Five US agencies publish “Know Your Cargo” compliance note

On December 11, 2023, five US agencies (US Department of the Treasury’s Office of Foreign Assets Control (OFAC); US Department of Commerce’s Bureau of Industry and Security (BIS); US Department of Justice (DOJ); US Department of State’s Directorate of Defense Trade Controls (DDTC); and US Department of Homeland Security’s Homeland Security Investigations (HSI)) published a compliance note on “Know Your Cargo” best practices for the maritime and other transportation industries.

The quint-seal compliance note provides guidance for all companies involved in the global transport of goods—vessel owners, charterers, exporters, managers, brokers, shipping companies, freight forwarders, commodities traders and financial institutions—by highlighting common tactics employed by malign actors, recent enforcement actions taken in response to alleged sanctions and export control violations and steps that companies can take to ensure compliance with these laws. This publication comes just a few weeks after the Price Cap Coalition (comprised of the G7, the EU and Australia) issued its own advisory focused on evasion of the Russian oil price cap and the growing “shadow” trade conducted by sanctioned persons or involving sanctioned cargo, which was the subject of our previous briefing.

Red flags and recent enforcement

The compliance note identifies several red flags for companies involved in cargo trade that may indicate efforts to evade sanctions and export controls. These red flags include:

• Manipulation of location or vessel identification data;
• Falsification of cargo and vessel documents;
• Ship-to-ship transfers at night or conducted in high-risk areas;
• Voyage irregularities and use of abnormal shipping routes that appear to be done without a legitimate reason;
• Frequent registration updates (flag hopping); and
• Obscure ownership structures or frequent changes in ownership.

Recent enforcement actions highlighted in the compliance note reinforce the importance of monitoring for red flags. For example:

• On September 8, 2023, DOJ announced its first-ever criminal resolution against a bareboat charterer allegedly carrying contraband Iranian oil, resulting in three years of corporate probation and a fine of almost US$2.5m for the charterer. In addition, DOJ entered into a deferred prosecution agreement with the company managing the vessel, which agreed to cooperate and transport the Iranian oil (almost one million barrels) to the US at significant expense. The two entities allegedly facilitated violations of US sanctions law by concealing the oil’s Iranian origin using several tactics (including some noted above) such as fabricating shipping records and vessel logs, engaging in unreported ship-to-ship transfers, spoofing AIS transponder information while loading the oil and falsely reporting the vessel’s location and exaggerating the tanker’s depth post-transfer in order to make the tanker appear fully laden. The contraband cargo is now the subject of a civil forfeiture action.
• In July 2020, DOJ filed a civil forfeiture complaint and warrant seeking to forfeit petroleum cargo on board certain vessels en route from Iran to Venezuela, alleging a scheme on behalf of a designated foreign terrorist organization to covertly ship the Iranian oil by altering shipping documents, using a substitute shipper that had changed names multiple times in a two-year period and engaging in ship-to-ship transfers. 
• In 2018, BIS imposed a US$155,000 civil penalty on a logistics company that allegedly exported items to restricted parties in China and Russia. The company allegedly used an abbreviated name for the entity it screened (despite knowing the full name), overrode or ignored red flags that arose during the diligence process and in one instance, did not conduct any screening at all. 
• In 2019, OFAC imposed a US$871,837 civil penalty on a US-based shipping company whose foreign subsidiaries allegedly executed agreements with third parties who nominated blocked Iranian vessels for their shipments, though they allegedly knew that financial institutions had previously blocked earlier payments to the vessels.
• In 2022, OFAC imposed a US$6,131,855 civil penalty against a major international freight forwarding and logistics company for allegedly causing US persons to violate sanctions through the receipt of almost 3,000 payments related to shipments involving blocked persons and North Korea, Iran and Syria. According to OFAC, the company had instructed its non-US affiliates to avoid including the names of sanctioned jurisdictions on invoices, and these payments were processed inadvertently by US financial institutions.

Compliance best practices

The compliance note emphasizes that companies in the maritime and other transportation industries are “strongly advised to know your cargo,” which includes instituting or confirming the existence of appropriate compliance measures that protect against certain evasive practices, especially when doing business in high-risk areas and categories of cargo. Best practices to mitigate the risk of sanctions and export control evasion in these industries include:

• Institutionalization of risk-based sanctions and export control compliance programs;
• Establishment of location monitoring practices and contractual requirements;
• Implementation of robust know your customer due diligence;
• Exercise of risk-based supply chain due diligence; and
• Industry-level information sharing.

With respect to exports subject to the Export Administration Regulations, the compliance note underscores that while the primary responsibility for export compliance rests with the “principal parties in interest” (usually the US seller and the non-US buyer), freight forwarders and other agents acting on behalf of a principal party also must comply with US export controls in relation to such transactions. As intermediaries in the supply chain, freight forwarders represent an area of business requiring additional caution. Robust due diligence programs should consider the entire supply chain; assess transactions, counterparties and third parties; and carefully consider any red flags arising from these analyses. BIS anticipates updating its freight forwarder guidance in the future. 

Key takeaways

The quint-seal compliance note exemplifies the US government’s increased monitoring of, and enforcement against, sanctions and export control evasion. It serves as a cautionary note to companies in the maritime and other transportation industries that as malign actors seek novel ways to exploit the global supply chain, the US government will continue to employ the range of tools at its disposal—including criminal prosecution and civil penalties—to enforce US sanctions and export controls. As the sanctions and export control space continues to evolve, all companies involved in the global transportation of goods (including those involved in funding or otherwise facilitating such trade) should assess their compliance programs to ensure they are sufficiently robust and calibrated to address all relevant sources of risk.

Companies—both US and non-US—involved in global transportation industries should carefully and comprehensively consider their exposure to US sanctions. As demonstrated by recent enforcement actions, non-US persons can face potential civil or criminal liability when their transactions involve a US nexus under the theory that they are “causing” US persons to violate sanctions. Furthermore, even where their transaction has no US nexus whatsoever, non-US companies transacting directly or indirectly with sanctions targets can be exposed to the risk of designation pursuant to executive orders that authorize sanctions for providing material support to blocked persons.

Our team will continue to monitor enforcement and guidance in this space and will publish additional updates as appropriate.