Posted on November 11, 2024
Bion Behdin, chief revenue officer at First AML, highlights how long, complex shipping chains are being exploited for money laundering
Money laundering in the maritime and shipping industry is a significant but often underreported issue due to the sector’s complexity and international scope. With multi-layered and international ownership structures, it has become increasingly susceptible to money laundering.
These operations’ sheer scale and complexity create gaps that bad actors can exploit, obscuring illicit activities across jurisdictions with inconsistent regulatory frameworks. Where transparency is already a challenge, complex shipping operations make hiding the true origins of financial transactions easy.
While regulators work to address these vulnerabilities, many compliance frameworks remain outdated, often relying on manual processes. This leaves organisations exposed to financial crimes that can result in significant fines, operational disruptions, and reputational damage.
As money laundering techniques evolve, the maritime industry must adopt stronger, tech-driven compliance tools and establish more consistent anti-money laundering (AML) regulations. Without these advancements, businesses risk becoming unwitting participants in illegal activities, further complicating global trade and financial systems.
Bion Behdin, chief revenue officer, First AML
A money laundering haven
Maritime trade is inherently a cross-border activity. As it constantly flows between different jurisdictions and regulations, bad actors can exploit loopholes and hide beneficial ownership structures and identities better.
The UK government website outlines a range of evasion practices used to circumvent its financial sanctions. In particular, it summarises the vulnerability of complex ownership structures.
Many global shipping operations, for example, are naturally and legitimately complex due to “the need to balance lawful risk exposures to their assets under regional and international laws”, according to the UK government. However, these structures also allow bad actors to use shell companies and multiple levels of ownership “to disguise the ultimate beneficial owner of cargo or commodities”.
Clearly, without the right customer due diligence and technology to assist, trying to uncover entity structures and identify the ultimate beneficial owner (UBO) of shipments is incredibly challenging. Other deceitful tactics include false flags and flag hopping, where vessels operate under another country’s flag or continually swap them, ships taking irregular routes to mask the final destination of the cargo, and fraudulent documentation.
Further complicating compliance efforts is the shifting nature of roles and responsibilities across the maritime sector.
Beyond the need to scrutinise vessels themselves, shipping companies must consider a broad spectrum of actors when conducting AML and combating the financing of terrorism (CFT) maritime sanctions checks. These range from vessel captains and port authorities to maritime insurers, industry associations, crewing agencies, flag registry administrators, as well as traders and suppliers.
Each entity involved in these transactions adds layers of complexity to compliance, making it vital for organisations to conduct thorough due diligence across all these connections.
An urgent need for enhanced AML regulations
To close regulatory gaps in the maritime sector, there is an urgent need for enhanced AML regulations. It is an inherently high-risk sector and therefore must be joined by more compulsory and robust AML checks.
Enhanced customer due diligence, such as screening individuals or entities against changing sanctions lists and interrogating ownership structures, should be commonplace when onboarding clients in this space.
Companies can also look into an individual or entity’s relationships with third parties. Risk assessments should assess if any high-risk countries are involved in relationships or transactions and whether a company’s AML processes are robust enough to match the complex world of trade and shipping. What’s more, for such an international industry, regulatory bodies must attempt to harmonise their regulations and create a more cohesive structure.
In the maritime sector, before engaging in any business transaction, businesses must verify the identities of their customers, partners, and third-party intermediaries, screening against official sanctions lists like the UK Sanctions List maintained by the Foreign, Commonwealth and Development Office, and the Office of Financial Sanctions Implementation’s Consolidated List.
Without regulatory oversight and consistency from region to region, bad actors can navigate shipments and transactions through different routes with greater ease and mask their money trail.
Implementing robust compliance policies, adopting advanced screening tools, and providing ongoing training programs are essential to empower organisations in identifying and managing risks effectively. Greater collaboration is a key way to mitigate such practices.
The processes for conducting compliance checks are also in need of evolution. Relying on email communication, manual data entry processes, and spreadsheets can mean that data gets missed, lost, or siloed or that processes are not aligned with changing regulations.
Ultimately, it is far more inefficient than using compliance technology. Most importantly, it plays into the hands of bad actors. As they can change tactics frequently and quickly, companies need the latest tech to match this agility.
Adopting a tech-driven compliance regime
Trying to stay compliant with international regulations by bodies like the International Maritime Organisation (IMO) and a multitude of national laws can be an overbearing administrative task. However, AML software can connect to public and corporate registers and global regulations to ensure shipping companies are compliant wherever they operate, helping to create a more holistic compliance regime.
The technology also streamlines and automates manual processes. For example, employees can automatically unwrap and view entity ownership structures and easily identify UBOs. Crucially, this means they can spend more time assessing risk and less time retrieving and inputting data. As data is automatically refreshed and up-to-date, they can respond in real time to changing structures and regulations.
Moreover, using tools like transaction monitoring systems is a highly effective way of spotting suspicious activity and reporting it to the authorities. However, this highlights the issue of accruing an overbuilt tech stack [a collection of technologies that is more complex than necessary] to manage different aspects of AML.
As such, companies should either try to use all-in-one compliance systems or adopt a central system that can seamlessly integrate with other platforms and house all of the relevant data in one location.
For technology to work well, it must be joined by training programmes that show how it can be harnessed to maximise its value – for instance, there’s no point having tech if employees aren’t made aware of the most common red flags and how to report them. A culture of compliance means the whole business is on board with the programme.
An enhanced AML regime
The maritime sector, through complex ownership structures and changing international regulations, provides ample opportunity for money laundering.
Bad actors, who don’t need to deal with regulatory red tape and slow-moving compliance regimes, can stay one step ahead of authorities and exploit gaps in regulations to their advantage.
Such complexity requires a modernity in compliance processes and technology. There is not only a real need for enhanced AML regulations to close these gaps – these new regulations need to be harmonised internationally.
In today’s world, proper due diligence comes from adopting a tech-driven compliance regime. Through streamlined automation and interconnectivity with global data sources, technology gives companies the capabilities to sail through the AML challenges embedded in the sector.
