Shipping’s compliance risk conundrum
Sanctions targeting shipping are an expensive burden for industry and ineffective as a policy tool, but don’t mistake the anticipated lifting of Iranian sanctions for an easing of compliance risk.
The Trump era of ‘maximum pressure’ campaigns may be recast under the Biden administration, but the requirement to monitor maritime risk is now embedded within financial, insurance and political processes. All signs point to an increasingly complex global regime well beyond the current focus on US compliance
WHAT Donald Trump’s approach to sanctions lacked in diplomacy was more than compensated by commercial creativity.
By turning banks, insurers and individual companies into de facto enforcers, the US blacklisting of Iranian tonnage saw the shipping industry back away from the Islamic Republic immediately. At least initially.
Twelve months after the US fully imposed sanctions on the vast majority of Iran’s owned or controlled fleet in early 2019, AIS vessel tracking data showed the movements of those ships had halved.
Iran is now gearing up to resume formal oil exports once the US lifts trade sanctions as anticipated, and old customers including India, Japan, South Korea and Taiwan await the green light to engage. But the reality is that these sanctions have always been far from watertight, and oil exports never really stopped, and escalated in the last six months.
At their most effective, the restrictions were porous. Sanctioned vessels conducted entire voyages with their AIS signal switched off and their routine manipulation also masked other trades.
Analysis of Lloyd’s List Intelligence data reveals that around one third of the sanctioned fleet were ‘dark’ for more than 50% of the past two years.
This suggests that, far from cutting off trade, the Iranian state simply got better at hiding it. Outside of the list of vessels directly targeted by sanctions, however, the porous restrictions become like a sieve with too many holes to hold back the flow.
Over the past two years a fleet of elderly tankers has kept oil and refined products flowing to and from both Venezuela and Iran via a network of ship-to-ship transfers and evasive operations.
Emboldened by the end of the Trump administration, this fleet has brazenly defied the US: Chinese imports of Iranian crude surpassed 1.3m barrels a day in April – the highest monthly figure tracked since sanctions were announced in 2018.
This could be read as a calculated risk on the part of a minority of tanker operators and opaque business networks willing to take their chances with China over US policy in flux.
A more realistic assessment questions whether overuse of sanctions undermines their effectiveness and given time, all sanctions can be circumvented to some extent.
It should not, however, be interpreted as an easing of the increasingly onerous and expensive compliance burden that has been borne by the shipping sector over recent years.
On the contrary – compliance is getting more complex because the evasion tactics used by those circumventing scrutiny are evolving and outpacing the existing sanctions effectiveness. There are no signs that the Biden administration will disrupt the trend set by others to use sanctions as a standard foreign policy tool.
Regardless of some shipowners’ appetite for risk or willingness to skirt the greyer areas of international trade, the US retains a stranglehold over financial compliance within dollar-denominated trades.
As one ex-US Treasury staffer put it, “government policy trumps commerce”, so the octopus of bureaucracy is winning, and trade is losing.
Sweeping measures against Russia, asset freezes for targeted Chinese officials and a swathe of companies added to the list of company targets in relation to the Myanmar coup have seen the Ofac lists continue to grow again this year.
China’s maritime dominance is therefore widely considered a high target.
The US has previously imposed sanctions on several Chinese refiners and oil traders, as well as briefly designating the tanker subsidiary of China’s state-owned shipowner, Cosco, in September 2019.
The Chinese government offered first sight of its pre-emptive plans to counter that threat earlier this year.
By issuing the first sanctions blocking regime in China to counteract the impact of foreign sanctions on Chinese firms, Beijing was responding to the Trump administration’s barrage of trade restrictions, but the long-term implications could be significant for shipping particularly.
Although the law — which borrows from a similar measure adopted by the European Union — became effective on January 9, it currently only establishes a legal framework.
The Chinese blocking statute will become enforceable once the Chinese government identifies the specific extra-territorial measures — likely sanctions and export controls the US has levied against Chinese companies — to which it will then apply.
While the European Union blocking statute has not yet been tested against a maritime case, in theory it could constitute a serious risk for European traders caught between Ofac’s demands and the European legislation designed to “protect EU operators, whether individuals or companies, from the extra-territorial application of third country laws”.
In practice the shipping industry has opted to risk breaching untested EU legislation that dates back to the early 1990s rather than risk the known retribution of Ofac which has a more recent and tangible track record. But that calculation will not be so simple if China adds teeth to its blocking mechanism in ways the EU was unable.
Senior insurance industry officials are already privately warning that the prospect of an emboldened China applying the blocking mechanism could be “horrendous” for shipping.
Discussed potential scenarios include a shipowner being found in breach of US sanctions but operating in accordance to EU law and potentially being locked out of future China trades if it doesn’t fulfil a contracted trade.
The risk remains untested for now, but the blocking mechanism has already sparked concern among the finance and insurance officials currently consulting lawyers to advise on mitigation practices.
For those banks and insurers seeking to apply transparency to the opaquest end of seaborne trade, many are only just realising how far they still need to go in order to mitigate the risk that the Trump era in some way helped expose.
As the former US Deputy Attorney General Paul McNulty pithily summarised it: “If you think compliance is expensive, try non-compliance.”