By Matthew Oresman
WHEN people discuss compliance and Cyprus they are often referring to the banking sector, which has made major improvements over the last years, culminating in this year’s positive MONEYVAL assessment. However, it is becoming increasingly clear that the next wave of compliance will focus on the shipping industry. As host to one of the largest global shipping management centres, as well as one of the largest merchant fleets, Cyprus will need to adapt to this new reality to maintain its dominant position.
This paradigm shift was made clear on 14 May 2020, when the US Coast Guard and the US Treasury Department’s Office of Foreign Asset Control, the much dreaded “OFAC” many in the Cyprus financial sector know well, issued a new advisory focused on combating deceptive shipping practices, including those used to avoid US and global sanctions.
This advisory provided extensive guidance in the form of “best practices” to all participants in the shipping industry, from insurers to brokers to captains and more, on how to combat deceptive practices. While compliance with this guidance is not mandatory, if past experience is any guide, industry participants and their government regulators that do not implement and adhere to the best practices will face increased scrutiny and pressure from US authorities.
Both governmental and private sector participants in Cyprus’ shipping industry would be wise to review this new advisory and consider how to implement its suggested best practice. While some practices may seem complicated or costly to implement – and in some cases the information sharing required would violate EU privacy laws – failure to modernise will likely carry significant negative consequences.
Of importance to the Cyprus shipping industry, this advisory reviews common deceptive shipping practices, as well as includes specific annexes related to sanctions evasions tactics in North Korea, Iran, and Syria. Included amongst the common deceptive practices are:
- The presence of voyage irregularities in which bad actors may disguise the ultimate destination or origin of cargo or recipients by using indirect routing, unscheduled detours, or transit or transshipment of cargo through third countries;
- False flags and flag hopping tactics in which bad actors may falsify the flag of their vessels to mask illicit trade. They may also repeatedly register with new flag states (known as “flag hopping”) to avoid detection; and
- The use of complex ownership or management schemes in which bad actors use complex business structures, including those involving shell companies and/or multiple levels of ownership and management, to disguise the ultimate beneficial owner of cargo or commodities in order to avoid sanctions or other enforcement action, among other reasons.
Given Cyprus’ proximity to Syria, special attention should be paid to the annex on Syria, which details specific deceptive practices used by those bringing good, especially petrochemicals, to Syria.
In addition to identifying the deceptive practices, the advisory also details general approaches to aid the shipping industry in carrying out due diligence and implementing sanctions compliance policies and procedures. Some of these have been discussed before, but it is worth noting several new recommendations from the US Government, including monitoring ships throughout the entire transaction lifecycle, adding new contractual language to cover compliance requirements, and encouraging industry information sharing. However, this last recommendation, while important, poses challenges when also complying with EU privacy laws.
Usefully, the advisory contains specific advice for each sector of the shipping industry, including maritime insurance companies; flag registry managers; port state control authorities; shipping industry associations; regional and global commodity trading, supplier, and brokering companies; financial institutions; ship owners, operators, and charters; classification societies; vessel captains; and crewing companies.
Some of this will be old news for Cyprus, some of it is new advice. The major revelation is the consistent and increasingly detailed efforts the U.S. Government is taking towards deceptive shipping practices and sanctions evasions. OFAC has demonstrated a strong capability to track ships and bring sanctions against complex networks designed to evade restrictions. The US Navy has also increased at-sea interdiction efforts.
A strong compliance program is increasingly central to the long-term health of any business, with “governance” now a central guidepost for most investors. Cyprus’ shipping industry should take note and consider how it can implement this advisory and other best practices to ensure its economic sustainability, as well as avoid future tension with US authorities.
Matthew Oresman is a Partner at Pillsbury Winthrop Shaw Pittman, where he provides clients advice on international law and policy matters, including global sanctions compliance.