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Private sector prepares to meet maritime sanctions compliance


What’s inside?

    Shipping plays a significant role in the global supply chain. This fact hasn’t been overlooked by regulators, as they continuously shift some of the responsibilities on stopping sanctions evasions towards the maritime ecosystem.

    For years, the financial sector has been viewed as the key gateway for sanction evasions.  

     The recent OFAC advisory has, for the first time, detailed the responsibilities and expectations that private businesses that are connected to the maritime sector must adhere to, resulting in increased scrutiny in parallel with the rise in sanctions.  

    This change has left many businesses in the extended maritime ecosystem unclear of their role and responsibility in managing compliance proactively, and the risk they undertake if they fail to do so. 

    Windward and K2-Fin co-hosted a webinar to discuss the impact of the recent OFAC advisory on the private sector.  Ron Crean, Vice President of Commercial at Windward, discussed the key implications together with K2-FIN Global Co-Managing Partner and Chief Strategy Officer, Juan C. Zarate, and Eric Lorber, Vice President of K2-FIN. 

    During the webinar, Ron, Eric, and Juan discussed the impact the new OFAC regulations will have on businesses in the shipping sector, the role of shipping in minimizing sanction evasions, and how compliance will impact overall maritime operations. 

    To catch up on the webinar, follow this link. To view our top takeaways, continue reading below.

    Fear of the unknown 

    As the new OFAC expectations are becoming clearer, many private businesses recognize their biggest worry is what they don’t know. Asked about what worries them most about sanctions risk, the majority of participants said their most pressing concern was “the lack of knowledge those in the maritime sector have about sanctions requirements.” 

    Unlike other sectors such as banking and finance, the shipping industry has not been subject to sanction scrutiny in the past, and many private businesses do not even have compliance programs in place. As a result, private companies will now have to simultaneously understand the impact of sanctions while also complying with them.  

    Shipping is the new finance 

    A decade ago, many considered the financial industry as the gateway for sanction evasions, and as a result, there was an increase in regulation on financial and banking institutions. The effectiveness of these regulations on money laundering and sanction evasions has led governments to increase scrutiny on the shipping ecosystem, which is now viewed as a key artery of sanctions evasions, in the hopes of achieving the same results.  

    The goal of the sanctions imposed is to create a robust ripple response throughout the system and bring the shipping industry to where the financial industry is in terms of compliance and due diligence.

    Culture of compliance 

    Understanding and adhering to sanctions is something the maritime industry is going to have to adapt to at a rapid speed. Unlike the financial sector, which has been subject to legal requirements for over 50 years, the maritime industry will need to adopt a new culture of compliance. This shift in thought is drastically different from what the maritime industry has known until now, and may not even exist in many companies.  

    Since the maritime industry already operates on a thin profit margin, one of the critical difficulties private businesses will face is creating this new compliance culture with the same level of resources, or even less.

    Expectation vs. obligation 

    The OFAC advisory is precisely that – an advisory. The requirements detailed by the advisory are not legally binding, but rather suggestions, recommendations, and expectations. However, if sanction evasion does occur, companies will still be liable even if they do not comply, and perhaps be scrutinized even more.  That is why it is prudent to view the regulations as “soft obligations.” 

    While the advisory is not a hard obligation, it brings an expanded expectation from companies that will change the face of shipping.  Businesses with any connection to the maritime domain must do more than check their own work –  they must also scrutinize the work and programs of their suppliers, customers, and counterparts to reduce their own risk and liability.  

    The bar is the new floor 

    The new sanctions have not just raised the bar for compliance – they have actually determined a minimum standard, effectively making the bar the new floor.  

    The impact shipping has on the entire supply chain will force many actors in the maritime domain to examine their risk and compliance capabilities and adapt at a rapid rate.  Businesses that may not have thought they needed to comply may otherwise find themselves in violation and subject to scrutiny, reputational damages, and fines.

    Know Your Vessel 

    To meet the new “bar for compliance,” it is necessary to incorporate proactive screening measures that go beyond AIS. If companies have to examine every single case based solely on AIS signals and manual assessment, it would require an army to sort through false positives. 

    A quick examination of the 8,000 vessels that compose the Panamanian fleet resulted in over 24,000 AIS transmission gaps in just 30 days. However, a more in-depth investigation revealed that only 6% of those incidents required escalation to human professionals. 

     Integration of machine learning, deep learning, and artificial intelligence can change that. The incorporation of machines to ‘do the heavy lifting’ for their human counterparts, creates a new discipline of knowing your vessel (KYV). The use of KYV practices that are data-heavy and have a predictive capability can reveal behavioral patterns and reasons for transmission gaps, and only flag cases that need an experienced human to examine. 

    The Ostrich Defense is done 

    Private businesses can no longer contract their way out of sanctions liability and use the ostrich defense. The OFAC advisory clearly specifies the types of assessment and information companies need to implement for their counterparty due diligence. 

    That is why companies need to focus today on their exposure, examine their current sanctions programs and see where it may fall short, look for gaps in compliance capabilities, and see what new tools can be integrated to reduce the human workload. 

    The magic happens when you let technology do the heavy lifting and rely on the human expertise where you need it the most. 

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