In recent months, sanctioned countries such as Iran and Venezuela have reportedly increased their exports of oil, and cargo trackers have noticed increased ship-to-ship (STS) transfers at sea, most commonly off Malaysia, Africa and in the Caribbean.
Vessels involved in STS transfers thus risk unwittingly facilitating unlawful exports and legal repercussions such as seizure of assets and exclusion from the US financial system. This article highlights the primary legal risks of such practices and suggests key steps for members to avoid unwanted repercussions.
How are STS transfers used to evade sanctions?
STS transfers are the transfers of crude oil, petroleum products, liquid bulk chemicals and liquefied gas between tankers while at sea, without the vessel having to call at a port or other facility.
Many STS transfers are legitimate; however, suspicious circumstances such as operations at night and in high-risk areas, anchoring or drifting near sanctioned countries, and missing AIS data should raise immediate concern.
Mitigating legal risks
There are serious consequences from breaching sanctions, and it is paramount that members are aware of these. Non-compliance with sanctions or related regulations may trigger wide-ranging repercussions from authorities and counterparties, jeopardize insurance cover, and expose the party in breach to acute financial- and reputational difficulties. To avoid this, due diligence before, during and after STS operations is paramount.
Local regulations concerning STS operations
Some states, for example Malaysia, require specific permission for anchoring and for conducting STS. There are several examples of the Indonesian Coast Guard detaining and expelling vessels due to unlawful STS operations and lack of required permits, causing arrest of vessels and lengthy delays. A counterparty vessel involved in sanctions breaches may purposefully seek to evade such rules as they increase attention from local authorities.
Hence, when planning STS within a state's maritime zone, it is of paramount importance to ensure that the parties involved comply with all local regulations. We recommend that members check with local agents and correspondents to ensure compliance.
Identity and status of counterparties
It is essential to know who is involved in the STS operation, and whether that party may be subject to sanctions; either through the corporate entity itself, or associated companies, vessels, governmental bodies or involved individuals. Extra caution is recommended if the STS operation is near to sanctioned countries.
Key elements in proper due diligence include:
- Identifying those connected to the STS operation, i.e., counterparty vessel owners, shippers, receivers, and any intermediaries.
- Checking the counterparty vessel against involvement in sanctions breaches. Researchers at the security think tank C4ADS published a report in September 2021 stating that nearly a dozen vessels had used identity theft to evade sanctions, for instance through using false AIS transmissions or setting up fictitious vessel registrations with IMO numbers of non-existent vessels.
- Scrutinizing the corporate structure, control and ownership of all companies involved.
- Recording evidence of proper due diligence procedures in case an issue arises later.
Origin of cargo
Sanctions-evaders frequently use STS transfers to falsify the origin of oil cargo, for instance by using countries close to the transfer location rather than the actual origin.
Key elements to mitigate risk include:
- Check the cargo information and know as much as possible about what is being transferred.
- Pay close attention to Certificates of Origin - unfortunately, fraudulent Certificates of Origin have been used to conceal the origin of cargo from Venezuela or Iran.
- Review all relevant shipping documentation to ensure that the correct details about the cargo, voyage, involved parties, and vessel particulars are recorded.
- If necessary, a more extensive list of load port documents can be requested to verify the origin of the cargo, such as for instance certificate of cleanliness, port logs, ship/shore agreements, ullage reports, the material safety data sheet from the cargo producer, pre-load surveys etc. These documents should be stamped and signed, also by third parties, which may clarify regarding any suspicious activity.
- Has the cargo passed through the custody of any intermediaries before reaching the current vessel? If so, investigate closely who and where.
- Know the destination of the cargo and any intermediate destinations.
Counterparty vessel movements
AIS manipulation is often used by vessels involved in sanctions violations, and therefore we advise members to check carefully the AIS history of their counterparties:
- Check for disabling of AIS, before and during STS transfers.
- Monitor the vessel's movements during and before STS operations to ascertain if there is a history of irregularities in AIS activity.
- Check for AIS history before entering into contracts involving STS transfers.
In addition to sufficient due diligence prior to and during STS transfers, appropriate contract clauses may provide legal and economic protection.
The industry has developed several standard clauses regarding sanctions compliance. For STS operations, charterparty clauses are most relevant, and we recommend considering the wording from for instance BIMCO or Intertanko and adapting it to the specific needs and activities in question.
A good sanctions clause should include a warranty that none of the parties and their associated companies are subject to sanctions. If possible, shipowners may also ask charterers for a warranty that cargo interests, sub-charterers, and their affiliates are not sanctioned.
In addition to warranties directed at counterparties, shipowners may seek protection by obtaining a warranty from charterers that the trade is not sanctioned.
- Clauses should be wide enough to warrant against sanctions directed at specific types of cargo (due to origin or particulars).
- Charterers may be required to warrant that the particular cargo is not sanctioned; corresponding clauses should be inserted into associated contracts (sub-charterparties, sale contracts etc.).
- Warranties provide better protection if they cover the entire performance of the contract (not just when it is concluded).
Rights and limits of sanctions clauses
It is important to consider the rights and limits of sanctions clauses. To avoid being implicated in case of a counterparty becoming subject to sanctions, it is useful to have a right of termination in case of breach of sanctions.
Members are also advised to consider the consequences if sanctions arise during performance of the contract. These will be quite different depending on the trade in question.
- Clauses should regulate when and how shipowners may refuse to complete STS.
- The parties should agree what is to happen to the cargo if sanctions issues arise during operations, including when shipowners may refuse STS and what the consequences should be.
- Right to refuse STS should be triggered in the following circumstances:
- Counterparty vessel owners/beneficial owners are sanctioned.
- Counterparty vessel is sanctioned.
- Counterparty vessel is without AIS for a certain period.
- There are concerns about the cargo origin/destination.
- Given the common connection between illegitimate oil trade and switching off AIS, we would also recommend to consider a clause regulating AIS activity, such as for instance the new BIMCBO AIS clause from July 2021, the aim of which is to allow shipowners and charterers to terminate contracts with any counterparties that switch off AIS for illegitimate reasons.
It is essential to remember that contract clauses will not provide complete protection and should not be relied upon as a guarantee, especially since sanctions warranties are contingent upon the counterparty being able to pay, which sanctions issues may impair. Thus, we emphasize the importance of the actions recommended here to mitigate the legal risks connected with STS operations.