Compliance Risk Management

What is Compliance Risk Management?

Compliance risk management refers to the process of identifying, assessing, and mitigating risks related to an organization’s adherence to laws, regulations, standards, and internal policies. The primary goal of compliance risk management is to ensure that a company operates within the legal and ethical boundaries established by regulatory bodies and avoids potential penalties, fines, or reputational damage that could arise from non-compliance.

What is Compliance Risk Management in the Maritime Industry?

Compliance risk management in the maritime industry involves ensuring that shipping companies, vessels, and other maritime stakeholders adhere to a complex web of international, national, and local laws, regulations, and standards that govern maritime operations. The maritime industry is highly regulated due to the global nature of shipping, the environmental impact of maritime activities, and the safety concerns associated with seafaring.

The Benefits of Compliance Risk Management

Compliance risk management in the maritime industry offers several key benefits:

• Regulatory adherence ensures that maritime companies comply with international, regional, and local regulations, such as SOLAS, MARPOL, and ISM Code. This reduces the risk of fines, sanctions, and legal actions.
• Reputation protection is achieved by proactively managing compliance risks, allowing companies to avoid incidents that could damage their reputation. A strong compliance program demonstrates a commitment to ethical practices and safety, which is crucial for maintaining trust with clients, partners, and the public.
• Operational efficiency is enhanced through a well-implemented compliance risk management system that identifies potential risks early. This allows companies to address issues before they escalate, leading to fewer delays, lower costs, and smoother day-to-day operations.
• Financial security is protected by effective compliance risk management, which helps avoid hefty fines, legal costs, and increased insurance premiums. This mitigates financial exposure and safeguards the company’s bottom line.
• Global trade facilitation is supported by compliance with international standards, which is crucial for smooth cross-border operations. Effective compliance risk management ensures that vessels and cargoes can move seamlessly across jurisdictions, avoiding delays and complications.
• A competitive advantage is gained by companies with robust compliance risk management systems, as they can differentiate themselves in the market. They are often seen as more reliable partners, leading to increased business opportunities and partnerships.
• Future-proofing is enabled by having a strong compliance risk management framework in place, allowing maritime companies to adapt quickly to new regulatory requirements and ensuring long-term sustainability and competitiveness.

By integrating compliance risk management into their operations, maritime companies can navigate the complexities of global regulations while safeguarding their operations, finances, and reputation.

Three Ways Compliance Risk Management Helps Maritime Companies Avoid Sanctions

Compliance risk management plays a crucial role in helping maritime companies avoid sanctions by ensuring that their operations, transactions, and partnerships adhere to international laws and regulations. Here are a three ways:

1. Screening and due diligence:
   • Vessel screening: compliance programs often include screening vessels, owners, and operators against sanction lists maintained by entities such as the United Nations, the European Union, and the U.S. Office of Foreign Assets Control (OFAC). This ensures that maritime companies do not inadvertently engage with sanctioned parties.
   • Counterparty due diligence: conducting thorough due diligence on counterparties, including customers, suppliers, and agents, to verify their compliance status. This includes checking for any connections with sanctioned entities or individuals.
2. Monitoring and reporting:
   • Real-time monitoring: implementing systems that monitor maritime activities in real time, such as AIS tracking, to detect suspicious behavior, like unauthorized ship-to-ship transfers or deviations from declared routes, which might indicate potential sanction violations.
   • Transaction monitoring: ensuring that all financial transactions related to maritime operations are screened for compliance with sanction regulations. This includes monitoring for suspicious payments or business dealings that might be connected to sanctioned entities or countries.
3. Regulatory compliance:
   • Staying informed on sanction laws: compliance risk management involves keeping abreast of changes in international sanctions and trade laws. This proactive approach ensures that maritime companies can adapt quickly to new regulations and avoid activities that could lead to sanctions.
   • Regulatory engagement: maintaining open communication with regulatory bodies and ensuring that the company’s compliance practices are aligned with the latest guidance and requirements.

A Good Compliance Risk Management Strategy

It’s essential for companies to complete their due diligence and establish a compliance and risk management strategy to lower the risk of non-compliance. This includes verifying the following issues:

• Vessel behavior in your fleet
• Cargo data
• Countries where the ship will dock
• Ownership structure

By following Know Your Vessel (KYV) principles, there won’t be any surprises from the behavioral and historical actions of the ship. Such solutions provide real-time, actionable data regarding potential risk exposure, compliance issues, and more. 

It’s important to know the latest updates, advisories, and warnings from agencies like the Office of Foreign Assets Control (OFAC), Office of Financial Sanctions Implementation (OFSI), and the UN. 

How to Navigate Compliance Risk Management?

The compliance risk landscape is constantly evolving and shipping companies must be proactive to ensure they evolve with, and stay ahead of, sanctions. To maintain a high standard of risk compliance and avoid any unwanted surprises, companies should: 

• Access the latest real time data: viewing reports with the latest maritime data is the best way to execute successful sanctions screening and compliance checks. Having software that handles these functions  significantly streamlines the processes. 
• Know the latest regulations and guidelines:the rules are constantly changing and it’s up to  everyone in the maritime ecosystem to  understand the latest standards and regulations. It’s crucial to stay up to date with international commerce policies, common sanction evasion tactics, and environmental issues. 
• Learn to manage risk effectively:pinpointing illegal or “borderline” actions can be complex and “false positives” for deceptive shipping practices can be crippling for the business/trading side. Being able to isolate an issue and rework it to mitigate risk can require coordination between multiple tasks, or organizations. Having an open line of communication is essential to lowering the risk of non-compliance.

Use all available resources: having access to the right tools is an important factor in lowering your risk profile. Whether that means getting access to artificial intelligence (AI), hiring a compliance risk management specialist, or a combination of the two, make sure to carefully consider your organization’s specific risk appetite.

Four Different Types of Risk

1. Sanctions compliance risk: sanctions compliance risk involves potential violations of sanctions regulations, impacting reputation and operations. Effective management includes:

• Pre-fixture screening: essential for identifying business partners and ensuring compliance
• Post-fixture investigation and monitoring: allows deep dives into escalated cases and risk exposure monitoring
• Container tracking: ensures visibility and compliance with new regulations, preventing breaches
• Bunkering: requires thorough due diligence to avoid enabling sanction evasions

2. Financial risk: effective financial risk management requires transparency, compliance, and timely execution, including:

• Pre-trade verification and compliance: verifying voyage details and assessing risks before trade
• Audit trail: maintaining detailed logs for compliance and review
• Post-trade monitoring and adjustments: continuous monitoring to identify deviations and manage risks

3. Safety risk: safety risk management ensures vessel safety and reliability through:

• Marine insurance: assessing vessel quality and behaviors to set premiums and coverage
• Marine assurance: conducting voyage-specific inspections to ensure safety and compliance

4. Security risk: security risk management protects borders and infrastructure:

• Geopolitical disruptions: adapting risk profiles based on local tensions
• Smuggling: identifying high-risk vessels to prevent illegal activities
• IUU fishing: tracking behaviors to detect illegal fishing and associated activities
• Critical infrastructure: monitoring vessel behaviors near vital locations to mitigate risks

Avoid Financial Crimes with AI-Based Compliance Risk Management Solutions

Using an AI solution can be a real game-changer when it comes to identifying and stopping financial crimes, such as Trade Based Money Laundering (TBML) and fraud from various actors in the maritime industry. The software can provide real time information about the client and their relationship with any high-risk ships, including tracing back through seven levels of ownership, all the way to the UBO. 

Effective technology can improve the speed and accuracy of compliance screening. It scans the latest sanctions lists, to quickly identify sanction violations or deceptive shipping practices. Lastly, it provides a full rundown of the bill of lading. This will automatically pair the documented trade data with all aspects of the shipping process, including its AI-generated risk score. 

Using a Compliance Risk Management Solution

Having the right compliance risk solution is one of the keys to lowering your compliance risk and avoiding sanctions.

There are different types of compliance risk management solutions. There are basic tools that help track compliance requirements and deadlines and advanced AI solutions that scan hundreds of data points and provide real-time analysis of the ship’s compliance management. Some common features of compliance risk management solutions include the ability to:

• Monitor and track compliance requirements
• Automate compliance processes and procedures
• Generate reports and alerts to help organizations identify potential compliance risks
• Provide guidance on how to address compliance issues
• Integrate with other systems and tools to help organizations manage compliance more efficiently

These types of solutions can assist organizations to ensure that they are meeting the necessary requirements and help them avoid fines, penalties, and other negative consequences that can result from non-compliance.