SHIPPING, INSURANCE AND AML/CFT/CFP

INTRODUCTION

In a previous post I considered if shipping registries could have a role to play in ensuring that shipping is not used to circumvent not only UN (and other) sanctions, but also other export and trade controls, smuggling, human trafficking and other illicit activities[1].  My point was that, in addition to law enforcement and regulators, if other parts of what may be described as the industry’s supporting structure – including corporate service providers, lawyers and banks – have some role as “gatekeepers”, if only to prevent themselves becoming liable, then perhaps the registries also had a part to play.  After all, it is in everyone’s interest (except, of course, for the criminals, sanctions-busters and terrorist involved) to try to prevent of detect such illicit activities.

There are others involved in the shipping industry that might play a part.  In addition to the other obvious players – the owners and operators of the vessels and those supplying cargoes, passengers and crew – there are those that insure the vessels and their cargo, and the classification societies that provide guarantees as to technical and safety standards for the construction and operation of ships and offshore structures[2].

THE SHIPPING INSURANCE SECTOR

Considering the insurance element, marine insurance covers the loss of ships, cargo, terminals and any transport of cargo by which the property is transferred, acquired or held between points of origin and final destination[3].

However, a marine policy typically covers only around three-quarters of the liabilities towards third parties that could arise, such as through collision, going aground or wreck removal.  To cover the remaining liabilities, in the 19th Century shipowners banded together to form what are termed Protection and Indemnity Clubs (or “P+I Clubs”).  These are a form of mutual insurance society where members pay a premium, which is then used to purchase reinsurance, with further calls made on members for payments should the Club suffer excessive losses, though the Club would seek to establish a reserve to cover such eventualities.

To take one example, the American P+I Club[4] lists the main risks for which P+I insurance would provide cover for shipowners, operators and charterers for third party liabilities encountered in the commercial operation of their vessels.  These include –

  • loss of life, injury and illness of crew (including repatriation costs), or of passengers and other persons;
  • cargo loss, shortage or damage;
  • fines and penalties;
  • mutiny and misconduct by the crew; and
  • vessel diversion expenses.

There are other, more specialised forms of insurance relevant to the shipping industry, such as that which may be made available for yachts and other pleasure craft and fishing vessels.  The there is “war risk” insurance for specific regions of particularly high risk, and cargo insurance, where the premium and risk depends on the type of cargo involved.  A particular type of insurance that has developed over recent years is that for kidnap and ransom, which exists to pay for the release of a ship (and/or cargo and crew) held by pirates, and which has priority over claims made under any other policy[5].

THE THREATS FACED BY SHIPPING

In the previous post concerning registries, I briefly mentioned the various threats that could be faced by ships and shipping, and saying that in recent years extensive evidence of the role of shipping in a wide range of illegal activities, and not just in “traditional” smuggling and perhaps obvious crimes like human trafficking, but anything from the role played in the evasion of UN sanctions on North Korea to the involvement of vessels in illegal, unreported and unregulated (IUU) fishing[6].

In a later post, I compiled a list[7], almost certainly incomplete and with only brief outlines of the topics included, of the various crimes, regimes and requirements that the average compliance officer in a regulated business might want to bear in mind.  Whilst not all of these would be relevant to the shipping industry (online gambling, for example), many were – in addition to those mentioned above, there were the quite obvious ones of trade-based money laundering and other trade-based financial crime[8]; import, export, transit and transhipment licensing violations; exchange control violations and bulk cash smuggling; modern slavery and other human rights abuses (including of the crews themselves[9]; bribery and corruption[10]; proliferation activities linked to WMD and their means of delivery[11] and related financing[12]; terrorism-related movements of people, goods and finances; breaches of UN, EU or other sanctions controls; the shipment of counterfeit goods or blood or conflict diamonds[13].

All of the above are in addition to the more obvious risks to shipping, through piracy, theft of vessels or cargo and threats to officers, passengers and crew.

There are huge amounts of money involved in trade-based financial crime[14], huge potential risks from terrorism and proliferation, and terrible suffering and hardship present in such things as human trafficking and slavery at sea.

The again, the ships themselves, or their cargo, may be the “tool”, benefit or value being moved in a money laundering, terrorist financing or proliferation financing arrangement.  This is obviously the case for trade-based money laundering and other trade-based financial crime, where the cargo (real, non-existent, misdescribed or misrepresented) may be the main element.

The UK P+I Club, for one, has a formal AML policy[15] as part of its governance code.  It says that it seeks to ensure compliance with internationally recognised practices, standards and regulation for the prevention of money laundering.  This is good.  However, I would question to what extent that or any other P+I Club is integrated into any information-sharing and consultation arrangement that might exist, for example, were it a bank or other financial institution.  My own view is that they should be included, and have an important role to play, particularly in respect of sanctions and trade-based money laundering and trade-based financial crime.

In sanctions cases, the acquisition, chartering or use of the ship might be to evade prohibitions and restrictions in place.  Currently, the most high-profile situation involving the control of shipping in respect of sanctions measures involves North Korea – where ships, shipowners and even a (Russian) port service company[16] have been listed in sanctions lists.  In February 2018, the US Treasury published an Advisory detailing deceptive practices employed by and for North Korea and involving shipping, and risk mitigation measures that could be adopted[17].  In August 2018, it again issued a warning, reminding the shipping industry, including flag states, ship owners and operators, crew members and captains, insurance companies, brokers, oil companies, ports, classification service providers, and others of the significant risks posed by North Korea’s shipping practices.

However, the threats arising from sanctions are not new, and at least one P+I Club has suffered as a consequence in the recent past.  In May 2013, the American P+I Club reached an agreement to pay the US authorities around $350,000 in settlement for the potential liability involved in 55 violations of US sanctions on Cuba, Sudan and Iran.  These related to the settling of P+I claims and providing security by way of letters of undertaking and letters of indemnity.  This may be one reason why this P+I Club at least now has fairly comprehensive guidance for its members on how to comply with US, EU and other sanctions prohibitions and restrictions[18].

The specialist UN agency, the International Maritime Organisation, does have a focus on what is describes as maritime security.  However, its concentration is on the safety and security of ships, and the people and cargo on those ships.  It touches upon, for example, human trafficking and terrorism, but in a rather, to my mind, narrow sense.  On terrorism, it says that it aims to provide an international legal framework to deal with those committing unlawful acts against ships (and fixed platforms on the continental shelf), including the seizure of ships by force; acts of violence against persons on board ships; and the placing of devices on board a ship which are likely to destroy or damage it. Notably, it does not mention financing and laundering activities that might be linked to those activities it does mention, or which may be entirely unrelated.

Finally, the risk might involve frauds directed against the insurers by means of the actual or purported total loss or vessel and/or cargo – a crime as old as the marine insurance industry, or even of shipping itself – and one to which the insurance industry might be expected to be most acutely attuned[19].

Currently, when a country is evaluated by FATF or one of its regional affiliates, the evaluation does not directly touch upon that country’s shipping registry (it would probably not be on the evaluation team’s visit schedule), and would likely only touch upon any shipping insurance element in the context of the overall insurance sector.  However, any scandal affecting shipping linked to the country can colour the evaluation and the outside perception of the integrity of the jurisdictions.  Furthermore, any such scandal would be likely to spill over, if not directly implicate, other business sectors (lawyers, corporate service providers etc).

HOW CAN THE SHIPPING INSURANCE SECTOR PLAY ITS PART?

It appears to me that there three ways in which the shipping sector as a whole, including the P+I Clubs, and their agents could help to improve the prevention and detection of crimes –

  • increase awareness of the risks, and possible indicators – there are bodies already in existence that track threats from piracy, and the International Maritime Bureau of the International Chamber of Commerce is an important one[20];
  • improve the availability, exchange and dissemination of information between all parties involved – between insurers, between agents, amongst shipowners, and establish channels of (two-way) communication between these and law enforcement and financial intelligence units;
  • enable or require other parties to also be aware of the risks, carry out checks and generally exercise appropriate due diligence – this could apply to all the agents, charterers and representatives used[21]

The third of these bullet points is that which I suggest would be the one that the shipping sector could most usefully take on board and implement.  Taken together with the other two, there should also be –

  • an improvement in (or even just implementing) “know your customer” and due diligence checks – on an ongoing basis and not only when taking on a new customer, client, supplier etc; and
  • each business or organisation needs also to undertake meaningful risk assessments of areas of business.

If these measures were put in place, they could not only help to prevent or detect illicit activity, but may well benefit the business or organisation directly by providing some degree of protection against allegations of not doing enough to prevent bribery, corruption or involvement

CONCLUSION

As with the shipping registries, it appears to me that the role or roles that the P+I Clubs in particular could play in combating serious trade-based crime, and especially sanctions violations and proliferation activities has been under-appreciated in the past.  They need to be included in any discussion, and any information-sharing arrangements.

The increasing spread of anti-bribery and anti-corruption legislation, and of legislation seeking to penalise human rights abuses, all of which can have extra-territorial effect (or might apply anyway because it is the law of the flag state of the vessel concerned) presents a threat to insurers and their clients and members of P+I Clubs.

Whether or not FATF and similar bodies directly addresses the activities and shortcomings of shipping registries and the marine insurance sector, there remains the real risk of problems in those areas, or spilling over from those areas into others which are evaluated by FATF and others, affecting evaluations, ratings and perceptions of a jurisdiction.

Therefore, if only from the purpose of self-protection it appears to make sense for businesses and organisations involved to examine, revise and upgrade (or implement) controls and procedures.

It also appears important, from a jurisdiction’s point of view, to ensure that the shipping sector as a whole is included in any national risk assessment, and in any consultative and information-sharing arrangements.

 

Ray Todd

18th August 2018

————————————————————————————————————————————–

[1]  https://wordpress.com/post/raytodd.blog/3168

[2]  Classification societies set technical rules based on experience and research, confirm that designs and calculations meet those rules, survey ships and structures – both during construction and commissioning and periodically thereafter – to ensure that they continue to are in accordance with the rules.

[3]  For a fuller description of marine insurance and its scope see https://thelawreviews.co.uk/edition/the-shipping-law-review-edition-5/1170842/marine-insurance

[4]  https://www.american-club.com/

[5] Under English law at least, the payment of ransom to pirates is not, in itself, illegal, and there is anyway a strong moral argument to do to secure the release of any individuals held.  However, it should be noted that care has to be taken not to breach any relevant sanctions measures involving terrorist groups as, in essence, pay outs may be made to criminals, but not to or for terrorists.  For example, see https://www.gov.im/news/2015/aug/07/united-nations-and-european-union-sanctions-ransom-payments/

Modern piracy is by no means as rare as one might think; see https://www.icc-ccs.org/piracy-reporting-centre/live-piracy-map for a map detailing attacks made in 2018.  See also guidance on www.maritimeglobalsecurity.org, a stakeholder in which is the International Group of P+I Clubs.

[6]  The EU Regulation to prevent, deter and eliminate IUU fishing entered into force on 1st January 2010.  The European Commission reports that it is working actively with all stakeholders to ensure coherent application of the IUU Regulation.  Meanwhile, Greenpeace has issued lists said to contain the names of irresponsible fishing operators and the companies behind them – http://blacklist.greenpeace.org/home

[7]  https://wordpress.com/post/raytodd.blog/3429

[8]  See https://www.gov.im/media/1348726/notice-1000-man-trade-based-money-laundering-july-18.pdf

[9]  Seen as a particular risk in IUU fishing; see http://www.ilo.org/global/topics/forced-labour/policy-areas/fisheries/lang–en/index.htm

[10]  Even more of a risk given the extra-territorial reach of such legislation as the Bribery Act 2010 in the UK and the Foreign and Corrupt Practices Act in the US.  The UK P+I Club has an anti-bribery policy, for example, to meet the requirements of the Bribery Act: https://www.ukpandi.com/about-us/corporate-governance/compliance-regulatory/anti-bribery-policy/

[11] Including procurement and transport of materials, components, fuel etc and delivery systems, such as rockets and missiles, and their components, guidance systems etc.

[12]  See https://www.gov.im/media/1352777/notice-1008-man-proliferation-and-proliferation-financing-risks-2-jul-18.pdf

[13]  See https://www.gov.im/media/80563/sanctions-notice-27-kimberley-process-certification-scheme-imports-and-exports-of-rough-diamonds-27-10-16.pdf

[14] $950 billion in 2014, according to the Global Finance Initiative.

[15]  https://www.ukpandi.com/about-us/corporate-governance/compliance-regulatory/anti-money-laundering-policy/

[16]  Sanctions imposed in August 2018 by the US Treasury on Profinet Pte, which provides services at Nakhodka, Vostochny, Vladivostok, and Slavyanka, were thought to be the first time such sanctions had been imposed on a port services operator (its director was also designated by the US Treasury).  This perhaps indicates that the reach of such measures continues to expand into new and hitherto largely unaffected areas.

[17]  https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/dprk_vessel_advisory_02232018.pdf

[18]   https://www.american-club.com/

[19]  A classic case was that of the scuttling of the supertanker Salem in 1980, a case that also involved sanctions-busting with oil being delivered to apartheid South Africa.  The story is an amazing one, and well worth reading.  The architect of the scam, jailed for 35 years in the US in 1985, but then escaped from prison 3 years later.  See http://archives.datapages.com/data/phi/2004/85.htm

[20]  Established in 1981 (in the wake of the Salem scandal), it is a non-profit making organisation that acts as a focal point in the fight against all types of maritime crime and malpractice.  It has MoU with both the World Customs Organisation and Interpol, and the International Maritime Organisation has urged governments, all interests and organisations to co-operate and exchange information with each other and with the IMB with a view to maintaining and developing a co-ordinated action in combating maritime fraud.  The IMB provides an authentication service for trade finance documentation. It also investigates and reports on a number of other topics, notably documentary credit fraud, charter party fraud, cargo theft, ship deviation and ship finance fraud.

[21]  With the increase in such systems as the EU’s Authorised Economic Operator (AEO) scheme and security requirements for the pre-clearance of cargo entering the US, such requirements could be built into agreements with third parties – which would no doubt be useful when applying for AEO status or the equivalent.  It would also be of use to defend one’s position if implicated by another’s nefarious activities – the UK Bribery Act, for example, provides for a defence if a business has adequate arrangements in place to prevent bribery taking place.

Author: raytodd2017

Chartered Legal Executive and former senior manager with Isle of Man Customs and Excise, where I was (amongst other things) Sanctions Officer (for UN/EU sanctions), Export Licensing Officer and Manager of the Legal-Library & Collectorate Support Section

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