Listen: Maritime and Trade Talk Episode 23: Deceptive shipping practices

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Presentation

Kristen Hallam

Deceptive shipping practices began to emerge as a topic of interest in 2020 following guidance from the U.S. Treasury Department. Subterfuge shipping has always been an issue, but this proverbial game of cat and mouse has continued to escalate in terms of the complexity of tactics used to circumvent these regulations as well as the industry tools used to identify and combat them.

How are the tactics used in subterfuge shipping activities evolving? And what risks do they pose for businesses and financial institutions. I'm Kristen Hallam, content strategist at S&P Global Market Intelligence. Here to discuss the Maritime state of play research from S&P Global Market Intelligence is my colleague, Jeremy Domballe, a subject matter expert in our Maritime, Trade & Supply Chain Group. Thank you for being here today, Jeremy.

Jeremy Domballe

Thank you for having me.

Question and Answer

Kristen Hallam

Jeremy, could you start by giving us a high-level overview of the maritime state of play reports? How many are there in the series? And what is the focus of each report?

Jeremy Domballe

Of course. So there's 2 within the series at the moment, different topics of interest within risk and compliance. So the first one was surrounding emerging trends being observed for entities operating within the maritime space because we're in a very unique position as a company, being the only one who actually managed the numbering scheme for the registered owners and also entities operating within the maritime space.

We have this unique perspective of those presence, but also those who are intertwined within the individual vessels themselves. So that was the first paper in terms of seeing how things evolved over the last few years. And there are 4 key takeaways that came out of that paper. Some of them was common but being able to actually quantify and was incredibly interesting.

So firstly, we've had a look at the number of companies coming forward for registration drastically increased. We saw that there were a lot of recently founded companies, not necessarily just companies coming forward for registration, but those being very recent in incorporating since 2021, that there was sometimes a commonality in the addresses being given.

So multiple companies setting up shop at the same address. And this behavior of what we describe as single ship fleets. So companies establishing themselves but only harboring single vessels. That first paper went into uncovered these various elements. And then in a different vein, the second paper started to look at AIS or Automatic Identification System, which is a broadcasting technology on board vessels meeting various fields of information.

But within deceptive shipping, does this aspect of possibly manipulating that technology to conduct subterfuge operations. So we've explored in some depth what AIS is, how it gathered the various fields of information, how it's processed and ultimately, how it can in one way or another be utilized to identify anomalies.

Kristen Hallam

And what was the driving force behind putting these reports together?

Jeremy Domballe

We engage a lot with the industry. And a common question that comes up is how are things evolving -- it is -- as you mentioned in the introduction, it is a cat-and-mouse game. This game of chess, where as one player moves the pieces forward, the opposition tries to also move pieces forward. And staying on top of that can be quite challenging.

So the idea behind these papers was to help contextualize these types of tactics and hopefully, in turn, better arm those that require, this visibility in carrying out their due diligence.

Kristen Hallam

What are the deceptive shipping practices identified by the U.S. Treasury's Office of Foreign Asset Control in 2020?

Jeremy Domballe

So in May 2020, there were 7 practices which were identified at that point. Some of them had been discussed beforehand, and it seems to be the case as new deceptive shipping practices come through, they reiterate previous ones and then add new ones along. So...

Kristen Hallam

They get creative.

Jeremy Domballe

They do. They do get creative. Yes. So at that time, there was this notion of AIS manipulation or going dark, which is just turning off the AIS itself. Manipulation of identifiers, particularly in terms of the physical identifiers of vessel, those falsifying cargo and vessel documentation, this notion of transshipment through various vessels or ship-to-ship transfers, voyage irregularities, which kind of encapsulates some other concepts, use of false flags and flag hoping. And then finally, sort of the complexities surrounding ownership of a vessel. So those would be those 7 practices as identified then.

Kristen Hallam

Okay. It seems a few of those, maybe most of those deceptive shipping practices you just described involved manipulating or misrepresenting a ship's identity. Can you tell us a bit about the concept of identity in the maritime world?

Jeremy Domballe

Yes. It's interesting because we don't necessarily perceive it that way, but there's 3 different concepts of identity that come together to paint this picture, which is that of registered identifiers, digital identifiers and physical identifiers. And those translate, not necessarily just to shipping, but even as in individuals in terms of how we come across.

So registered identity is essentially anything on paper legally just describing what is. And then you have digital identity, which is how you're perceived digitally within that sphere. So that can be AIS as an example, information coming through digitally across various fields. And then physical identifiers is what's in the physical sphere what we're actually seeing, so to speak.

So to give an example, if on paper, there's a particular name, then you would expect that to also be visible in the digital sphere and then physically be observed on a vessel itself. So those 3 come together as a tri-factor to paint this picture of identity. But when one of those is out of kilter, out of balance, suddenly, it's not as easy to actually 100% ascertain, is there something possibly wrong or anomalous there. And that's why, as you say that this common theme of mispresenting identity seeps through.

Kristen Hallam

Yes. And you're right. It is similar to us as individuals, too, isn't it? I hadn't really thought of it that way. And where have these deceptive tactics historically been employed?

Jeremy Domballe

So again, this follows sanctions programs mostly. So wherever those have come into force over the decades is where we see some of these playing out. So historically, this would have been surrounding Venezuela, Iran, Syria, and North Korea, so breeding grounds, the tactics might suddenly vary, but ultimately would be in those geographic areas that we would observe them.

Kristen Hallam

And have they spread to other areas more recently?

Jeremy Domballe

Against the backdrop of the conflict between Ukraine and Russia, yes. Notion of the flag hoping, for instance, when the conflict began a lot of vessels reflagged to different registries. And even now in terms of changes and name changes in ownership, manipulating or position manipulation of AIS, we see those also coming through around Russia.

Kristen Hallam

So Jeremy, are there newer tactics that you've been seeing since the sanctions against Russia have come into force? Or is it more variations on the practices that you've already talked about?

Jeremy Domballe

So it's a little bit of both. I feel as though some of these are building up on tactics, which have been previously established with greater sophistication. So manipulation or turning off of AIS was problematic when initially identified. And even in response to that, we started to see anomalous positions coming through beginning of 2021 in certain areas like around Venezuela.

We saw vessels coming into the Caribbean Sea drifting without necessarily interacting with anything. Being seen live and then moving away with updated drafts. Because the emphasis back then was on trying to identify gaps in AIS, they would slip through the cracks so to speak. But looking more today, it's similar but different in some regards because now this notion of position manipulation is far more prominent, particularly in the wider concept of voyage irregularities.

If a vessel is going some way, it's not interacting with anything, but it leaves with an updated draft that's a voyage abnormality, so to speak, because it's done something for that draft to change. And draft for context is how deep the vessel is sitting in the water. So the deeper it sits in the water, you can infer that it's more laden. That’s the Archimedes concept.

So in that regard, yes, and that's why the use of alternative tracking technology is becoming more prominent because although you can manipulate how you come across digitally position-wise, you can't hide from a camera in the sky. So it's similar, but different. It's evolved in that way for that concept. And then changes in ownership reflagging, looking at in terms of P&I clubs and looking at IACS Classifieds usually some of the 2 new ones that came about. Similar but different, the message beforehand was look at varying changes when it comes to the entities tied to ships. So it's still looking at these changes. It's just different fields now, which included, so to speak.

Kristen Hallam

Again, very creative variations and twists on the classics, if you will. So recently, the U.S. Treasuries, OFAC released a secondary advisory with 7 recommended actions for the industry. What types of data does one need to take the actions recommended by OFAC, Jeremy?

Jeremy Domballe

So this was -- this next slide of October, the October advisory during price cap. And so there was 7 concepts within that advisory. Some of them are just repeats of previous tactics, which were described. But the underlying message was essentially undertake proper due diligence. If you cover your basis in terms of those various types of screening and report any concerns, the sort of all-round sentiment being broadcasted.

But there were repeats -- there was a focus on AIS in terms of best practices surrounding AIS, so making sure that vessels are visible and that there's nothing anomalous coming through. There was monitoring of high-risk STS transfers. So before the 11th package of sanctions within EU, there was a lot of transshipment taking place within the Mediterranean Sea.

And so you would have these feeder vessels going to hubs, offloading it to other vessels that will then go to the end destinations of their voyage. There was an emphasis on monitoring these high-risk areas for transshipment activity.

There was requesting of additional documentation to better scrutinize these trades, just to be able to clearly see where are the various price points in that shipment, but also looking at associated P&I insurance for the vessels and establishing if the vessel is classed under IACS member society, which is an International Association of Classification Societies. As many of those vessels operating around Russia had to move away from that, from these associations.

Kristen Hallam

And I guess it's time for the money question. Why should businesses and financial institutions be concerned about deceptive shipping practices?

Jeremy Domballe

Well, that's the money question. As you say, it's penalties and fines as well as reputational damages. So it's -- ultimately, compliance is a small but incredibly important part of the process because if you're caught out, it can be very damaging financially and reputation wise.

So in ensuring that there is proper due diligence processes in place, mitigate some of that exposure and some of that risk. So that's predominantly why. But the other side is it's becoming more common now. These tactics and these technologies are far more sophisticated than they were before. And so it's easier in some ways to slip through the cracks if you don't know what you're looking for. So partnering up with providers such as ourselves, again, helps to mitigate and minimize that risk and exposure.

Kristen Hallam

Well, I think it's time to wrap up our discussion with some key takeaways for our listeners. What would you say are the top 1 or 2 takeaways from our conversation today, Jeremy?

Jeremy Domballe

The underlying message that it is dynamic. The tactics which you observed now might not necessarily be the same as what we might see in the future, being vigilant, I think, is key. And I think partnering with appropriate providers that can help contextualize some of this information is also a key. There's a lot of data out there that can help these processes, but contextualizing that information into something meaningful is also important. So I think those are the 2 takeaways...

Kristen Hallam

Vigilant is always important for businesses, that's for sure. Especially in this global environment. Well, all that's left for me to do is to thank you, Jeremy, for sharing your insights with us today, and thanks to our listeners for tuning in. Two of Jeremy's reports are available on our blog, and you can find the links in the description of this episode.