SHIPPING REGISTERS AND DUE DILIGENCE
(updated 20th November 2018)
- WHAT ROLE DO (OR SHOULD) SHIPPING REGISTERS PLAY IN PREVENTING OR DETECTING USE OF SHIPPING TO EVADE CONTROLS?
- THE UN PANEL OF EXPERTS REPORT ON NORTH KOREA
- OTHER FACTORS THAT REGISTRIES MIGHT CONSIDER
- WHAT ILLICIT ACTIVITIES DO OR CAN INVOLVE SHIPPING?
- THE ISLAMIC REPUBLIC OF IRAN SHIPPING LINE, US SANCTIONS AND THE ISLE OF MAN
- SHIPPING REGISTERS – TYPES AND LEADING JURISDICTIONS
- WHAT CHECKS DO REGISTRIES UNDERTAKE?
- WHAT MIGHT REGISTRIES DO?
- FALSIFIED SHIP REGISTRATION
WHAT ROLE DO (OR SHOULD) SHIPPING REGISTERS PLAY IN PREVENTING OR DETECTING USE OF SHIPPING TO EVADE CONTROLS?
The UN Panel of Experts report on findings and recommendations in respect of UN sanctions imposed on the Democratic People’s Republic of Korea (DPRK)[1] highlighted several means by which ships and shipping were used to evade the prohibitions and restrictions imposed by the UN Security Council Resolutions.
Whilst law enforcement and regulators have a role in ensuring 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, and (at least in some jurisdictions) corporate service providers, banks and insurers have some responsibilities as “gatekeepers” – if only to avoid themselves becoming liable – what about the role of the shipping registers?
Recent years have provided extensive evidence of the role of shipping in illicit activities, not just “traditional” smuggling and migrant trafficking, but anything from the role playing in evading UN sanctions on the DPRK and restrictions formerly placed upon Iranian shipping to the involvement of vessels in illegal, unreported and unregulated (IUU) fishing[2].
In the past, the role of shipping registers[3] has been to confine themselves to ensuring that the vessels on their registers comply with the relevant statutory requirements – typically so that the legal ownership of the vessel can be established (especially where mortgaged), and that certain safety requirements (for the vessel, its crew and in respect of the threat of pollution) are met[4]. They have not normally been required to undertake any form of “know your customer” (KYC) or customer due diligence (CDD) checks that other bodies might be required to undertake for the purposes of anti-money laundering and countering terrorist financing (AML/CFT)[5]. Some of the checks they might have taken to verify the information provided in an application may have been similar in some aspects to those required for AML/CFT purposes and, in at least some jurisdictions, the registry might be required to report any suspicions relating to money laundering or terrorist financing[6] to the relevant local authorities. In general, however, neither the local authorities (financial intelligence unit, customs, police) nor international or supranational bodies (such as the UN and EU) have appeared to have focussed attention on registries.
Another factor can be said to be the increasing importance in many countries of anti-bribery and corruption laws with extra-territorial effect. Ships and shipping can become involved in a variety of ways – including bribes to accept or clear cargo, movement of stolen or misappropriated cargo, payments to facilitate access or passage.
However, the increasingly holistic approach now being taken by the Financial Action Task Force (FATF), and regional bodies carrying out similar work using FATF standards and recommendations[7], and the stress on not only technical compliance with requirements but even more on proving the effectiveness of the compliance, is likely to see increasing attention paid to areas such as shipping and aircraft registries that, in the past, were seen as outside the scope of compliance control, or at least somewhat peripheral.
Increased attention is also being paid to the involvement of shipping and the shipping sector in evasion of sanctions by the UN, EU and US authorities. In March 2017, VERTIC[8] announced that it was implementing a project on ‘Improving Global Implementation of Maritime Sanctions on North Korea’, in a consortium with the James Martin Center for Nonproliferation Studies (CNS) and King’s College London (KCL). The project, funded by the US State Department, aims to counter North Korea’s nuclear and missile programmes by preventing North Korea from obtaining revenue via prohibited maritime trade that directly funds North Korea’s nuclear and missile efforts. One of the ways this is to be done is by providing guidance and assistance to registries on how to carry out the sort of KYC and CDD controls required.
THE UN PANEL OF EXPERTS REPORT ON NORTH KOREA
In addition to the obvious question of how the DPRK continued to export goods in defiance of the sanctions[9], some of which at least must involve maritime transportation, the UN Panel of Experts identified several specific ways in which shipping was implicated –
- The Panel investigated illicit ship-to-ship transfers of petroleum comprising a multi-million-dollar business that is driving an international network of brokers and ship charterers as well as unwitting global commodity trading companies and oil suppliers. It found that the network behind the vessels was primarily based in Taiwan, while there were affiliated companies were registered in the Marshall Islands and the British Virgin Islands (BVI), with ships flagged in Dominica, Hong Kong, China, Panama and Sierra Leone. The Panel also said it was investigating several multinational oil companies for their roles in the supply chain of petroleum products transferred to the DPRK.
- DPRK was said to be continuing its illicit coal exports, with the country combining deceptive navigation patterns, signals manipulation, trans-shipment and fraudulent documentation to obscure the origin of the coal. The Panel investigated more than 30 cases of exports of coal from the DPRK to at least 4 States in South-East Asia, including several cases that involved the trans-shipment of coal via Russian Far Eastern ports.
A sizeable number of vessels, as well as companies and individuals have been designated as being subject to sanctions measures, by the UN, the US authorities and the EU, for involvement in breaches or evasion of sanctions measures.
Methods employed by the DPRK and those assisting it included a combination of multiple evasion techniques, deceptive routes and deceptive shipping tactics. Techniques identified included manipulation of the Automatic Identification System (AIS)[10], loitering, voyage deviations and fraudulent documentation. In respect of the movements of coal, the report said that the Panel found extensive use of a combination of multiple evasion tactics, including indirect routes, detours, loitering, false documentation, trans-shipment through third countries and manipulation of AIS signals and destinations/estimated times of arrival, as well as changes to the class, length and draft of the vessels. These are used to obfuscate actual routes, conceal port calls and give the impression that the coal was loaded in ports other than in the DPRK. The consistency and similarity of the tactics suggest that they are part of a centralized strategy on the part of the DPRK to evade the commodities ban.
There was also said to be extensive evidence of false cargo documentation. Although authentic verification documents and stamps accompanied numerous contracts, bills of lading, certificates and warranties of origin, many vessels never visited the ports in mentioned in the documentation[11].
The UN Panel noted problems in enforcement caused by the offshore nature of much of the affected oil, maritime and finance sectors involved, or potentially involved.
OTHER FACTORS THAT REGISTRIES MIGHT CONSIDER
In addition to falling foul of sanctions legislation, shipping registries might want to take account of other reasons for introducing some adequate form of KYC/CDD. These are more intangible, but could have equally severe effects, and might include the following.
The attitude and use of a country’s shipping registry, and the degree of oversight and control involved can be a factor during reviews by FATF and FSRB. Even if the registries themselves are not seen as falling within the scope of the AML/CFT, sanctions and proliferation review process, what they do, and any evidence of past bad publicity and/or inadequate regard to AML/CFT etc in their practices can and will be something taken into account by the reviewing team in its overall risk assessment (particularly in the pre-visit preparation).
Increasingly, major organisations, including banks, are becoming more risk averse and (as illustrated in the case of IRISL and the Isle of Man below) can threaten or take preventive action to minimise risks to them. If a registry or the arrangements it oversees are seen as not doing enough to prevent abuses by a reviewing body, or is criticised for such by another government (such as in the International Narcotics Control Strategy Report published annually by the US State Department) or a non-governmental organisation, or is the subject of an exposé such as Panama Papers or the Paradise Papers, it might find itself not considered as suitable and not be considered for use by reputable businesses.
The fallout from any scandal or exposé also risks reputational risk, sometimes considerable, and not only to the registry and any vessels and companies involved, but to the jurisdiction as a whole. This can lead to an accumulation of perception that the registry, and the jurisdiction and its shipping sector, are poorly managed and that registry, sector and the jurisdiction itself similarly suffer from poor governance. This then may lead to it and they being regarded as higher risk, and a less suitable partner or place to undertake business.
Inevitably perhaps, any pressure to introduce KYC/CDD controls is more likely to be felt in the smaller and offshore jurisdictions. These are most open to persuasion or pressure from larger countries, and more susceptible to the effects that scandals, exposés and bad reports can have on their reputation and business. Some jurisdictions already have a poor reputation, but there are others that have a good reputation for management of ships on their register and which they would want to protect.
WHAT ILLICIT ACTIVITIES DO OR CAN INVOLVE SHIPPING?
These can be many and various, and include –
- Violating UN or EU (or US or regional bodies’) sanctions that can impose such things as arms embargoes or more general trade embargoes[12]. They can also restrict or prohibit the use of a country’s vessels in trade with a country or entity – the obvious current example involves the DPRK.
- Smuggling of goods into or out of a territory – smuggling has a long history and still goes on and can include the illicit removal of goods as well as the illicit supply; such as the removal of oil from territory controlled by ISIS in Iraq during the conflict there. Almost anything may be smuggled, from the traditional alcohol and tobacco to arms and military equipment, endangered species, timber, currency, gold, oil, coal etc. The Italian authorities used to regularly detain small coaster-type vessels involved in the contraband cigarette and tobacco trade around the Mediterranean.
- Drugs trafficking – perhaps the most high-profile of smuggling activities. Sometimes the entire vessel may be used, particularly smaller pleasure craft or fishing vessels.
- Human trafficking – of higher profile in recent years due to the migrants attempting to reach Europe from North Africa. It may be people smuggling of those who want, and pay, to make the journey, or the trafficking of those effectively enslaved to be used in providing sexual services or enforced labour.
- Illegal Unreported and Unregulated (IUU) fishing and illegal fishing – the UN Food and Agriculture Organisation (FAO) estimates that perhaps 30% of all catches are composed of IUU fishing. It is neither a new phenomenon, nor confined only to the high seas[13]. The FAO also says that those involved need not be using flags of convenience but says that the root cause of IUU fishing is a lack of effective flag State control. Since 2010, EU operators who fish illegally anywhere in the world, under any flag, risk substantial penalties proportionate to the economic value of their catch, which deprive them of any profit[14]. IIU fishing may also the use of enforced labour (see below). Illegal fishing is defined by the UN Office for Drugs and Crime as encompassing all fishing activities conducted in contravention of national and international laws, as well as agreed regional fisheries management and conservation measures[15], such as fishing beyond allowable catch limits, taking of juvenile fish and prohibited fish species, and fishing during closed seasons or in closed areas.
- Use of enforced labour – the exploitation of seafarers has a long and depressing history. The UN International Labour Organisation (ILO) defines enforced or forced labour as meaning where persons are coerced to work through the use of violence or intimidation, or by more subtle means such as manipulated debt, retention of identity papers or threats of denunciation to immigration authorities[16]. In the present day, the most oft cited example is connected to IUU fishing (see above)[17]. Under US law, the importation of anything produced using forced or indentured labour is prohibited and other countries will have similar laws.[18] The UN and individual countries, notably Canada, are promoting “social responsibility” laws that impose on businesses in one country responsibility for human rights and other abuses carried out by them, or on their behalf, in other countries. The so-called “Ruggie Principles” comprise the responsibility of the state and the company to ensure human rights are protected[19].
- Environmental crime – this could involve the unauthorised disposal of oil[20], waste or other unwanted materials by a ship. It could overlap with smuggling (as well as bribery and corruption), where the unauthorised disposal involves dumping the material in a place where this was not allowed (such as in the infamous Ivory Coast incident in 2006)[21]. IUU fishing above could also be considered an environmental crime.
- Bribery and corruption – may be connected to any of the above, and in the US, UK and increasingly elsewhere, involvement in bribery or corruption anywhere in the world can be an offence under your own domestic law. Not only that, as in the UK, failure to have adequate processes in place to prevent and detect bribery and corruption within your organisation can constitute an offence, with very recently the first conviction in the UK for such an offence[22].
- Money laundering – this too may be connected to any of the above – the vessel may be bought with, or otherwise financed by, the proceeds of the illegal activities. The classic example may be the pleasure craft bought with the ill-gotten gains of its owner. However, one should bear in mind that trade-based money laundering, and other trade-based financial crime, is thought to far exceed “normal” money laundering, and that the ship, its operations and cargo may be an intrinsic part of the crime itself[23].
- Tax evasion (or avoidance), which may then be linked to money laundering, is also a factor to be considered. Even where the registry involved has done nothing wrong under maritime law, it can be tainted if it is then revealed that there was something amiss in the purchase, ownership, management or operation of the vessel. A good example occurred in late 2017, then the Paradise Papers alleged that certain wealthy individuals had benefitted from an advantageous VAT arrangement on the acquisition of business jets in the Isle of Man[24]. Doubts were also expressed about arrangements involving yachts. Though the ones mentioned in the report did not fly the flag of the Isle of Man, the Island nevertheless has a sizeable number of expensive pleasure craft on its register and doubts and suspicions do not always need evidence.
- Terrorist financing – as with money laundering, this may be connected to any of the above, in that they were a means of raising funds for the terrorist body, or were (as was the case with the shipment of oil from Iraq by ISIS) an essential element of the body’s activities.
- Proliferation of weapons of mass destruction (WMD) and delivery systems – it would be a mistake to think that this heading only applied where UN sanctions applied, such as in respect of DPRK. In fact, prevention of proliferation of WMD and their delivery systems (such as missile systems), can not only fall under the heading of sanctions, but also that of smuggling in general, or be linked to potential use by terrorists. It also links with export and trade controls below, and involve dual-use items and technology as well as actual components or the finished objects themselves.
- Export and trade controls – like with several other of these headings, this overlaps with several of the foregoing. Export (and import) controls, including licensing requirements and outright prohibitions, with the avoidance, evasion or ignoring of them are obviously closely linked to what might be considered to be smuggling. Trade controls exists in several countries, including the UK, and extra-territorial effect, requiring a licence from the home state of the owner and/or shipper for movements between two other countries[25]. An example of the effect of this requirement is the need for those providing armed anti-piracy security on British ships to obtain a licence from UK authorities (which covers the movement of the weapons and related equipment required)[26].
- Piracy and armed robbery at sea – this seems self-explanatory and is more generally seen as a risk of being a victim of the sort of maritime piracy such as that seen off Somalia or in the Gulf of Guinea. On the other hand, the pirates must get their vessels from somewhere.
Any or all of the above could or would involve organised crime or terrorist organisations, and some may also involve state actors in the form of unscrupulous states, officials or official bodies.
In its Advisory on “Sanctions Risks Related to Shipping Petroleum to Syria” in November 2018[27], the US Treasury listed some of the deceptive practices identified as having been used to ship oil products to Syria. These included falsified cargo and vessel documents (see also below on “Falsified Ship Registration”), ship to ship (STS) transfers (which can be on the high seas) and the disabling of a vessel’s AIS.
THE ISLAMIC REPUBLIC OF IRAN SHIPPING LINE, US SANCTIONS AND THE ISLE OF MAN
A good indication of the risks that a registry (and any agents and others involved) can face is illustrated by the experience of the Isle of Man, its registry and companies and individuals in the Island, following the imposition of first US, and then EU, sanctions on the Islamic Republic of Iran Shipping Line (IRISL) and associated ship-owning companies and vessels. A number of vessels operated by IRISL had been registered in the Isle of Man, but then flagged out to Iran via the Demise Register. They were owned by individual companies set up to acquire and own them[28]. When this was done this was long before any sanctions measures were imposed by the US or others against IRISL or Iranian shipping as a whole. Indeed, it was seen as good business and supported by the government at the time. The arrangement was put in place, it was said, at the request of the German banks funding the construction and supply of the ships. It was argued that this enabled the banks to be satisfied that they had sufficient ability to have the ships detained etc in the case of any default, on the strength of their registration on the Isle of Man register. Matters in the Island were handled by a specialist firm, and a local flag state representative with long experience in shipping and maritime affairs, and using companies incorporated in the Island. The firm involved would have undertaken all necessary AML/CFT due diligence on the transactions, being regulated by then Financial Supervision Commission (now FSA).
Problems arose several years later, from 2008, when initially the US Treasury Office of Foreign Asset Control (OFAC) listed the ship-owning companies because of the alleged involvement of IRISL in the movement and supply of materials in support of Iran’s nuclear and WMD programmes. It is important to note that OFAC sanctions do not, legally and technically, have any effect in the Isle of Man or other non-US territories. However, no major bank or financial institution would want to do business with any listed person or entity, nor indeed anyone associated with them, for fear of themselves falling foul of the US authorities. Any listing by OFAC, the US Department of Commerce or other reputable body would (or should) obviously be taken into account in assessing or reassessing risk, regardless of whether there is the danger of any direct effect on the business concerned. In this case, this meant that not only the companies owning the ships faced difficulties, but the Island firm, its officials and the local flag state representative all faced having their business and even personal accounts closed – despite their having done nothing wrong in the eyes of the law, or the authorities, where they were located.
Despite there being no legal obligation on them to do so[29], and at the cost of losing valuable business and the undermining of a longstanding good relationship with the IRISL organisation and its officers, the firm responsible for the vessels in the Isle of Man moved to sever links with IRISL and its affiliates, and with the vessels concerned. They co-operated fully with the local authorities. The authorities in the Island liaised closely with the US Treasury[30], and invited OFAC officials to the Island, where they met all the various bodies involved – including the Ship Registry and the local business, as well as with the local Customs and Excise[31], FIU and regulators. With the greater understanding of the background and context, and following the co-operation of all involved, further action by OFAC against those in the Island was averted. Nevertheless, it might easily have turned out otherwise, and there remained some degree of damage to the reputation of the Island, its business community and institutions[32], and several months of worry and uncertainty for those involved.
Would a KYC/CDD process having been in place at the Ship Registry have averted the situation that arose? Perhaps not. However, it might have provided earlier warning, allowing it and those others involved to have acted sooner. With the emphasis now on risk assessment, and ongoing risk assessment, for KYC/CDD the threat may have been flagged up and steps taken before the US took action[33].
One interesting point to note was that the OFAC officials said that a suspicious factor was the renaming of the ships involved. Whilst in this specific case this may have been true (the ships receiving innocuous British names in place of original Iranian ones), renaming of vessels is a common practice in the shipping industry – and may be triggered by such events as a change of owner, refit, change of charter, change of use etc.
SHIPPING REGISTERS – TYPES AND LEADING JURISDICTIONS
As already mentioned, the UN Panel of Experts report on the DPRK in 2017 highlighted concerns caused by the offshore nature of the oil, maritime and finance sectors involved. This need not be because of particular concerns about the integrity of a particular register, but may be about the way in which offshore companies and special purpose vehicles (typically individual companies formed for the acquisition, ownership, management or operation of one or more individual vessels) are routinely used, and the fact that, of necessity, much or all of the business conducted in carried out in a non-face to face manner and/or through local agents or representatives.
An open registry is one which does not have a nationality or residency requirement attached to the ship or its owners. Panama[34], for example, offers the advantages of easier registration (which can be undertaken online) and the ability to employ cheaper foreign labour than might be required under other registries. It also has the bonus that the foreign owners pay no income taxes[35].
On the other hand, national or closed registries typically require that a ship be owned and constructed by national interests, and at least partially crewed by its citizens.
Some registries are not themselves operated by the host country’s government, but rather the services have been outsourced or sold off to be performed by private sector businesses. For example, the Marshall Islands register is administered by International Registries Inc and is actually a US concern based in Virginia[36]. As a US company, one would expect it to be cognisant of the effects of the often wide-ranging US sanctions regimes, and to protect itself in this regard by undertaking adequate precautions.
Panama is a register that offers “dual registry”, which it introduced in 1973, and which allows a foreign vessel bare boat chartered for a period of 2 years can be registered in Panama for the same period without losing its previous registration (and vice versa). It may be termed “bareboat charter”, which temporarily permits a vessel to fly the flag of another country while ownership continues to be registered in the owner’s State. The Demise Register operated by the Isle of Man offers a similar way to divide responsibility for a vessel. For example, the Registry website says, mortgaging facilities might be more attractive in one jurisdiction because of its laws relating to recovery of liens, whereas the manning requirements might be attractive in another state. However, the use of any of these methods can further reduce oversight and control that the original registry can have (and, as the process works in both directions, registries can take on ships originally registered elsewhere), and there can always be the risk that one or both registries involved assume that the other is exercising more or appropriate control. It was the use of the Demise Register that lay at the heart of the difficulties experienced by the Isle of Man over Iranian vessels[37] (see above).
In modern terms, a “flag of convenience” is one less willing (or unwilling) to enforce international minimum social safety and environmental standards on its vessels. Shipowners can avoid or evade some or all of such standards, and mask or hide true ownership and liabilities, by use of such flags. The International Transport Workers Federation (ITF) maintains a list of flag states that it considers to have flags of convenience, a list that includes Panama, Malta, Gibraltar, the Bahamas, Barbados, Bermuda, Jamaica, Liberia, the Cayman Islands and Cyprus[38]. The ITF says that cheap registration fees, low or no taxes and freedom to employ cheap labour are the motivating factors behind a shipowner’s decision to use such flags. Its primary concern, naturally, is for the seafarers employed on vessels using such flags.
WHAT CHECKS DO REGISTRIES UNDERTAKE?
Taking the Isle of Man Shipping Registry as an example, it offers registration for ships, including on its demise register (for more information on this register see the comments about IRISL vessels above), and for commercial and pleasure yachts (which would include so-called “superyachts”), “small ships” (locally-owned vessels of less than 24 metres in length, such as small yachts), and fishing vessels (only available to locally-owned and -operated fishing vessels). The documents that may be required include such things as a bill of sale, builder’s certificate (if new-build), certificate of incorporation (of the company owning the vessel), certificate of survey, tonnage certificate, deletion certification (if previously registered), a CLC Blue Card (if an oil tanker), a bunker oil Blue Card (if over 1,000 gross tonnage) and a Nairobi Wreck Removal Certificate (if over 300 gross tonnage). Any documents must be notarised if executed outside the UK, Channel Islands, Isle of Man or British Dependencies, and vessels over 24 metres in length if owned by a non-Isle of Man entity require the appointment of a local representative person[39].
The Isle of Man Registry is not, strictly speaking, an “open registry” in the sense that term is now used[40]. Whilst allowing foreign-owned vessels[41], each must have a local representative that acts for it and/or the company involved (this is by means of a corporate service provider or CSP, which are themselves licensed by the Financial Supervision Authority or FSA – therefore these can, or should, be seen as a “gatekeeper” who should undertake KYC and CDD on the underlying ownership), and the Registry is run by the Isle of Man Government, and is not outsourced to business to run as a straightforward commercial operation[42].
One of the largest registries, with over 3,000 vessels, is that of Liberia[43]. On its website it provides a flowchart showing how the registration process works. It is noticeable that nowhere on the flowchart is there any mention of the registry (or others) carrying out any due diligence checks for AML/CFT, sanctions, proliferation or other potential criminal use. This is quite normal, and you would find a similar situation in the application processes in the UK and elsewhere.
When criminal activity is mentioned on a registry’s website, this is usually in the context of countering maritime piracy and providing armed security aboard vessels[44].
Research undertaken by King’s College London and reported in November 2018[45]was said to show that “many” registries had in place inadequate processes and systems to conduct the necessary due diligence for the purposes of sanctions compliance. It was said that many only carried out a review of the vessel at first registration and often to no require companies to provide registration documents to confirm their (i.e. the owning company’s) legitimacy (and even then, do they, or would they, carry out any checks on the company?)[46]. The paper from King’s College London also pointed out that many registries are run by private contractors, meaning that there could be a lack of official oversight (and, of course, the private contractor, which may be in another country, is likely to be driven by the profit incentive, and may not be tasked or funded to undertake any “unnecessary” or non-mandatory checks).
The IMO does not currently lay down requirements for flag registries. Not does it (despite being an agency of the UN itself) have a role in ensuring that vessels (or vessels of countries) subject to sanctions are not on recognised registries. This role is left to the member countries. IMO rules do not require details of real or beneficial owners to be included on its database, and IMO rules do not require registries to carry out the type of sanctions screening once would expect to see a CSP, insurer or finance institution undertake.
To be fair, to the IMO and registries, the King’s College London paper does point out that the UN has not provided clear guidance on what states or service providers must or should do to comply with sanctions. However, despite this, it seems regrettable that many or most registry websites, and even the IMO website (according to the paper) lack mention of UN sanctions.
WHAT MIGHT REGISTRIES DO?
Registries may already carry out some checks that would or could form part of any KYC/CDD controls. They would or could be checking sanctions lists and using tools such as World-Check. In some jurisdictions, such as the Isle of Man, there would be some implicit reliance on the “gatekeepers” in local, regulated businesses with which much or all of the work of registry is routed[47].
One thing that has become apparent from the current round of evaluations carried out by FATF and FRSB is the need to evidence what controls an organisation undertakes and the results of those controls. Therefore, the registry should have a protocol or code detailing how it undertook any necessary checks, as well as a record of results and any action taken (including referrals to law enforcement, regulators or in the form of suspicious activity reports to the local FIU).
The FATF guidance also makes clear that AML/CFT and related controls should be risk-based, and therefore the registry’s protocol or code would have to set out the structure and criteria used.
As a depositary and a register in a competitive environment, there will always be potential constraints on what it can do, and there will inevitably always be a reliance on others – the corporate service providers and other regulated businesses as gatekeepers, other parts of government, the FIU etc for help and checks on people and businesses. There is likely also to be a need to be able to reach out to contacts within the shipping industry and, ultimately, engaging outside resources if or when “enhanced due diligence” is considered necessary.
Perhaps, in its simplest form, a three-level grading of applications (not forgetting that existing registrations would also have to be checked retrospectively, for completeness as well as providing some further reassurance) might be considered –
- “routine” applications – being those adjudged to be of the lowest risk. This might involve vessels wholly owned and managed within the jurisdiction, for “local” trade and with known, reputable persons and businesses involved;
- “standard” applications – where normal CDD would be applied; and
- applications requiring enhanced due diligence – where something about the type of vessel, its intended use (including any reflagging out), or where it is intended to operate means that a higher level of diligence is required.
The grading would depend on an assessment of several factors – what is known or can be established about those involved, the vessel type, background of the company and persons involved, intended uses, previous history of the vessel or company involved (with the registry or elsewhere), whether intending to be reflagged in or out. The current typologies and “red flags” from the like of FATF and local authorities would be taken into account. In addition, verification of information provided (i.e. “trust but verify”) would be necessary – as registries should already be doing for mandatory requirements such as ship safety.
It may be that it is felt that amendments to the existing legislation would be necessary to ensure that the registry has the power to require any necessary information to carry out its risk assessment. However, it is most likely that most of the information required would be available through normal channels available to the registry. The checks proposed are akin to those undertaken by banks and financial institutions, with the ability to refuse any business with which you are not happy.
Two other factors that would have to be considered are the additional resources and effort required within the registry to undertake the risk assessment, and the effect on its competitive edge through any added costs that might be involved or any delay that undertaking additional checks might produce. However, this need not be a reason for not introducing the risk assessment process – and not only because they are not good reasons for potentially letting potential criminals and others make use of the register – as having such a process in place can only enhance the reputation of the registry and help protect it and the jurisdiction from risk.
As pointed out above, currently neither the UN nor the IMO impose any mandatory requirements specifically on registry to carry out sanctions screening; although there appears to be a growing impetus for improvements in sanctions controls at least by registries (motivated in large part by the efforts of the US State Department and with the situation involved North Korea in mind).
In November 2018, the US Treasury issued an Advisory from OFAC[48]on the subject of “Sanctions Risks Related to Shipping Petroleum to Syria”[49]. This warned of the risks, and the consequences, of involvement in the supply of oil products to Syria. It outlined some of the deceptive practices that had been identified in use (see above in “what illicit activities do or can involve shipping?”). It also listed some of what it described as risk mitigation measures that the shipping sector could adopt, and these included strengthening AM/CFT compliance, reviewing all applicable shipping documentation, and making use of all available resources (i.e. sources of information to cross-check and verify). All of these, I would argue, could be adopted and adapted by a registry as good practice indicators.
FALSIFIED SHIP REGISTRATION
Of course, it can be that registries are duped, and provided with false or partial information – and particularly if the registry’s interest is in the purported legal ownership, any mortgage, and crew and environmental safety. On the other hand, the claimed registry may be entirely false, the equivalent of the flying of false flags. International law demands that all vessels operating in international waters must be registered with a “flag state”.
In September 2018, an article by Olivia Vassalotti and Cameron Trainer for The Diplomat website[50] considered the problem of falsified registration in the context of sanctions on North Korea. Shortly after, in November 2018, the paper referred to above from Project Alpha at King’s College London[51] also addressed the question of falsified registrations, in that case in the context of the failure of IMO rules to address the issue of UN sanctions enforcement.
Vassalotti and Trainer said that the falsification could take various forms – such as continuing to claim registration when cancelled, using the identity of another vessel, transmitting incorrect or misleading information for tracking services[52] or to national or port authorities, claiming and having false documentation for a registry which has no knowledge of the vessel), or even going so far as to create wholly non-existent “registries”.
In one case, after the Cambodian authorities closed its registry, North Korean vessels continued to fly the Cambodian flag[53]. In other cases, companies claiming to be (or represent) a national register have claimed to have many vessels on their register and using a country’s flag without that country’s knowledge[54]. As some countries do farm out their registry services to private companies, and as a fake website and documentation can appear highly plausible, this is not hard to imagine happening. In the case of Micronesia, after the International Maritime Organisation (IMO) wrongly recognised the fake registry some 300 vessels may have used the country’s flag.
Vassalotti and Trainer in their article also refer to what they term “reputation laundering”, whereby ships with a history of involvement in illicit activity can move (or appear to move) to another, more respectable register. As vessels’ names change more frequently than one might imagine (though their IMO identification number[55] should remain the same).
Ray Todd
12th April 2018
Updated 20th November 2018
AMENDMENTS TO THIS PAPER
20 November 2018
Numbered Index added.
New Section 9 (Falsified Ship Registration) added.
References to King’s College London discussion paper dated 15th November inserted.
References to US Treasury/OFAC Advisory of 20th November 2018 inserted.
Three added paragraphs added to “What checks do registries undertake?”.
Two added paragraphs added to “What might registries do?”.
[1] http://www.un.org/ga/search/view_doc.asp?symbol=S/2018/171
[2] 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. Greenpeace has issued lists said to contain the names of irresponsible fishing operators and the companies behind them – http://blacklist.greenpeace.org/home
[3] In addition to their role in generating revenue for the jurisdiction involved – an important factor in many, especially offshore centres.
[4] In this way they may be likened in some ways to company registries, which also were generally regarded as repositories and did not normally undertake detailed KYC/CDD checks for AML/CFT or similar purposes. In 2008, it was reported that a detailed examination of the records at UK Companies House undertaken by World-Check had revealed that the names of almost 4,000 directors of British companies appeared on international watchlists of alleged fraudsters, money launderers, terror financiers and corrupt officials. It is interesting to speculate what a similar exercise on some shipping registries might reveal.
[5] However, in March 2018 Panama issued its “Restricted Vessels” list which included vessels that have been deleted from the Panama Ship Registry, as a result of investigations that have shown links to the DPRK, or vessels that have been reported as vessels having link to DPKR https://www.segumar.com/wp-content/uploads/2018/03/PANAMA-Nave-Canceladas-Corea-del-Norte-MAR-06VER01-SE-ELIMINAN-NAVE-DE-COREA-AUN-EN-PROCESO-DE-CANCELACION.pdf
[6] For example, that the vessels might have been purchased with the proceeds of crime (perhaps the best example would be in those jurisdictions whose registries host “superyachts”).
[7] The 9 so-called FATF-Style Regional Bodies (FSRB), such as the Council of Europe’s MONEYVAL, the Asia/Pacific Group on Money Laundering (APG) and the Latin America Anti-Money Laundering Group (GAFILAT).
[8] Based in London in 1986, VERTIC (the Verification Research, Training and Information Centre) is an independent, non-profit making charitable organization. VERTIC supports the development, implementation and verification of international agreements as well as initiatives in related areas. http://www.vertic.org/
[9] For example, the report said that the DPRK exported a total of $62,184,815 in iron and steel between January and September 2017 to Barbados, Bolivia, Chile, China, Costa Rica, El Salvador, India, Ireland, Mexico, Pakistan, the Philippines and the Russian Federation. All of these exports were, or could be, in violation of existing sanctions.
[10] Used to track a vessel’s progress using Internet websites: http://www.shipais.com/ It was actually developed as a collision avoidance system that gives information all the ships in your area, their speed and courses and how to contact them (name, callsign, MMSI). This information is publicly broadcast on VHF radio which can be picked up either by other ships or by shore-based receivers. It may be, see http://www.shipais.com/doc/about.php
[11] Given the stated involvement of offshore companies and jurisdictions, where even a reputable business (or law enforcement or a regulator) were involved, there would be an obvious reliance on such apparently bona fide documentation.
[12] In November 2018, Project Alpha at King’s College London published a paper examining the interplay between UN sanctions and the rules governing the maritime sector, showing how the sanctions impose requirements on shipowners, shipping companies that go beyond the rules of the International Maritime Organisation (IMO). The paper also argues that the IMO rules do not permit the effective implementation of sanctions, and it identifies a number of issues and opportunities for changes to be made to the rules. See https://projectalpha.eu/discussion-paper-un-maritime-sanctions-and-the-international-organisation/
[13] http://www.fao.org/fishery/iuu-fishing/en
[14] https://ec.europa.eu/fisheries/cfp/illegal_fishing_en
[15] https://www.unodc.org/documents/organized-crime/GPTOC/Issue_Paper_-_TOC_at_Sea.pdf
[16] http://www.ilo.org/global/topics/forced-labour/definition/lang–en/index.htm
[17] In May 2018, the Indonesian authorities detained a Tog-flagged vessel described as a “slave ship” http://www.straitstimes.com/asia/se-asia/indonesia-seizes-alleged-slave-ship-wanted-by-interpol
[18] It prohibits the importation of merchandise mined, produced or manufactured, wholly or in part, in any foreign country by forced or indentured child labour – including forced child labour. Such merchandise is subject to exclusion and/or seizure, and may lead to criminal investigation of the importer(s).
[19] http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf
[20] In 2011 it was claimed that up to 810,000 tons of oily waste is intentionally and illegally dumped into the world’s oceans by commercial vessels.
[21] In 2006, a ship registered in Panama, chartered by the Singaporean-based oil and commodity shipping company, offloaded toxic waste to an Ivory Coast waste handling company which disposed of it at the port of Abidjan, giving rise to a health crisis in the country.
[22] On 21st February 2018, Skansen Interior Limited was found guilty of failing to prevent bribery under section 7 of the Bribery Act after the jury were unconvinced that the company had adequate procedures in place to prevent bribery.
[23] For more information on trade-based money laundering see https://www.gov.im/media/1348726/notice-1000-man-trade-based-money-laundering-29-sep-17.pdf
[24] https://www.icij.org/investigations/paradise-papers/offshore-gurus-help-rich-avoid-taxes-jets-yachts/
[25] The classic example, would be a licence required from the UK for a UK company to ship arms from South Africa to India.
[26] For more information see https://www.gov.im/media/814275/notice-279t-man-trade-control-licensing-27-10-16.pdf and https://www.gov.uk/government/publications/open-general-trade-control-licence-maritime-anti-piracy
[27] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/syria_shipping_advisory_11202018.pdf
[28] For example, Cobham Limited, incorporated in 2003 to own the Sewak (aka the Iran Fars). The New York Times published a list of 66 companies owning vessels and linked to IRISL, including those in the Isle of Man http://archive.nytimes.com/www.nytimes.com/interactive/2010/06/08/world/middleeast/sanctions-companies-table.html
[29] UN and EU sanctions, which would apply in the Isle of Man, did not follow until 2010, although from 2008 a UN Security Council resolution provided for states to be able to inspect vessels it owns or operates should be inspected, provided there are reasonable grounds to believe that such vessels are transporting prohibited goods.
[30] Perhaps fortunately, having excellent working relations with the US due to previous joint operations and continuing co-operation.
[31] Responsible for sanctions matters.
[32] For example, see the BBC report of July 2010 http://www.bbc.co.uk/news/10604897
[33] Bearing in mind that the US authorities provided no direct forewarning of its intentions in respect of the Isle of Man-registered vessels.
[34] For a review of the Panama Ship Registry 1917-2017, see
[35] As a result, the Panama Registry claims to be in charge of managing the world´s largest ship registry, with over 8,000 registered vessels which accounts 18% of the world fleet.
[36] http://www.register-iri.com/index.cfm?action=about
[37] http://www.bbc.co.uk/news/10604897
[38] http://www.itfseafarers.org/foc-registries.cfm
[39] For a merchant ship, , the representative person must be a body corporate incorporated in and having its principal place of business in the Isle of Man. For a pleasure craft, the representative person can either be an individual or a body corporate resident in the Isle of Man.
[40] It describes itself as being “semi-open”.
[41] From certain countries other than the UK, Isle of Man and Channel Islands. See – https://www.iomshipregistry.com/registration/more/how-to/check-ownership-eligibility/qualifying-owners-schedule-1/
[42] Such as is the case with the Marshall Islands (see above).
[44] For example, see on the Marshall Islands registry website http://www.register-iri.com/index.cfm?action=page&page=247&fromPage=5
[45] https://projectalpha.eu/discussion-paper-un-maritime-sanctions-and-the-international-organisation/
[46] A registry might well ask where it should stop -after checking the vessel, and the company, do they then check out the owners (including any unidentified beneficial owners), and even the middleman companies supplying the business? Do they, can they, rely on the word of the agent, CSP, flag state representative?
[47] In the Isle of Man, for example, such gatekeepers are the CSP, which are themselves regulated for AML/CFT purposes etc by the Island’s Financial Services Authority.
[48] The Office of Foreign Asset Control, which is responsible for the enforcement of US financial sanctions measures.
[49] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/syria_shipping_advisory_11202018.pdf
[50] https://thediplomat.com/2018/09/fake-flags-at-sea-sanctions-enforcement-and-ship-identity-falsification/
[51] https://projectalpha.eu/discussion-paper-un-maritime-sanctions-and-the-international-organisation/
[52] All vessels over 100 gross tons must have Automatic Identification System (AIS) fitted. See Chapter V of International Convention for the Safety of Life at Sea (SOLAS), 1974: http://www.imo.org/en/About/conventions/listofconventions/pages/international-convention-for-the-safety-of-life-at-sea-(solas),-1974.aspx
[53] https://www.voacambodia.com/a/cambodia-denies-flag-of-convenience-on-north-korea-vessel/4054722.html
[54] Vassalotti and Trainer cite the DRC, Fiji, Micronesia, Nauru and Samoa of being victims of such a fraud.
[55] This number is issued to all propelled sea-going merchant ships over 300 gross tons when constructed and consists of the letters “IMO” and 7 digits. As with VAT numbers in the UK, the last digit is a check digit, and use of a formula allows one to determine if the number is, in fact, a genuine one (though it would not, of course, on its own mean that the ship using it was the right one). Companies owning, managing and operating vessels must also have their own IMO number. See https://gcaptain.com/imo-numbers/
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