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Why holistic screening technology is a necessity for banks and the whole trade ecosystem

Sanctions compliance has become an increasingly complicated concept in recent years, so much so that real-time technology is now a must for trade finance organisations that wish to fully assess the end-to-end risks in each transaction.

The big change in the industry came with the introduction of the OFAC (Office of Foreign Assets Control) sanctions advisory in 2020, which targeted the wider maritime industry. While non-binding, it was significant in that it moved charterers, brokers, flags, ports, shippers, ship owners, operators, managers and freight forwarders into the same jurisdiction as financial institutions, commodity traders, and insurers. Its scale means that any organisation involved in a trade transaction must improve their compliance programme to ensure US sanctions are met.

The outlook of both OFAC and the UK’s OFSI means that end-to-end due diligence and monitoring across the financial and organisational ecosystems that support transactions have become vastly more important. As a result, any business with involvement in maritime trade is now in the spotlight when it comes to investigations and penalties for breaches in regulation, whether it believes to be responsible or not.

Don’t underestimate OFAC

OFAC’s recent actions have backed up its rhetoric. In June last year, it took action against a Panamanian-flagged crude oil tanker owner after the vessel reportedly delivered 515,000 barrels of Venezuelan oil to Qingdao and engaged in an illicit ship-to-ship transfer of more oil near Malaysia.

Back in December, OFAC penalised  four vessels and six companies due to their involvement in prohibited North Korean coal trade, which contravened UN sanctions. This year, OFAC sanctioned and placed on the Specially Designated Nationals list 14 entities and six vessels for their involvement in trade with Venezuela. The US Department of Justice also brought charges against an individual alleged to have used front companies and false documentation to send money through the US financial system in support of shipments to North Korea.

Screen and monitoring methods

While understandably the prospect of being blacklisted or facing criminal charges and reputational damage is one that organisations wish to avoid, it’s almost impossible for a bank, lender or insurer to be 100% sure that what they have financed or underwritten is compliant. How can financial institutions establish that vessels involved in a trade  have no history of illicit activity that may attract OFAC attention, such as offshore ship-to-ship cargo transfers? Many organisations engaged in international trade will have the response that they don’t have visibility to know who to trust or which vessels may have previously been involved in suspicious or noncompliant  activity.

Organisations need to do their due diligence

While this was once a valid argument, it will no longer suffice and due diligence is now key to mitigating this risk according to trade organisations and P&I clubs, such as The Shipowners’ Club. This means screening all involved parties and vessels effectively, with the help of EU, OFAC, and UN databases. For trading banks, lenders, and charterers the entire ecosystem behind a transaction and shipment needs to be screened.

Despite this, what due diligence really means in this context has been kept somewhat vague by OFAC, with it being relied on as a deterrent instead. The situation is complicated even further by significant policy differences between nations and trading blocs, for instance the EU and the US differ on their approaches to sanctions on Iran.

What is clear however, is that organisations need to be keeping a historical record to ensure that due diligence can be demonstrated. As well as screening the parties to a transaction against reputable databases, financial organisations must screen vessels and their proposed routes as early as possible, using auditable digital solutions to streamline the process.

The role of technology in compliance screening

The unfortunate fact remains that human error is likely to creep into a manual due diligence process, while also being extremely time-consuming. The answer is technology. The right kind of technology will also provide a tamper-proof audit trail to demonstrate to authorities that due diligence has been conducted. Organisations should be alert to histories of infringement but also to the indicators of suspicious activity, such as complex ownership structures, activity in high-risk geographical areas, and reporting gaps in a vessel’s compulsory AIS.

Screening also needs to be comprehensive, covering activities such as the alteration of vessels’ names. Mitigating deceptive shipping practices like this, for example, requires the ability to note a vessel’s characteristics and identify it from its unique IMO number.

It’s vital that AIS and satellite systems are used once a vessel has launched to provide visibility to parties and regulators that the travelling shipment is compliant with sanctions rules. OFAC policy is to look back 24 months and find gaps in the AIS, but it offers little guidance as to what it considers a suspicious gap. For this reason, organisations should also have access to hybrid monitoring technology that includes alternative satellite data, such as Inmarsat, in case AIS transceivers are switched off or malfunction. Hybrid monitoring will prove a vessel was where it claimed to be, even if its AIS is spoofed by another vessel undertaking nefarious activities. The draught of a vessel can also be monitored as an indicator of whether a cargo transfer has occurred during a dark period.

Battling false positives

By being able to quickly analyse detailed databases, the use of technology in screening and monitoring helps reduce the likelihood of false positives. It’s worth remembering that due to tax reasons, some complex ownership structures need not be suspicious. Congestion in transit bottlenecks can also be a valid reason as to why AIS malfunction has taken place.

By leveraging the right technology solutions, all parties involved in a transaction can gain visibility of this information, saving time that otherwise would be spent sifting through documentation or third-party reports. The need to screen and monitor has become vital for all organisations in a global trade supply chain, but in particular for insurers, financial institutions, and lending platforms with exposure to maritime trade.

As sanctions have become more prominent within the management of international relations and potential penalties have increased, taking steps to avoid falling foul of regulators via the use of screening and monitoring technology is vital. Technology enables organisations to capture opportunities that they may have otherwise missed out on due to excessive caution. Legitimate organisations in the trade ecosystem have much to gain from the adoption of advanced screening and monitoring technology, with increased efficiency, risk mitigation, and time savings, just to name a few.

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