The global shipping industry plays a pivotal role in international trade, with an estimated contribution of $3.6 trillion by 2030. While this rapid growth presents vast opportunities, it also exposes shipping firms to significant financial crime risks. As businesses navigate complex global trade networks and increasingly diverse supply chains, understanding the landscape of financial crime and implementing robust mitigation strategies is crucial.

Financial Crime Risks for Shipping Firms

Shipping firms are particularly vulnerable to financial crimes due to their cross-border operations, complex logistics networks, and high transaction volumes. The most pressing risks include money laundering, sanctions evasion, and terrorist financing. To protect their business operations and stay compliant with regulatory requirements, shipping companies must implement comprehensive Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) measures.

Trade-Based Money Laundering (TBML)

Trade-based money laundering (TBML) is one of the most prevalent financial crime risks faced by the shipping industry. Criminals manipulate the trade system to launder illicit funds by disguising illegal activities as legitimate business transactions. There are several methods used to carry out TBML, such as:

• Over-shipment: Sending more goods than declared in the shipping documents to transfer value to the importer.
• Under-shipment: Shipping fewer goods than invoiced, allowing the exporter to retain excess value.
• Over-invoicing: Charging a higher price for goods than their true value.
• Under-invoicing: Selling goods at a price lower than their actual value.

Due to the global nature of the shipping industry, TBML often spans multiple jurisdictions and involves several parties, making it challenging to detect and track. Shipping companies should stay alert for red flags such as complex corporate structures, vague commodity descriptions on invoices, or unusual pricing patterns. According to the Financial Action Task Force (FATF), companies engaged in TBML are often linked to shell companies or use mass registration addresses.

Sanctions Evasion

Another significant risk for shipping firms is sanctions evasion. Governments impose sanctions on countries, entities, and individuals to punish violations of international law. Shipping companies must be vigilant to avoid inadvertently breaching these sanctions, which can lead to severe penalties, both civil and criminal. Sanctions-related concerns include:

• Import and export embargoes: These restrictions prohibit trading specific goods with designated countries or entities.
• Transport sanctions: These involve restrictions on vessels and shipping operators, such as bans on registering or operating specific ships.

A growing concern is the use of “dark fleets” by sanctioned entities, where vessels avoid detection while engaging in illicit trade. Shipping firms must consistently monitor the latest sanctions lists from relevant authorities to remain compliant.

The complexity of the shipping industry further exacerbates these risks. Many vessels operate under the flag of one country, but may be owned by entities based elsewhere. Identifying the ultimate beneficial ownership of a vessel can be difficult, particularly when corporate structures are used to disguise ownership.

Third-Party Risks

Shipping companies rely heavily on third-party vendors and suppliers to complete transactions. These third parties include vessel captains, crewing companies, insurance providers, traders, and more, each potentially presenting risks related to money laundering, terrorist financing, or sanctions evasion. To mitigate these risks, shipping firms must conduct thorough screening and monitoring of these third parties.

Additionally, the shipping industry is susceptible to various forms of fraud, such as misdirected goods, double brokering (where a carrier subcontracts the shipment), and shipping container scams. These fraudulent activities can result in substantial financial losses and disrupt supply chains. To prevent fraud, shipping firms should carefully vet all involved parties and maintain ongoing vigilance.

How to Mitigate Financial Crime Risks

Mitigating financial crime risks in the shipping industry can seem daunting due to the complexity and constantly evolving nature of the regulatory environment. However, with the right tools and strategies in place, shipping companies can effectively protect their operations and remain compliant. Here are some best practices for reducing financial crime risks:

Due Diligence and Risk Assessment

The foundation of any effective AML/CFT strategy is thorough due diligence. Shipping companies must have strong Know Your Customer (KYC) and Know Your Business (KYB) processes in place to verify the identities of customers, suppliers, and partners. This includes gathering and analyzing key information, such as the ultimate beneficial owners (UBOs) of entities. By conducting detailed risk assessments for each business relationship, firms can ensure that their compliance strategies align with the level of risk they face.

Compliance with Local Regulations

Given the cross-border nature of the shipping industry, firms should avoid a one-size-fits-all compliance strategy. Instead, they should tailor their procedures to comply with the regulations of the jurisdictions in which they operate. This ensures that shipping companies can apply the appropriate rules to their AML/CFT screening and monitoring processes. Staying updated on regulatory changes and ensuring compliance across different regions is key to avoiding risks.

Automated Screening and Monitoring

Automating screening and monitoring processes is a highly effective way to reduce compliance costs and mitigate financial crime risks. Shipping firms should leverage screening tools that integrate multiple data sources, including sanctions lists, politically exposed persons (PEPs), and adverse media. Automation allows companies to continuously monitor their partners and customers, helping them detect any changes in risk profiles promptly.

Ongoing Monitoring

Shipping firms must implement continuous monitoring of business relationships to stay alert to any changes that might affect their risk levels. Rather than relying on periodic checks, firms should use automated systems that flag any changes in real-time. This proactive approach ensures that companies can quickly respond to emerging threats, protecting both their reputation and financial interests.

Conclusion: Navigating Financial Crime Risks in the Shipping Sector

The shipping industry faces a variety of financial crime risks, from trade-based money laundering and sanctions evasion to third-party fraud. To protect their operations and stay compliant, shipping firms must implement comprehensive AML/CFT strategies. By conducting thorough due diligence, tailoring compliance efforts to local regulations, and leveraging automated screening and monitoring tools, companies can reduce their exposure to financial crime and safeguard their reputation in an increasingly complex global market.

Related Links

• FATF Guidelines on Trade-Based Money Laundering
• International Maritime Organization (IMO) Sanctions Overview
• UN Security Council Sanctions
• OECD Anti-Bribery and Corruption Resources
• World Customs Organization (WCO) Trade Security

Other FinCrime Central Articles about Sanctions

• Russia’s Tools for Sanctions Evasion: The Digital Ruble and BRICS+ Currency Plan
• How Lax Sanction Controls Lead to $2bn Russian Arms Sales to Saudi Arabia
• Strengthening Maritime Compliance Against Money Laundering and Sanction Evasion
• How AI Revolutionizes the Fight Against Sanctions Evasion in Shipping

Source: ComplyAdvantage