Maritime legal exposure in a post-grain laundering landscape

The recent identification of grain laundering marks a meaningful shift. Until now, most trading concerns have revolved around wet cargo, with the crude oil trade being the focus for the big trading companies and the global economy in relation to the application of sanctions and their impact. In April 2022, however, shipbroker Banchero Costa was quoted in Hellenic Shipping Notes as predicting a major impact on the grain trade:

“The Russian invasion of Ukraine has particularly strong implications for the seaborne grains trade, with a potentially significant impact on both dry bulk shipping and most importantly on global food security. Russia is the world’s single largest exporter of wheat, accounting for about 20 percent of global wheat trade in the 2020/21 season. Ukraine is also one of the top exporters of wheat, accounting for about nine percent of global wheat trade. The conflict in the Black Sea has disrupted the flow of grains from the region.”

Commodity traders, particularly those based in Switzerland, Dubai and India, have been accused in both industry and financial press of funding the war in Ukraine via the back door. The commodities industry is generally under-regulated and under-recorded, which has allegedly allowed commodities houses to act as intermediaries in Russian raw materials transactions. As a result, the Swiss Attorney General has recently indicated that the commercialisation of looted raw materials could constitute a war crime, even if committed abroad, adding that looting of this type might constitute a predicate offence to money laundering. This is a clear warning to the commodities industry to avoid dealing in coal, grain, or other commodities pillaged from Ukraine.

In addition to this threatened risk of criminal prosecution, as well as the serious consequences of breaching international sanctions, commodities traders (particularly the major commodities houses) will wish to avoid any reputational risk, or damage.

Traders suspected of dealing in stolen goods, or transacting with sanctioned entities, may find they have jeopardised their legitimate deals with reputable counterparties.

Commodities traders should, therefore, proceed with caution to avoid inadvertently greenlighting illicit trades or getting themselves involved with prohibited partners. When shipping goods to and from high-risk ports, they should use advanced technology to track voyage details and abnormalities, ensure that STS transfers are monitored, and that the origins of the cargo are identified.

A commodity trader that fails to exercise due diligence in respect of goods or counterparties may find it increasingly difficult to obtain insurance cover. 

And with an increase in self-sanctioning (organisations choosing to distance themselves from Russian operations), traders may start to encounter difficulties in sourcing owners willing to undertake such voyages. They may also face increasing restrictions in obtaining trade finance and of course both P&I and H&M cover.

When a vessel is found to be operating not in compliance with flag state requirements, the owner risks prejudicing their P&I cover. There may also be grounds for the relevant provider to deny P&I cover in reliance upon the imprudent or unlawful trading rules where an owner trades their vessel in breach of sanctions, disguising its location by manipulating or withholding the transmission of AIS data.

This is particularly due to the long arm of U.S. secondary sanctions, with the result that a number of the International Group of P&I Clubs (IG) introduced automatic cesser provisions in their rules. Breaches of SOLAS and unlawful disabling of AIS also heighten the risk of collision where, if cover is denied, an innocent third-party vessel that collided with a vessel that had gone dark in a navigational position that heightened risk, may be left proceeding against an uninsured company with a single asset.

A further concern is in relation to environmental damage if a major incident results in pollution where cover has been withdrawn.

In January 2021, the LMA/IUA Joint Hull Committee released an AIS Operation Clause to be used by marine underwriters to reinforce adherence to SOLAS. The clause also empowers underwriters to require the production of AIS records. This new clause was intended to complement the widely used sanctions clause.

The IG has entered into agreements with commercial providers to track the movements of their entered vessels. The IG has stated that the agreed, common, minimum standard of vessel tracking in high-risk areas helps identify deceptive or illicit activities, such as port calls in sanctioned countries, abnormal navigation, manipulation and/or switching off a vessel’s AIS transmitter, and STS operations in high-risk areas.

P&I clubs can use the information received from the tracking provider to reach out to their members to ensure that they are fully aware of the sanctions that might impact their trading patterns, as well as due diligence steps that can be taken to ensure no sanctions are violated. The information can also be utilised to mitigate against the risk of the club inadvertently providing cover to a vessel that is violating sanctions.

Illicit activity occurs across multiple sectors in the maritime industry, going far beyond ship-owners and operators. Charterers, marine insurers, classification societies, customs and port state controls, flag registries, commodity traders, and brokers may all potentially be exposed to financial sanctions risk. While most sanctions legislation requires a failure to exercise due diligence before a breach is deemed to have occurred, some states act against shipowners carrying cargo that is deemed unlawful under the sanctions regime, without necessarily considering the owner’s compliance procedures.

By virtue of the UK’s Economic Crime (Transparency and Enforcement) Act of 2022, the Office of Financial Sanctions Implementation (OFSI) has new powers. It can impose monetary penalties on a strict civil liability basis. There is no longer a requirement to prove that the relevant individual or entity had knowledge, or reasonable cause to suspect they were in breach of financial sanctions. This change could significantly expand the scope for sanctions breaches in the UK, as inadvertent breaches could now incur financial penalties.

All stakeholders in the maritime industry should ensure that they have enhanced due diligence procedures in place. This should greatly reduce potential incidents and is likely to work in their favour if an inadvertent breach occurs and there is discretion on the part of the relevant authority to consider whether to impose penalties for the breach. The focus needs to shift from the concerns of regulatory breach, to elaborating on how organisations in the maritime ecosystem can adopt proactive steps to protect their interests.

Reputational risk is also a key factor. Public association with any sanctions-busting activities, whether through the media or by word of mouth within the industry, can be extremely damaging.

The IG has reported examples of vessels declined access to ports, refusal of banking services, and removal from flag registries in response to unsubstantiated allegations of sanctions breaking. A shipowner or operator who can point to their established due diligence systems will be better positioned to deflect criticism and minimise adverse consequences.

Each organisation within the shipping sector should take a risk-based approach, assessing its own risks and putting due diligence measures in place. The authorities generally offer guidance, instead of mandating specific measures. The onus remains on each organisation to decide what it needs to do.

Some measures worth considering include the following:

• When conducting business in, or in relation to, high-risk jurisdictions, make sure you have a thorough understanding of the applicable sanction regulations and your obligations under those rules.
• Seek independent legal advice as necessary.
• Appoint third-party experts to advise on and establish risk management and due diligence procedures and programs within your organisation.
• Choose a trusted maritime technology vendor that offers enhanced due diligence to understand the full range of activities involved in any transaction and all people and entities involved from end-to-end.
• Consider incorporating AIS switch-off clauses in shipping contracts.
• Again, consider partnering with a leading maritime AITM technology vendor for extensive information on ownership structures, vessel flag information, details of home ports and recently visited ports.
• Instruct the ship’s master to immediately report any suspicious activity or behaviour.
• Carefully check the validity of all financial, shipping and cargo documents.
•  Immediately report any suspected or prohibited activity that comes to light to the relevant authorities.