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Unpackaging the 11th Package Part II - the impact on the maritime sector
Released in June 2023, the EU’s 11th Sanctions Package included a significant focus on trade compliance. In this episode, Aneta Klosek, Director of Market Planning for Trade Compliance, LexisNexis Risk Solutions, discusses the goals of these new measures, and what they mean for the 1,200 ports across the EU.
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DISCLAIMER: The information provided in this podcast is for informational purposes only and is not intended to and shall not be used as legal advice. The views and opinions expressed in this podcast are solely those of the speakers and do not necessarily reflect the views or positions of LexisNexis Risk Solutions. LexisNexis Risk Solutions does not warrant that the information provided in this podcast is accurate or error-free.
Hi everyone and welcome back to another episode of the RIGTEC Pulse. A few weeks ago on this show, we discussed the Eleventh Sanctions package, which the EU released late in June. Julia Sochi from Studio Legali Pedavan gave some very interesting insights and today we are joined by our Market Planning Director for Trade Compliance, ineta Klossick. We're going to focus this episode specifically around trade compliance, because there's a very big trade compliance element to this piece. So, ineta, thank you so much for joining us. Ineta, thank you very much for having me, julia, so let's just dive straight in. So, obviously, as I said, we discussed this a little bit with Julia and we talked about the sort of the anti-circumvention measures which were included in this latest package, but there is a really big focus on trade. So I wondered if you could start by giving us an overview of these new regulations regarding trade and, ultimately, what the goal is of those, ineta?
Speaker 2:Yes, absolutely so.
Speaker 2:I'm sure they recap what the regulation is about and what it will cover, and in what scope and shape or form it will be enforced. So the regulation came into force on the 24th of July and the ultimate goal is to create effective sanction tools that enable the prevention of circumvention of sanctions by actors in the trade ecosystem that have bad intentions. It would give the regulator an effective tool to enforce very quickly strict measures such as, for example, bans or like, for example, prohibitions to sell and distribute goods to great countries or those that have previously appeared to be in lucrative stepping stone for sanction evasions, as in like a country that would use as a transit country for goods to be shipped to a sanctioned country. With the ultimate goal at the end, the regulatory update created a greater focus on the trade ecosystem, because they recognize the risk of ports and the role they play in the entire ecosystem, and it pushed further emphasis on corporations and their role in the fight against financial crime and the role of trade and economic sanctions and how closely everything is tied.
Speaker 1:So, touching on that point about ports, in particular ports and shippers, what are some of those practical implications for shippers, port owners, banks, who are involved in the international trade?
Speaker 2:So maybe let's just focus on ports for a second, because it's one of the biggest developments in the regulatory history in relation to trade, probably, and I'd like to touch on two points. The first development I want to point out is the prevention of the abuse of transit rules, as in like so-called false transit, which is one of the most widely used circumvention schemes used by bad actors in that field. So the proposed expansion of the Euro transit ban is focusing on adding certain technology and tech products and aircraft parts that would go to these third countries via Russia, and I do think it's the right step to recognize that this is actually a crucial development here, because it's recognized as a risk and then a big red flag from previous examples, from previous breaches, and to avoid sanctioned circumvention, the ban on transit should include a wide range of sanctioned products, so it wouldn't stop here at aircraft parts and technology, but it will be widened out once we have more clarity what products are affected, and those products will be constantly reviewed. The second recent development from the EU concerning international trade would be focusing more precisely on vessels that engage in illicit shipments of Russian oil. As part of this 11th package, the EU has introduced a mechanism that would require ports to block access to ports that are located in the EU for vessels that are found to engage in deceptive practices such as, for example, ship to ship transfer or switching off their transponder for purposes that are not allowed. There are certain circumstances where ships would be allowed, for safety reasons, to switch off their transponder, especially in waters where there is a higher risk of piracy, but if there is no solid reason to engage in such practice, ports would have the requirement to reject this ship from Anchorage and would also have to go so far as to report this vessel to the authorities.
Speaker 2:So these new measures are illustrative on an increased regulatory scrutiny on international trade, and a variety of export controls and trade sanctions are now in place against Russia, with a focus on particularly energy products and defence capabilities. So regulators seek to crack down on malign actors using such deceptive practices that try to breach these sanctions. So what I wanted to point out is that ship-to-ship transfers and AIS manipulations have long been called out as a red flag in the past and have been adopted by several regulators around the world, but no regulator has actually provided guidance or implemented in their regulation on who would be responsible to do what exactly? And the EU regulator did exactly this. They called out ports as being the gatekeeper of the land and playing a crucial role in that supply chain and in the trade ecosystem, and that ports would have substantial power to prohibit the access of vessels that play the bad game and would therefore cut off that access to the port and cut off that journey of those goods.
Speaker 1:And we're talking about ports in the EU here. So how many ports are we talking about here? How many ports is this going to impact?
Speaker 2:That is correct. Yes, so I mean, because it's obviously the EU regulation. It will focus on any port that is located in the European Union first, but that's not to say that other regulators, as it often happens, will follow suit. So we're talking here right now about the Mediterranean Sea, for example, marks the southern end, while the Baltic and North Sea and Norwegian Sea mark the north end of the sea.
Speaker 2:These water bodies provide a 360 degree opportunity for ship trading, of which Europe consists of over 1200 major and minor ports across such a diverse and rich waterways.
Speaker 2:Three of these Antwerp, rotterdam and Hamburg collectively handle the world's 12% of cargo goods. Rotterdam, for example, has bulk liquid cargo handling of 192 million metric tons. A total throughput of almost 437 million metric tons of cargo also contains about 192 million liquid cargo. But also smaller, less known ports like Bremerhaven, which is based in Germany, or Algerkiras in Spain and Peres in Greece, play a significant role in the shipping ecosystem Alone. In Bremerhaven, for example, out of the 5978 total vessel calls that have been reported in 2020, as much as 60% belong to a container vessels, and this puts things into perspective. You need to know which ports have the highest anchorage of vessels that ship oil or other commodities that are subject to these restrictions and then later, once the regulation will focus more into a wider range of products and goods that will be banned or prohibited from this export and especially transit of the country, then that might also play a huge part in how ports and corporates design their compliance procedures around that.
Speaker 1:I mean, yeah, some of those numbers are huge. So this is going to be a massive, massive change for them. And I guess, from an operational perspective, from a compliance perspective, what action do these ports or port owners need to be taking now? And is it from now, is it today? Do they have time to prepare for this? When does this come into force?
Speaker 2:So they do need to get ready to be able to track vessels that ship oil, first and foremost, because that's the immediate regulatory implication that came into force already on the 24th of July. Then there is also an element to obviously knowing your vessel as an, identifying the vessel, whether it's a sanctioned vessel and whether these vessels may enter the port to begin with, but then, at the same time, it goes a step beyond that and to identify and to practice further due diligence of the operators of the ship as well as of the owners of the ship, which is the second step. Another step which is very crucial is, even though most of the ports will engage in GPS tracking, simply due to the reason to be able to operationally identify vessel routes and how vessels voyage through the sea, and for safety reasons, obviously they need to have that additional layer of sanctioned formation and intelligence to be able to overlay this data on top of the general operational data that they are receiving and to be able to draw conclusions at a holistic level At the same time, when you think about the type of vessels or the type of maritime shippers in the world and what volumes of cargo or volumes of liquid they transport and ship. We're talking here about massive volumes.
Speaker 2:So, while the first step might be referring to the vessel, tracking and suspicious activity, which I personally think is much easier undertaking because for that you need to have the data of the voyage of the vessel and whether it, historically and at any point while it's approaching your port, may behave suspiciously I call it the easier part.
Speaker 2:The harder part will become when ports are literally required to block a vessel because this ship not only engaged in suspicious activity but also may carry goods that might pose even a higher risk for transiting through certain countries. And identifying goods as probably the biggest headache of the entire industry, whether it be banks, whether it be corporates that need to identify, whether it be transportation companies and so on which doesn't only focus any longer on controlled goods, but we're talking here about sanctioned goods, which goes in so many different directions of different products and items and commodities that will cause a real big headache for companies operationally, given on how many million of tons and how many millions of transactions they deal on a daily basis. The biggest shippers in the world deal with as much as 50 million transactions per day that have several data points, that require several processes, that require several workflows and several different decision-making routes. So, yes, we're literally looking here at the tip of the iceberg.
Speaker 1:And probably a bit of a headache initially getting people's heads around these new requirements and I guess the new measures that we're talking about here. It does seem to reflect this is what we've been talking about for a while. There is this increasing focus on increasing importance of this compliance within the shipping and the maritime sector. We're hearing a lot more about not only about sort of sanctions, but about things like trade-based money laundering right Correct.
Speaker 2:I think this is literally the ripple effect that trickles down from one sector to another. Regulators, as well as the industry, slowly recognise that they cannot look at their own industry in a silo but then start looking left, right and centre on what's happening around them and then adopt accordingly. I think, because of the complexity of the trade ecosystem and the supply chain in general, and because there are so many actors involved that have a variety of levels of impact on each other, I think regulators are slowly learning from previous audits and previous breaches, previous enforcements and penalties, and they tend to identify new risk flags and recognise that breaches are often enabled by a number of different compliance failures or lack of measures and financial crime compliance requirements. Realise that classic payments are not the source but a symptom and the actual root cause runs way deeper from the actual financial instruments and the operationalisation of such that thus far they were not aware of. And then trade-based money laundering, for example, recognises that trade is not a point in time transaction but stretches operationally often across many weeks or even months, meaning they have recognised and also implemented and do their requirements that things like behavioural monitoring is required or pattern recognition to recognise whether certain transactions even fit the business model of the business itself and also recognise that in that time of process and while the entire trade transaction is being processed, which may stretch over several weeks that new data is being added or changes are being made and at the same time, regulatory requirements may change also.
Speaker 2:And how many entities have been added recently due to the political unrest in the European Union? Trade-based money laundering also recognises that not only the financial transaction should be in the focus, but also all mechanisms that try to manipulate the situation for a higher gain. For example, while money laundering, as from a compliance perspective, would look at the movement of cash and the potential disguise of its sources, whereas trade-based money laundering includes the facilitation of these practices by falsifying information about the underlying goods, meaning false declaration of the quantity or lying about the value of the goods, which then leads to mis-declaration and so on. Because the data is so inconsistent in that industry and there is literally no standardisation that criminals or those with illicit intent will find those loopholes if the correct procedures or measures are not implemented by the companies.
Speaker 1:So, basically, while you've got okay regulators yes, they're cracking down on oil and gas manufacturers, they're cracking down on banks, the energy sector, financial institutions they're all more affected by these strict regulations. But then there's suddenly this well, not suddenly, but there is a clear understanding that the behaviour of actors within the maritime industry is going to impact all of those other sectors, right? So this is where this regulation is starting to become more and more strict.
Speaker 2:Yeah, definitely. You can see that, even though this regulation doesn't particularly speak about or doesn't give the bank the power to reject the vessel, right as in, it will not require the bank to reject the vessel from a transaction, because the bank can reject the transaction itself to their customer, but they cannot say we reject the vessel and prohibit this vessel to enter the European Union. That's not something that they can do. But, at the same time, this prohibition or this rejection by the port to a vessel will have huge implications to every single trade finance transaction, to every single policy maker as in like insurance policies as well that may be affected by this, and also the operational process of every single corporate that either engages in the same trade or that is involved in the same transaction that involves these goods, which are being transported on the rejected vessel.
Speaker 2:So, even though what's the regulation doesn't target corporates and banks for this directly, it may, though, as it keeps the space in the annex for additional provisions, and that is later to be found out they will be operationally affected, meaning they may not again, they may not need to block a vessel, but they will need to know whether they should engage in that trade finance transaction.
Speaker 2:They should know whether their customer should be engaging with a different shipper, or should maybe instruct their customer to engage a different shipping company or a different transportation company that fulfills the entire transaction for them. So the same goes for corporates itself. While they are not obliged to track vessels for the regulatory reason, they still may want to know if a vessel could get potentially blocked from entering the port, and then they may need to take precautions for the goods that are being shipped. This may impact their investment strategies, this may impact their cost calculations and their financials after all, and they would also need to check if insurance policies for these goods and for the loss of business would still cover, or if it would cover delays of the business if the goods appear to be on a vessel of concern that happens or appears to transport goods that are subject to these prohibitions and these restrictions.
Speaker 1:And so I guess maybe this might be a wide-ranging question, I guess is there any advice, practical guidance that you could give, whether that's to banks, shippers, ports maybe ports in particular going forward, having to navigate, particularly for them that this is all a very new world, what kind of advice would you give to them?
Speaker 2:The advice, first and foremost, is to look at their procedures and whether they have sufficient considerations for any new agile regulation that impact trade operations, and this may take any different shape or form from, obviously do I have the right people? Do they know about the red flags? Do they know about the risks involved? Do I even know where my risk is in my business or what areas of business are affected by increased risk? How do we engage in the trade? But then, first and foremost, obviously, the more the industry digitalizes, the more it opens itself up to bad actors that can hide behind the screen. The less face-to-face transactions happen, the more risk occurs in doing business, especially on the international scale. Knowing where your risk is and having a holistic view of all the different elements of trade transactions and trade operations is crucial to connect the dots between all the different elements of that trade, meaning you not only look at the entities that you deal with directly, but you also look at entities that might be directly or indirectly linked to the entities you're directly dealing with.
Speaker 2:The second discipline is to look at vessels, and how can I make sure, as a company, to at least be aware if the regulation doesn't impact me directly because I'm not required to reject.
Speaker 2:How can I at least make sure that my operations still run smoothly and how can I make sure that I can still account for investments and have my financials in order, should something happen that would impact the transportation of my goods that I'm trading? I would ask myself whether I'm a corporate, a bank, or else I think especially as a port now, because they are obviously mostly affected. Am I prepared to address these requirements that are being proposed by the regulator and in what shape or form, and with the volumes that I'm processing, as in the volumes of transactions that I'm processing here interfere with that process at all? Would that impact the speed of how I can conduct business? Would that impact my SLAs as a company towards my customers, because I now suddenly have to conduct more compliance checks? And, mostly important, which parts of my procedures can I actually automate in order to make space for analytical deep dives that may be required in investigative manners?
Speaker 1:That's brilliant. Thank you so much, Anita. Anita Classic, Market Planning Director for Global Trade Compliance. Thank you so much for joining us on the RIG Tick Pulse today. Thank you very much. And we've got plenty of resources relating to trade compliance. We'll make sure we include a few in the show notes. So that's it for today's episode. We hope you join in again soon.
