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.
Sanctions and Non-proliferation in the Insurance Industry
In at least three ways the insurance industry is an enabler of activities and thus has a responsibility to ensure those activates do not threaten international peace and security, including the proliferation of Weapons of Mass Destruction.
First, programmes of concern, such as those in Iran and North Korea, typically require goods from the international marketplace. This kind of trade is often dependent upon insurance: for example, through a “letter of credit” offered by a bank, or by the issuing of an insurance policy covering a vessel in which the goods are shipped.
Second, infrastructure with possible use in proliferation often also requires insurance in order to limit the liability of an incident. A nuclear power plant, for example, may well be insured through insurance ‘pools’ so that in the case of an accident the owner of the facility has limited liability.
Third, there are the indirect effects of providing insurance services. For example, if an insurer provides services to a business sector, which itself creates the necessary resources to allow a government to continue with its programme of concern, then the insurer is, de facto, supporting proliferation. Examples of this would include providing insurance cover to Iran’s oil and gas sectors, which are restricted by sanctioned since they are a key source of revenue for the Iranian government.
Why the Insurance Industry should care about Sanctions
The insurance industry has an obligation to adhere to the letter of the law in all cases. It is often prudent from a risk mitigation perspective, however, to adhere not only to the letter but also the spirit of such laws. Failure to do so can result in unmanageable reputational risks, an undesirable risk landscape for future business, and the untold costs, in terms of business resources, of providing policies that cannot be fulfilled..
In practice, it is often diligent to adhere to US unilateral sanctions measures, even when not subject to US laws. There are a variety of reasons why this is prudent. First, US laws are increasingly extraterritorial, meaning that firms conducting trade which would be prohibited if the firm was US-owned could, for example, be prohibited from conducting certain business in the US, including supplying the federal government or accessing the US financial system. Second, US law makers have demonstrated a resolve to restrict further the provision of trade-related services from the international marketplace The insurance industry can pre-empt the imposition of new laws and extraterritorial measures by adopting systems and processes now which appropriately manage the changing risk landscape.
What the Insurance Industry could do to Protect Itself
Insurance firms should consider taking a systematic approach to the implementation of non-proliferation and sanctions measures. This systematic approach must be supported by the company’s top management and in the form of both training and guidance for company staff. The systematic approach has two aspects:
For the insurance industry, compliance with trade controls typically involves the screening of policies against lists of designated entities, using screening systems specifically intended for this purpose. The objective is to ensure that any matches between a party to a policy and a “designated entity” are identified and managed.
US unilateral measures also require insurers to exclude policies covering certain proscribed activities with countries such as Iran. This typically requires the insurer to collect information from the prospective policy holder on the nature of their business and to ensure that the provided information is valid. In practice, this may be achieved by asking the policy seeker to complete a questionnaire thereby introducing a self-declaration clause in the policy, rendering the policy invalid if it emerges that illegal activities have been undertaken.
When a policy is not, strictly speaking prohibited according to the terms of the compliance process, the insurer should evaluate the benefits and risks associated with accepting the policy. This is primarily the task of an underwriter, but underwriters can also be supported by a risk management function.
Policies can pose a number of risks from a proliferation perspective. The primary risks are as follows:
Insurers can mitigate the risks posed by such policies by ensuring that government-led measures, such as export controls and IAEA safeguards, are adhered to by the policy holder.
Alpha for Insurers
Alpha is developing guidance for insurers on implementing non-proliferation and sanctions from a compliance and risk management perspective. Alpha also maintains information useful for implementing these systems in practice, such as country profiles. Finally, Alpha offers training for compliance and risk management professionals. Click here to find out more about Alpha’s services and memberships.
 Since insurance payments cannot be made when illegal activity is evident, policies which relate to proliferation cannot ultimately be fulfilled.