Vessel Due Diligence: The Major Sanctions Risks FIs Face

Intro: This is a two-part series focusing on the increasing risks, and costs, of maritime sanctions. This part will focus on the sanctions, economic, and environmental risks presented by the Dark Fleet, a group of tankers dealing in Russian, Iranian, and Venezuelan crude. The second part will focus on how financial institutions can counter these risks, and how to better use vessel screening and due diligence tools within the compliance process. See Part Two here.

Maritime sanctions, and the need to effectively screen and analyze a vessel’s behavior, have never been as important as they are today. Russia’s invasion of Ukraine precipitated the largest sanctions program in modern history, designed to cap the price on Russian crude (“Price Cap”) and stop shipments of armaments and dual-use goods to feed Putin’s war machine. Likewise, Hamas’ October 7 attack on Israel has caused the U.S. Office of Foreign Assets Control (“OFAC”) and some U.S. allies to double down on sanctions against Iran – Hamas’ state sponsor – and OFAC is focused on undercutting Iranian commodity sales.[^1]

It is no secret that the U.S. government and its coalition counterparts (“Coalition”)[^2] are expecting more robust due diligence on vessels and their cargo. While OFAC (and its counterparts)[^3] has historically produced guidance on an annual basis for the need to conduct vessel due diligence,[^4] the agency has published[^5] four[^6] advisories[^7] in almost as many months.[^8]

The U.S. Department of Justice (“DOJ”), which is in charge of enforcing criminal infractions of the sanctions regulations, has been even more active than OFAC in indicting companies for non-compliance and seizing maritime assets.[^9] It was no coincidence that the “Know Your Cargo” advisory’s centerpiece case study was a criminal indictment filed against a non-U.S. person.[^10] Other countries’ law enforcement authorities are equally keen on enforcement and the risk of prosecution for poor compliance has never been higher, even outside of the Coalition.

I. Increasing threat of maritime sanctions

Unfortunately, the intensity of new sanctions has also caused malign actors to use more advanced deceptive shipping practices to evade sanctions. Financial institutions, and trade finance departments in particular, are currently facing three major maritime sanctions risks:

• The rise of the “Dark Fleet”[^11] which consists of many companies operating tankers with the intention of circumventing the price cap on Russian oil or dealing in Iranian and Venezuelan-origin goods.
• A shift from simpler forms of sanctions evasion such as disabling the AIS transponder[^12] to more advanced forms of deceptive shipping practices such as spoofing – the act of faking a vessel’s location.[^13]
• The creation of a cottage industry of classification societies, insurers, and flag registries who offer dubious services (such as shoddy insurance) and cater directly to vessels engaged in sanctions evasion.

Coming to grips with any one of these threats would be a significant challenge, but OFAC and her sister agencies expect the financial crime compliance (FCC) community to address all three.