Europe: EU / UK regulatory roundup
A round up of recent regulatory developments in the EU and UK.
On May 14, 2020, following engagement with the private sector, including UK based insurers, the U.S. Government issued new sanctions guidance for international maritime operators. The intent of the guidance is to provide those in the maritime industry, energy and metals sectors with further information and tools to counter current and emerging trends related to illicit shipping and sanctions evasion. The guidance addresses how to tailor appropriate due diligence and sanctions compliance policies/procedures and provides recommendations on how to effectively identify red flags. The guidance, which can be found here, is primarily targeted at ship owners, managers, operators, brokers, ship chandlers, flag registries, port operators, shipping companies, freight forwarders, classification service providers, commodity traders, insurance companies, and financial institutions. Although the guidance does not appear to raise any significant new ideas or commentary, it is a helpful reminder of the US Government’s expectations. We set out five key points to note.
Private sector entities are advised to assess their sanctions risk and implement compliance policies and procedures to address any identified gaps in their compliance programs, especially when operating in or near high-risk areas. Entities should train their employees on how to implement the compliance program, and also apply the program to other related parties, such as subsidiaries, partners and affiliates.
The compliance program should identify to employees the consequences of not complying with sanctions, encourage and incentivize employees to monitor compliance, and provide for third-party audits that test the effectiveness of the program. Additionally, private sector entities are encouraged to require their business counterparts to 1) conduct their activities in a manner consistent with US and United Nations sanctions, as applicable; (2) have sufficient resources in place to ensure execution of, and compliance with, their own sanctions policies; (3) ensure subsidiaries and affiliates comply with the relevant policies, as applicable; (4) have relevant controls in place to monitor automatic identification systems (AIS); (5) have controls in place to screen and assess on boarding or offloading cargo in areas they determine to present a high risk; and (6) have controls to assess authenticity of bills of lading.
AIS manipulation and disruption may indicate potential illicit or sanctionable activities, therefore, entities in the maritime industry may choose to carry out individual risk assessments. Based on the risks identified, entities should research the ship’s history to identify previous AIS manipulation.
Service providers are advised to terminate contracts where there is evidence of manipulating AIS for illegitimate reasons. Additionally, service providers could also consider incorporating contractual language that prohibits transfers of cargo to client vessels that are not broadcasting AIS in accordance with the Safety of Life at Sea (SOLAS), or have AIS history that indicates manipulation or termination for illegitimate reasons.
If a vessel is unable to account for its AIS history that is consistent with SOLAS, then port authorities are advised to consider investigating the underlying activity to ensure that it is not sanctionable. If the activity is determined to be illicit or sanctionable, the port authorities are instructed to consider prohibiting that vessel from entering their port.
Where appropriate, and in addition to risk assessments undertaken, shipowners, managers and charter companies are encouraged to continuously monitor vessels including those leased to third parties. The observation could include supplementing the AIS with a Long Range Identification and Tracking (LRIT) and receiving periodic LRIT signals. Vessel operators should conduct due diligence where ownership of the vessel is transferred between companies controlled by the same beneficial owner for no reason. Shipowners and managers are advised to consider raising awareness of common deceptive practices among vessel operators that conduct ship-to-ship (STS) transfers in areas identified as high-risk.
The guidance identifies successful compliance programs as those which often rely on fostering industry-wide awareness of challenges, threats and risk mitigation measures. The Department of State, OFAC (Office of Foreign Assets Control) and the US Coast Guard recommend industry groups to encourage members to provide relevant information that is consistent with applicable laws and regulations and share it broadly amongst partners, other members and colleagues.
By way of example, when a protection and indemnity club (P&I) insurance company becomes aware of illicit or sanctionable activity or new tactics in sanctions evasion, it may wish to consider notifying other P&I clubs, where appropriate and redact personally identifiable information that cannot be shared with third parties
Reasonable, risk-based due diligence must be conducted. Such due diligence might include maintaining the names, passport ID numbers, address(es), phone number(s), email address(es), and copies of photo identification of each customer’s beneficial owner(s).
Exporters and entities across the maritime supply chain are encouraged to conduct appropriate due diligence to ensure that recipients and counterparties to a transaction are not sending or receiving commodities that may trigger sanctions, such as Iranian petroleum or North Korea-origin coal. They may also consider implementing controls that allow for verification-of-origin and recipient checks for ships that conduct STS transfers, particularly in high-risk areas. Parties should also consider requesting copies of export licenses (where applicable) and complete, accurate shipping documentation, including bills of lading that identify the origin or destination of cargo.
As appropriate, private sector maritime entities are encouraged to review the details of the underlying voyage, including the vessel, cargo, origin, destination and parties to the transaction. In particular, and in line with their internal risk assessment, parties are encouraged to review the relevant documents in order to demonstrate that the underlying goods were delivered to the port listed in the documentation and not diverted in an illicit or sanctions-evading scheme.
We have set out below some key updates in relation to US sanctions and compliance. If you have any queries in relation to the guidance, or sanctions compliance generally, please contact Katie McDougall, David Harris (London), Jeffrey Cottle, Stefan Reisinger or Kim Caine (Washington DC).
On July 16, 2020, the Court of Justice of the European Union (CJEU) published its decision in the landmark case Data Protection Commissioner v Facebook Ireland Ltd, Maximilian Schrems and intervening parties, Case C-311/18 (known as the Schrems II case).
On July 7, 2020, the Commission de Surveillance du Secteur Financier (CSSF) issued an FAQ document on Circular 02/77 concerning the protection of investors in case of NAV calculation errors and the correction of the consequences resulting from non-compliance with the investment rules applicable to undertakings for collective investment (the FAQ).