling at territories to which sanctions apply do not carry cargoes prohibited under sanctions.
|Certification and Accreditation Schemes||The World Customs Organisation’s “SAFE Framework” includes the Authorised Economic Operator (AEO), Customs-Trade Partnership Against Terrorism, Container Security Initiative and other schemes.|
|Unintended Consequences and Unmanaged Liabilities||There are a number of scenarios in which overly-sensitive risk appetites - can have unintended and negative consequences.|
|Audit Trails and Record-keeping||Companies should ensure that business partners are aware of the record keeping requirements and it is good practice to have these included in contractual agreements.|
Compliance Structures can mitigate sanctions compliance risks. They are known by many different names and may be referred to as Compliance Management Structure (CMS), Export Control Management Programmes (ECMP), Global Trade Compliance (GTC) and more. The key elements to create an effective compliance programme are:
• Management Commitment
• Compliance Organisation
• Policies & Procedures
• Communication & Training
• Contracts & Licences
• Documentation & Record Retention
• Security – including but not limited to; Restricted Party Screening, Criminal Background
Checks, Facility Security, Vehicle Security.
• Continuous Validation & Improvement
• Voluntary Self Disclosure (VSD)
These guidelines draw on the views of industry and regulators expressed at a symposium on “Managing Sanctions Risk in the Maritime Transportation Sector” in Singapore in September 2014, later discussed in a UN Security Council Report on Effective Practices for the Maritime Transport Sector, to which Project Alpha has contributed.
On 12 September 2014, the Governments of Australia and Singapore hosted a symposium in Singapore for the shipping and maritime transportation sector to raise awareness of United Nations sanctions and explore issues relating to compliance with such sanctions. More than 100 representatives participated from across the supply chain and related services, including ship owners and agents, freight forwarders, insurance companies, brokers and port operators, as well as industry associations, regulators and think tanks.
Together with Project Alpha, Singapore and Australia have documented the good practices in compliance identified at the symposium to produce the attached report. We expect that the report will be useful not only to industry but also to Member States and Security Council committees in better understanding the role and good practices of the maritime transportation sector, which is an essential partner in realizing the effective implementation of United Nations sanctions.
This report has been circulated to Member States by the Security Council. It can be downloaded below.
Additional restrictions can apply when dealing with countries that are subject to sanction. These can include restrictions on the actions of individuals and entities, including their ability to travel or to use financial system, and they can include additional restrictions on exports or trade activities, which often have the effect of broadening thecontrol lists to include items which would not normally be included in the UK consolidated list.
In addition to item, technology or software being specifically listed in the controls, a licence could also be required if the exporter knows, has been informed or suspects a WMD end use. Answering the question set out herein satisfies the experts obligation in this regard.
With regards to UK export controls, the primary question that must be answered is whether it appears on the export control list. BIS offers a range of services to help with the process of classification to determine whether the technology is listed.
Universities should be mindful that in some instances controls from other territories may apply in addition to UK-administered controls. This is particularly common for US technologies, where re-export clauses often apply which prevent not only the goods, software or technology being re-exported, but also can prevent it being transferred to foreign nationals from within the country.
What issues should exporters consider?
The following is a list of four questions which can be used by exporters to help them begin understand the issues of export control. Please note that it is not a comprehensive list.
The four questions are:
If you answer yes to any of the following questions please consult your company's export licensing control department.
To begin please click here.
Those charged with obtaining equipment and materials for illicit nuclear, biological and chemical weapons programmes have been known to make use of black market procurement and smuggling techniques on occasion. However much of the illicit procurement of ‘dual use’ equipment and materials seen in recent years involves purchasing through conventional commercial transactions, albeit with the buyer or the ultimate customer providing misinformation regarding the true destination or end use.
Once a purchase has been agreed, the items are then usually transported internationally through conventional commercial logistics arrangements. The international shipping/logisitcs industry comprises a diverse range of commercial entities of different types, with various (sometimes overlapping) functions. Any of these commercial entities, whether forwarder, haulier, cargo handler, carrier, broker or other, can potentially be involved (unwittingly or not) in facilitating the delivery of required goods to an illicit chemical, biological, nuclear or radiological weapons programme.
There are various legal, regulatory and reputational liabilities faced by companies involved in shipping that relate to both national and international non-proliferation efforts (and to efforts aimed against terrorism, human rights abuse and so on). Although the commercial entity generally deemed to have primary responsibility for ensuring that an export is legitimate is the seller, those others involved in the various stages of the shipping chain also have legal obligations. Companies need to be alert to the possibilities that their services may be exploited by those engaged in procurement for illicit ends, in order to comply with both the letter and spirit of the law. However, companies may be presented with opportunities to contribute materially to non-proliferation efforts above and beyond practicing compliance to avoid legal and regulatory penalties and reputational risk.
Guidance from national and international authorities on compliance and contribution to non proliferation is available and is broadly applicable to all involved, but appears to be generally aimed at consignors and freight forwarders (or those performing similar functions). Measures involve staying abreast of sanctions and embargoes in place, and of relevant designated entities lists produced by authorities whose jurisdiction is relevant (and notably many companies will wish to keep abreast of entities lists produced by the US government, even where they and those they do business with are outside of the US).
The requirement for entity screening and due diligence activities is clear, however the extent to which it is reasonable to pursue these, in the absence of a clear match to an entity or destination of concern, may call for difficult judgments at times. The response from national authorities to reported possible matches appears to be variable.
Both the positive effects for non proliferation purposes of compliance activities by companies in the shipping industry, and of the financial and commercial burden on those companies of undertaking compliance activities, are difficult to determine at this time.
Moves to develop integrated seamless data pipelines for international commercial logistics, involving information technology and partnerships between commercial entities and national authorities, may present opportunities to make compliance activities by the shipping industry easier and more effective for non proliferation purpose.
Information Available to Commercial Actors and Guidance from Authorities
Movement of a consignment is often a complex process involving multiple actors with varying functional, contractual and legal relationships with each other. These may include truckers, cargo handlers, trusted agents for security screening, customs clearance agents, international carriers (maritime, air, road and rail), and ship and aircraft brokers. Individual companies may perform multiple functions. Financiers and insurers will also be involved and are discussed elsewhere on the Alpha website. This complexity usually leads to hiring a freight forwarder to arrange and coordinate the actions of the different companies. Alternatively a large “integrator” may be employed for a complete door-to-door service.
All entities involved in the web of arrangements around a consignment may have information that could indicate that goods may be heading for an illicit end use.
However information held may not give rise to suspicion until combined with that held by authorities. Identity and/or contact details of the consignee or its agents may flag a risk if they are associated with illicit activity. Names of some of the individuals and organisations of interest are given in ‘designated entities lists’ that are openly published by certain national authorities, notably the US., and which often include entities connected with either terrorism, human rights abuses or proliferation. Equivalent classified lists are sometimes held by various national authorities but not made openly available.
In some cases sanctions may be in place preventing the export of any goods, or goods of a particular type, to any consignee or location in certain countries.
Guidance from national authorities is often that every entity involved in the shipping of a consignment is responsible for adhering to relevant laws and regulations. Companies are usually required to report whenever they know, or have reasonable suspicions, that goods are going to an illicit programme, a designated entity or to a sanctioned/embargoed destination, or that rules and regulations are otherwise not being adhered to.
Advice is generally provided in some amount of detail to exporters/consignors on steps they should take to be compliant with laws and regulations. This will usually involve checking the type of goods against control lists to see whether an export license may be required, screening the details of the procurer and their agents against entities lists (where applicable), and checking for any sanctions and embargoes that may apply.
Guidance is often provided on know-your-customer best practice. This includes factors that may give rise to suspicion (sometimes termed ‘red flags’) which should prompt exporters to seek further information and, if this does not resolve the issue, to discuss the deal with national authorities. [Red Flags are discussed in more detail elsewhere in the Alpha website, at link]. In some countries with ‘end use’ clauses in export controls, having grounds for suspicion means that a company should not proceed even when the goods are not on control lists, unless they have consulted national authorities.
The need for companies to exercise ‘due diligence’ is often discussed in official guidance. Examples of due diligence activity that should be considered (such as measures to check customers bona fides) can be found on various websites and publications.
The extent to which enquiries should be taken by exporters is usually not specified in fine detail - it would obviously be problematic to formulate detailed guidance for all situations. Published guidance from some national authorities acknowledges that due diligence efforts should be ‘proportionate’. However often much will be left to the company to make a judgment on what is reasonable and proportionate, both with regard to the exact nature of enquiries and the lengths that they should go to. The subject of exporters and anti-proliferation measures is covered in more depth elsewhere on the Alpha website.
WIth regard to entities within the shipping industry, specific guidance for companies fulfilling a particular function (haulier, carrier, broker etc) is generally not as prominent as it is for exporters/consignors. Advice given to exporters will obviously be relevant if a company has been employed to carry out functions that the consignor is usually responsible for (eg export license arrangements).
Some national authorities also give guidance directed specifically at freight forwarders (or similar), which typically focuses on checking whether any sanctions or embargoes apply, and screening entities involved against any entities lists that may be applicable. Forwarders are generally encouraged to be familiar with the guidance given to exporters on factors which might reasonably give rise to suspicion, and to consider what due diligence may be merited. In common with written guidance to exporters, forwarders will often have to judge for themselves the nature and extent of activity that is reasonable.
Appropriate levels of effort may be difficult to determine in the initial screening of the consignee and others acting for/with them. The extent to which forwarders should take further enquiries when a possible match to a listed entity occurs (eg a name is similar not identical to one on an entities list) can be difficult to determine with confidence.
Detailed screening may take into account things such as phonetic matching of a name or possible transliteration errors between languages, or may simply flag entities with names similar but not identical to those listed. This will tend to generate a significant number of possible matches that may call for further investigation. Subsequent enquiries may identify many ‘false positives’, but may also identify indeterminate cases.
Companies that report possible matches to national authorities may find that the relevant authorities have insufficient resources to respond in a timely fashion. In such cases there may be tensions between the commercial imperative not to refuse business without due cause, and the desire to ensure that the company has done everything reasonably possible to remain in compliance with laws and regulations.
Large companies such as the international logistics integrators and major freight forwarders may devote considerable manpower with specialist education and training to dealing with compliance issues and performing additional due diligence where this seems advisable. However the extent to which much smaller companies are able to shoulder the compliance burden and make similar efforts to their larger brethren is unclear.
One possibility is to outsource some of the work - at least one commercial company has been set up to keep track of changes to all published sanctions, embargoes and designated entities lists, both from international and national authorities, worldwide, and to provide an entity screening service against this body of information. However, usage of such a service obviously entails additional financial cost, and potentially other impacts if possible matches are identified, even if subsequent investigation reveals these to have been false matches.
Within the world of commercial shipping and international logisitics, forwarders and integrators are prominent at the forefront of export control compliance and wider antiproliferation activity. However, all types of commercial actors throughout the wider shipping industry have obligations in this sphere and the potential ability to contribute to the international community’s non-proliferation objectives. It is difficult to generalise about the exact shape of best practice for the large diversity of entities throughout the industry given multiplicity of arrangements involved, the variety of regulations and guidelines in different jurisdictions, and the varying capacities of different companies to perform antiproliferation activities. The key challenge is for companies to determine what are reasonable and proportionate ‘due diligence’ efforts in the particular situations they find themselves in.
Regulations and guidelines from national authorities can be somewhat vague in practice. While it is unlikely to be feasible to produce definitive, tightly written guidance that will cover all situations, current guidance is often difficult for industry to interpret in terms of practical, concrete procedures and actions required. Some commercial entities, especially very large companies, may be able to practice what can be thought of as ‘overcompliance’, devoting quite large resources to compliance activity and erring on the side of caution, but the burden to smaller operators may be more difficult to bear.
The ability of national authorities to respond in a timely and agile fashion when possible instances of illicit procurement are reported by commercial entities appears to be less than ideal. In some instances it may be that a greater emphasis from national authorities on having clearly identified, adequately resourced first points-of-contact, with clearly laid-out missions and performance standards, may be a useful step.