What do you do when the Bank has a transaction on behalf of a vessel that stopped in a sensitive/sanctioned port?
Let it be clear from the beginning that I am not talking about trade finance.
The international shipping scenery is characterized by the presence of numerous intermediaries that offer different services to vessels that cross international waters and stop in international ports.
Basically, a vessel that arrives in a foreign port cannot do the necessary activities linked to its staying in that port by itself or through its Captain and must work with intermediary companies. These companies receive the necessary amounts from the ship-owner via international wire transfers and offer their services for a commission. To make things even more attractive, ship owners are very often located in offshore territories. 🙂
Besides the ship-owner (Ro “Armator”), the following actors are the most common in this domain:
– ship agents/brokers – they offer administrative services to vessels staying in a port. They may handle the entire servicing of a vessel in a port (they present the necessary documents to the National Authorities in advance so that the vessel can enter the national territorial waters, pay the port taxes, arrange for repairs of the vessel, for the cashing-in of the salaries of the vessel crew, etc.) or just part of this. The ship agent receives the necessary amounts via international wire transfers from the ship-owner and makes all the necessary expenses on behalf of that specific vessel (including cash withdrawals for the salaries and expenses of the vessel crew).
– ship agents that offer bunkering services – they ensure the fuel supply to vessels. They are paid by the ship owners via international wire transfers.
– survey agents – they conduct inspections, surveys or examinations of marine vessels, obtain technical certificates, etc. They are paid by the ship owners via international wire transfers.
– ship repair companies – they offer repair services to vessels. In the Romanian landscape they are most often paid by ship agents which in turn receive the money from the ship owners via international wire transfers. They usually don’t work directly with the ship owners, but there are cases when they have a direct relation.
In this article I am talking about the situation when the bank customers are the a.m. intermediaries, which receive considerable amounts via international wire transfers on behalf of vessels that cross international waters and stop in several international ports during their journeys.
The “fun” of this domain to the Bank lies in:
– Considerable amounts received via international wire transfers, sometimes from offshore territories;
– Depending on its activity, the bank customer can make domestic payments, but also subsequent international transfers on behalf of that vessel (for eg. to pay for a certificate in a different country);
– If the intermediary company must make salary payments to the vessel crew, it will make considerable cash withdrawals (the so-called “cash to master”, representing cash that must be made available to the captain to cover crew wages or other expenses on board the ship);
– These intermediaries can offer services to vessels that are in national ports, but also to vessels that stopped in other ports, depending on their activity domain;
– The amounts routed by these bank customers are on behalf of vessels that have international journeys. In many cases the intermediary company doesn’t have access to the documents regarding the carriage of the vessel, so the bank cannot know what the vessel is carrying and if that carriage can be subject to international sanctions. It can only rely on statements, but not on documents. We all know that the international sanctions regimes prohibit direct and indirect provision of financial services. What if that vessel stopped in a sanctioned port during its journey? Does this make it a sanctioned entity? If the Bank allows a transaction on behalf of such a vessel, can this be considered an “indirect” provision of financial services?
“Fun” becomes “exciting” when:
– The payment order details do not contain the name and the IMO number (a unique identifier) of the vessel on whose behalf the payment is made – thus the vessel is not screened by the bank’s real time transactions monitoring system versus the sanctions lists;
– Correspondent banks refuse to process certain transactions because the vessel on whose behalf they were made stopped in a “sensible” port during its journey.
To this, please add the fact that it is absolutely impossible to monitor all the transactions of a bank customer before they are made. It is impossible and economically unreasonable.
So what should the Bank do?
Many banks consider that vessel tracking is the solution.
There are several useful websites that show you the latest ports in which a vessel stopped:
But, as I already stated, it is impossible to monitor all transactions of a customer and make vessel tracking for all the vessels on whose behalf it receives and makes payment orders.
A new approach
After a period of vessel tracking we tried a different approach, basically starting with a sound Risk Assessment:
1. Thorough documentation on this domain, its particularities and its actors from public documents offered by the Romanian National Administration of Ports and from direct discussions with the branch staff working directly with these customers, so that I fully understood what they do, how they operate and thus what is their expected transactional profile (the results of my efforts are at the beginning of this article);
2. Looking for international guidelines. Fortunately, I found the “Guiding Principles for Sanctions Issues Related to Shipping and Financial Products” which cleared many of my questions like: can a vessel stop in a sanctioned port (yes), should this, solely, prevent a bank from processing a transaction on its behalf (no), is vessel tracking useful in the situation presented in this article (not really), etc.
3. Targeted analysis on the most active customers of the bank working in this domain, so that I could understand their activity and see if their account activity matched their expected transactional profile. The individual analysis was focused on the risks posed from the international sanctions perspective and I made in-depth checks of the vessels and ship owners involved (including vessel tracking, public information, registrations in AML and Sanctions lists).
What I learned from this project?
– In order to apply correct mitigations measures you must first know what you are dealing with. It is therefore clear why even the 1st FATF Recommendation is Risk Assessment (in this case we understood the specificity of this domain, the roles and activities of the intermediaries, what should and should not be rejected based on the sanctions regimes, what were the risks the bank was facing in order to be able to recommend workable, reasonable and covering mitigation measures);
– Specific training on sanctions is necessary for the bank staff dealing with such transactions (not only front-office personnel, but also from the international payment department);
– The Bank should increase awareness to such customers by formally informing them (through the bank website, through letters/notifications) about the sanctions regimes, how dealing with a sanctioned entity can impact them and the UN, EU and OFAC public databases they can access to verify their transactional parties;
– Sometimes, the obvious is right in front of us. You just need information and knowledge to be able to grab it. For example, it took me 2 individual analyses on shipping intermediaries to understand that the most valuable mitigation measure we had in many cases was the fact that those companies were providing services only to vessels that arrived in the Romanian ports. Considering that Romania is a EU and UN member state, it must also respect these sanctions regimes. Therefore, if the Romanian National Authorities allow a vessel to enter its territorial waters, this is in itself a good mitigation measure for the bank to start with.
The subject is too complex to contain all the sides of this problem and all the mitigations measures that could be adopted by the bank (including closing the business relation when the risk is greater than the risk appetite of the Bank). I advise those dealing with such situations to read the Guidelines mentioned above because they contain valuable information.
I only wanted to clear some aspects that took me quite a time to understand and to raise an issue.
Please feel free to contribute with your own experience or with other valuable documents or websites that you found during your researches because there is very little documentation on this sensitive subject.
By Andreea Tampu, ACAMS