IUMI: sanctions and a “dark fleet” circumventing them loom large as marine risks

Sanctions have been a long-term focus for banks and financial services, but are a relatively new headache for the marine industry – and particularly thrust into focus since Russia’s invasion of Ukraine in February 2022.

That was the opening message from Patrick Murphy, partner, Clyde & Co, addressing the International Union of Marine Insurers (IUMI) 2023 conference in Edinburgh on the sanctions topic.

The sanctions focus has put increased onus on the strength of regular Know Your Customer processes and due-diligence work regularly taking place for contracts and transactions for marine insurers and their clients.

Financial sanctions are targeted asset freezes against designated persons and the entities they control, in the UK context relevant sanctions arising from the UK Treasury and the EU.

“It’s an extremely broad definition, that means if you're in a financial contract with someone, you cannot carry on performing that contract, and you certainly can't pay a claim in an insurance context, because that would be providing funds to a designated person,” Murphy said.

Some differences in wordings have grown between UK and EU sanctions in the past 18 months, “with unintended consequences…but they try to stay in step”, he suggested.

“One very important difference when it comes to designated persons is that there is aggregation of ownership in the EU. If you have two different designated persons owning between them, say 25% and 30% of a subsidiary, you aggregate that in the EU, and that subsidiary becomes designated – you don't do that in the UK.”

Divestment of assets has become common for Russian oligarchs, for example, a gift to a spouse. This represents one area of “nuance”, Murphy suggested.

“You have to ask the question about the quality of divestment, whether it's at arm's length, and whether there's residual control. Some of the risk factors you've got to look at are things such as whether it was a transaction at an under value; and is there implied control exercised, because the designated person had some sort of hidden benefit?”

Criminal penalties for breaching sanctions can include prison sentences but also civil penalties.

“Penalties for breaches can be very steep in monetary terms – £1m per transaction or 50% of the value of the breach, whichever is greater. If you've got multiple transactions occurring, for example, or payment of multiple claims,  then you could have serious financial consequences as a result,” Murphy said.

Regulators are open to mitigating circumstances, he suggested. Self-reporting and lower threshold breaches can result in a discount of up to 50% of penalties, he noted.

Trade sanctions, as opposed to financial sanctions, are focused on prohibiting restricting the import and export of “a long list” of categories of goods with Russia – with more consequences for insurers, Murphy noted. In the UK, these are enforced by the Department of Business and Trade’s Export Control Joint Unit.

The most obvious of these is the price cap on Russian oil agreed among the G7 countries,

“It's the responsibility of the trader involved to give an attestation to its counterparties, whether it's the shipper or otherwise, that the underlying trade has been concluded at $60 a barrel [for crude oil], or $100 a barrel [for products].

“The insurance industry is critical to compliance, and it takes these obligations very seriously, and the other parties in the chain are usually reluctant to run the risk of not being covered during the carriage of these goods, so there is evidence that this is working,” Murphy said.

Dark fleet

There is however a significant share of the global tanker fleet that is actively evading the cap.

The legal committee of the UN’s London-headquartered International Maritime Organisation has acknowledged a “dark fleet” of tankers circumventing sanctions – increasing the risks involved of oil spills and collisions.

Sanctions have driven certification providers, engine-makers, and insurers away from those oil carriers caught up in the sanctions, reducing oversight for the ships, cargoes and entities involved.

Michelle Wiese Bockmann, senior analyst, Lloyd’s List Intelligence, classified dark fleet tankers as: aged 15 years or older; anonymously owned or with a corporate structure designed to obfuscate beneficial owner discovery; and engaged in deceptive practices.

Her research indicated 535 tankers, representing 12% of the international trading fleet globally, with an average age of 23 years.

Almost half of the dark fleet (47%) sails under a flag of convenience of Panama, her research suggested. Some 27% of these sanctions-evading ships are managed from Hong Kong or mainland China, 17% from India, and another 15% from the UAE.

“Two in every three tankers that shipped oil from Russia over August were not compliant with the G7 sanctions,” she said.

These trends also raise concerns about money laundering and criminal activity. Issues of accountability and traceability in accidents involving the dark fleet and responsibility for wreck removal, pollution response, ship-to-ship transfers of oil, and for victims all remain unclear.

For instance, about two-thirds of dark fleet tankers have no known protection and indemnity (P&I) insurance protection – the third party liability cover designed, for example, to cover costs of an environmental cleanup in the event of a catastrophic oil spill.

Ilias Tsakiris, chair of IUMI’s ocean hull committee, warned: “There were eight incidents involving sanctioned oil tankers reported in 2022, including the destructive explosion of the Aframax tanker Pablo which caught fire in Malaysian waters in May and left three crew members missing.

“Because this ship was part of the “dark fleet”, salvors were not able to board. Fortunately, there was no other vessel involved but had this been a collision, or a ship-to- ship transfer, it would have been a completely different story. As it stands, the burnt-out wreck remains at anchor and the owners are impossible to contact, leaving the authorities with a significant headache.”

Bockmann warned about the risk of “ship-to-ship transfer hotspots”, where dark fleet tankers congregate in order to transfer their oil cargoes without being observed. Usually in international waters, the list included southeast Malaysia, West Africa, Ceuta near Gibraltar, Kalamata in Greece, Kavkaz in Russia, Yeosu in South Korea, and the mid-Atlantic.

Continually evolving

Any firm hoping that Russia sanctions will be relaxed – or even remain static – is going to be disappointed, according to Dominick Donald, senior advisor at Herminius, and an advisor to the London market’s Joint War Committee, for example.

“War related sanctions are here for at least five years, probably longer. Why? There is no possible outcome to the war to which we'll see Western states relax sanctions,” said Donald.

Dominick’s presentation, focused on shipping’s exposure to the Russia-Ukraine War, emphasised five major geopolitical factors, and one major effect: “a much greater threat of a total loss”.

The contributory factors were: higher geopolitical tension beyond the warzone for the maritime industry; ongoing and evolving sanctions; increased pressure to take a side and difficulty of maintaining neutrality; the risk of shipping becoming a political football; and the evolving role of technology.

Focusing on the sanctions element, he emphasised that legal and compliance departments would continue to need to devote resources to the problem due to sanctions’ evolving nature.

“Sanctions are not going to be static, as we’ve seen in the last 15 months. It’s a lot of work to keep abreast of the changes to sanctions regimes. But that work is going to continue,” he warned.

“Sanctions are a function of politics, and the political balance is always shifting,” he continued. “And they're also going to be shifting, these sanctions are going to be shifting, because Russia is always going to try to get around them by finding loopholes or creating get-arounds.”

Donald added: “And once that happens, if the people imposing the sanctions want the sanctions to remain effective, they have to close off those loopholes. They have to find new ways of achieving the effect that the old sanctions were meant to achieve, but now can't because there's a get-around.”