On December 11, 2023, the U.S. Departments of the Treasury, State, Commerce, Homeland Security (DHS), and Justice (DOJ) published a Quint-Seal Compliance Note titled "Know Your Cargo: Reinforcing Best Practices to Ensure the Safe and Compliant Transport of Goods in Maritime and Other Forms of Transportation" (the Compliance Note). The Compliance Note, which was published soon after three entities and three vessels were designated for sanctions stemming from alleged violations of the crude oil and petroleum products price cap (the Price Cap) imposed on Russia, is another sign that U.S. government agencies responsible for enforcing sanctions and export controls are focusing on the maritime shipping industry. Below is an overview of the Compliance Note and some key takeaways to consider.

Echoing previous guidance issued by the government, the Compliance Note warns that "[m]align actors are constantly seeking ways to exploit global supply chains for their benefit, often engaging in sanctions or export control evasion in the process." Such evasion tactics include: 

• Manipulating location or identification data
• Falsifying cargo and vessel documents (e.g., bills of lading, certificates of origin, invoices, packing lists, proof of insurance, and lists of last ports of call)
• Engaging in ship-to-ship transfers
• Undertaking irregular voyages and using abnormal shipping routes
• Making frequently vessel registration changes (i.e., "flag hopping") 
• Using complex ownership or management structures 

The Compliance Note does not break much new ground in highlighting sanctions and export controls evasion red flags, as many of these tactics have been discussed at length in previous advisories, including the Tri-Seal Advisory issued in March 2020 (focusing on the maritime industry, energy and metals sectors, and related communities) and the Treasury's Office of Foreign Assets Control (OFAC) Advisory to the Maritime Petroleum Shipping Community published in September 2019. The Compliance Note also includes many of the same recommendations seen in previous advisories: institutionalizing sanctions and export controls compliance programs; conducting Know Your Customer (KYC) due diligence; using best practices location monitoring and contractual requirements; exercising supply chain due diligence; and engaging in industry-wide information sharing. 

Nonetheless, there are some features that make this Compliance Note distinct. First, this "quint-seal" Compliance Note was issued jointly by five different government agencies, demonstrating increasingly high coordination on sanctions and export controls enforcement across various agencies. Second, having been published several years after maritime shipping has become a more significant focus for enforcement agencies, the Compliance Note includes substantive examples of the kinds of criminal and civil penalties imposed to date by the DOJ, OFAC, and Commerce's Bureau of Industry and Security (BIS) in response to sanctions and export controls evasion within the industry. The Compliance Note cites, for example, the DOJ's first-ever criminal resolution involving "a bareboat charterer of a crude oil tanker carrying contraband Iranian oil and a deferred prosecution agreement with a second company that managed the operations of the vessel" announced on September 8, 2023, noting that the methods used to disguise the nature of the cargo included Automatic Identification System (AIS) spoofing, document fabrication, and use of ship-to-ship transfers. It also cites a civil forfeiture action brought by the DOJ in July 2020 stemming from a scheme to ship Iranian oil via ship-to-ship transfers to Venezuela, where the participants in the scheme altered shipping documents to hide the involvement of sanctioned Iranian parties and used ship-to-ship transfers to take on Iranian oil. The Compliance Note also notes several recent instances in which OFAC and BIS imposed civil penalties where freight forwarders and logistics companies violated sanctions or export controls, often stemming from a failure to identify sanctioned parties or detect a counterparty's use of evasion tactics using readily available information. 

Finally, the latest Compliance Note emphasizes the compliance responsibilities of actors operating in an environment where, in light of various sanctions and export controls-related measures imposed by the government, more compliance risks exist. The Compliance Note states in its introduction: 

To avoid potentially illicit conduct, individuals and entities directly participating in and enabling the global transport of goods — entities like vessel owners, charterers, exporters, managers, brokers, shipping companies, freight forwarders, commodities traders, and financial institutions — must be responsible for assessing their risk profile and implementing rigorous, risk-based internal compliance programs.

Takeaways

• The amount of detailed guidance issued by OFAC and other government agencies over the last several years about sanctions evasion tactics in the maritime shipping sector, coupled with the recent designations of vessels and maritime shipping-related companies and the new types of sanctions- and export controls-related restrictions (including, most notably, the Price Cap) has substantially ratcheted up the risks facing entities that operate in or support the maritime sector and, perhaps more importantly, their compliance expectations. Companies affected by these new risks include insurance providers, vessel maintenance and management companies, ship owners and charterers, financial institutions, and other entities involved in funding and facilitating the transport of cargo.
• The continued focus on the maritime shipping industry is already having significant impact, with many companies adopting increased documentation or attestation requirements that apply to companies in their supply chain and other measures aimed at verifying the accuracy of shipping documentation and the location of vessels involved in cargo shipments. For companies whose operations or supply chains may be near high-risk jurisdictions or involve high-risk cargo, the use of vessel tracking services capable of flagging potential AIS spoofing and manipulation may be appropriate given the government's continued warnings about the prevalence of these sanctions evasion tactics. More broadly, businesses both directly involved in maritime shipping and those dependent on entities in this sector in their business operations should consider whether their existing compliance policies and procedures are adequate in an increasingly high-risk landscape. Such policies and procedures should be continually reviewed and updated to take into account new and changing sanctions and export control risks. 
• The publication of the Compliance Note is a sure sign that more sanctions designations and potential enforcement actions and potential export control restrictions are coming. Such designations or enforcement actions may not exclusively arise in the context of the Price Cap, but could also touch on the longstanding sanctions imposed on Iran and other jurisdictions where the DOJ has been active in pursuing companies involved in sanctions evasion. 

For more information, please contact:

Timothy P. O'Toole, totoole@milchev.com, 202-626-5552

Laura Deegan, ldeegan@milchev.com, 202-626-5942

Manuel Levitt, mlevitt@milchev.com, 202-626-5921

Caroline J. Watson, cwatson@milchev.com, 202-626-6083

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