The need for effective and compliant sanctions investigation

The maritime industry should know about sanctions compliance programmes, and implement them correctly, says Lloyd's List Intelligence

In maritime trade, compliance professionals face a persistent and ever-evolving challenge: understanding and evaluating their exposure to sanctions risk.

This problem is caused by multiple factors, including an increasingly complex regulatory landscape, recent geopolitical conflicts, and perhaps most notably, the progressively sophisticated strategies that sanctions evaders use to circumvent restrictions. As a result, organisations must be more diligent when assessing and reacting to any type of risk. However, this can be an issue in itself as this may lead to even more time-consuming investigations.

There is a solution at hand: implementing a robust sanctions investigation programme enables compliance professionals to identify genuine threats while mitigating the risk of false positives. This article will explain why this is essential and what stakeholders should know to achieve these outcomes.

The current state of play

Sanctions investigations have never been more complex for compliance professionals due to multiple interrelated factors.

Heightened geopolitical tensions are one of the biggest drivers of this complexity. Conflicts such as the Russia-Ukraine war have triggered a ripple effect across global trade routes, all while disrupting maritime operations (even to this day). Although Ukraine has recently reopened some of its greater seaports, maritime trade remains a fraction of what it once was as other key ports remain closed or under occupation.

The Red Sea, another critical maritime artery for international trade, has also become a focal point of concern. Ongoing attacks in the region have disrupted trade flows and increased safety risks for vessels and cargo to the point that in the first two months of 2024, trade in the Suez Canal has dropped by 50 per cent from a year before.

From an operational standpoint, such fluctuations in trade volumes and routes heavily obscure illicit activities, making it harder to identify suspicious transactions. And to make matters worse, this is unlikely to change anytime soon. As former CIA director and US Secretary of Defense Robert Gates puts it, the era of a "relatively relaxed environment" for shipping may become "a thing of the past" as nations continue to adopt more protectionist trade policies.

Overall, in light of the aforementioned global conflicts, it should come as no surprise as to why sanctions regulations have become so complex. According to Tom Keatinge, founding director of The Centre for Financial Crime and Security Studies at the Royal United Services Institute, if 2022 was characterised by Western countries throwing "spaghetti at the wall" in terms of sanctions, then 2023 and 2024 has signified a shift toward fully playing the game at "full fitness".

The EU has introduced 14 packages of sanctions against Russia. In addition OFAC has released recommendations on how non-US financial institutions can take steps to minimise their exposure to activity involving Russia's military-industrial base and those that support it.

The evolving regulatory landscape has turned sanctions enforcement into an endless "cat-and-mouse" game, with compliance professionals grappling with overlapping jurisdictions and often unclear requirements. Despite the abundance of information available, the lack of coordinated enforcement across countries further amplifies the burden on organisations.

However, perhaps the most noteworthy issue at hand is the rise of deceptive shipping practices. These practices, historically observed in trade with countries such as Venezuela, Iran, Syria and North Korea, have now become widespread in the shipping of Russian oil as well. Many of the tactics that illicit actors use to evade sanctions were outlined in OFAC's May 2020 advisory, including voyage irregularities, ship-to-ship transfers and more.

But since then, these have evolved into more sophisticated and elusive methods. For example, in March 2024 Russia employed GPS jamming to protect its assets and further obscure maritime activity in the Black Sea. And just a month earlier a tanker seized in Iran had its spoofed AIS signal appearing elsewhere in Türkiye. This advanced form of spoofing is especially concerning, as Lloyd's List Intelligence data shows a 50 per cent increase in spoofing events compared to the previous year.

What are the consequences of having an inadequate compliance programme?

Based on the aforementioned issues, it is clear that having a formal compliance programme is highly advisable as organisations must be able to show that they are adhering to the advisories.

However, simply having a compliance programme alone is not enough; it must be implemented correctly and efficiently. Business stakeholders, especially those operating in trade finance, already understand that the cost of compliance is too high to overlook the importance of this (compared to pre-financial crisis spending levels, operating costs spent on compliance have increased by more than 60 per cent for retail and corporate banks).

Since bad actors will continue to seek ways to circumvent regulations, any organisation's compliance programme must be robust and agile enough to help its compliance professionals keep up. Failure to do so exposes the firm to a range of consequences.

• High number of false positives

- The rise of more sophisticated deceptive practices underscores the critical importance of having an adequate compliance programme. Without it, organisations are naturally prone to experiencing an increase in false positives during sanctions investigations. This not only consumes valuable time and resources but also impedes a compliance team's ability to identify genuine threats effectively.

- Having an ineffective compliance programme means it is more likely that spoofing events are missed, further exacerbating the problem. The resources required to investigate each potential spoofing incident can overwhelm compliance professionals, leaving them unable to keep up with the volume of transactions and conduct investigations.

• Multi-million dollar fines

- Organisations that do not abide by sanctions regulations could incur fines totalling millions of dollars, in addition to suffering reputational harm and legal repercussions. For example, in June 2023 Swedbank Latvia reached a settlement with OFAC for US$3,430,900 regarding apparent violations of sanctions related to Crimea.

- It's important to note that in many countries, violations of economic sanctions are considered strict liability offences. This means that fault or intent does not need to be proven.

• Loss of revenue

- Inefficient compliance programmes not only result in direct fines but also lead to indirect financial losses. One significant aspect contributing to these losses is the prevalence of sophisticated spoofing tactics in evading sanctions detection. These tactics often compel compliance professionals to make difficult decisions: either proceed with transactions without completing thorough checks or risk missing out on deals due to delayed investigations.

What does an effective sanctions investigation workflow look like?

One way to protect an organisation from these consequences is to establish a structured workflow when conducting investigations, which will help ensure that nothing is overlooked. These are the typical steps involved and key risks to be aware of:

1. Review and prioritise cases. Sort escalations by size and transaction date to prioritise cases for further scrutiny based on risk profiles.

2. Assess risk. Evaluate the overall risk rating of the vessel. Look for potential red flags, for example:

(a) sanctions risk - check if: (i) the vessel is currently under sanctions or has been within the last two years; (ii) the vessel's current flag or flag history within the last two years are related to a country or a region restricted by sanctions; or (iii) the vessel's current or previous first-level ownership is or was sanctioned within the last two years.

(b) Ownership and registry risks - check if: (i) the vessel's flag is listed as black or grey by the Paris MoU; (ii) the vessel is using the identity of another vessel; or (iii) the vessel's ownership is connected to another vessel or entity linked to sanctions and if it is based in a country restricted by sanctions.

(c) Voyage risks - check if: (i) the vessel has made any high-risk port calls or probable dark port calls; (ii) the vessel has engaged in loitering, deviation, or ship-to-ship transfers; or (iii) the vessel shows signs of AIS gaps and spoofing.

3. Make an informed decision. If a vessel passes scrutiny, create an audit trail and proceed as per your organisation's compliance policy. If a vessel fails to meet standards, document your findings for further enquiries.

What are the benefits?

A robust and comprehensive compliance programme not only helps an organisation avoid risk; it also brings significant benefits to the company. It fosters improved teamwork, speeds up investigations, and enables more effective decision-making.

On top of this, when a company integrates a maritime intelligence tool into its programme, it can bolster its success across all five of OFAC's framework components. Employing such a resource makes it easier to:

• Cultivate a compliance culture through data provision.

• Conduct comprehensive risk evaluations.

• Facilitate real-time monitoring and mitigation of risks.

• Support thorough testing and auditing functions by granting access to historical data.

• Provide access to educational resources and practical examples to improve compliance knowledge and skills among employees.

How to conduct sanctions investigations

Integrating a maritime intelligence tool into a company's workflow is one way to help establish a successful compliance programme.

Failure to detect deceptive practices can lead to severe consequences. As such, compliance professionals must remain vigilant and adaptive in their approach to sanctions enforcement to effectively mitigate risks and ensure regulatory compliance. MRI

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Seasearcher Risk Suite is a solution, powered by unique data sources and machine learning, which detects where potential dark activity and high-risk trading have happened, minimising false positives and reducing investigation time while also streamlining workflow in one centralised platform. The facility, available at seasearcher.com, enables the user to:

• Complete document checks up to 25 per cent faster.

• Expose sanctions and transactional risk more efficiently and confidently, reducing false positives by up to 50 per cent.

• Screen vessels by name/IMO number for exposure to key sanctions watchlists.

• Detect behavioural risk flags, such as AIS spoofing, loitering, probable dark STS transfers, and verified dark port calls (even when AIS is switched off).

• Save time assessing risk levels against your internal parameters with personalised filters.

• Improve collaboration with in-platform escalation and exportable vessel risk reports.

For more on Seasearcher, see here: https://info.lloydslistintelligence.com/request-a-consultation