Risk appetite and navigating sanctions compliance

Recently Seatrade Maritime News sat down with North P&I Global Director – Claims, Mike Salthouse, and Director – FD&D and Head of Sustainability, Mark Church, at their Newcastle-upon-Tyne headquarters to try and understand the challenges shipowners face in Russian sanctions compliance and how well geared up they are for the task.

There has been a huge growth in the use of sanctions by governments over the last 5 – 10 years across countries such as Iran and North Korea, and most recently, and wide ranging – Russia. This something shipowners have had to put significant resources into dealing with.

“I think the awareness of sanctions than the amount of resources that members shipowners and operators have had to put into their sanctions compliance has really, really expanded. So, you will see big ship owners now with a team of 2-3-4 people working on compliance and working on sanctions and pretty much nothing else,” Church explains.

Challenges for smaller shipowners

While major owners and operators have the capacity to deploy large teams to work on sanctions that is not the case for smaller companies owning and operating just a few ships. They face the challenge of trying to understand not only the sanctions legislation, but also what it will actually mean in practice. “Having the ability to put in sufficient resource to really get to the bottom of the sanctions, regulations can be difficult. And I don't underestimate at all the difficulties faced by shipowners,” Church explains.

Related:Owners warn against sanctions

Simply working out if the sanctions apply to a particular shipowner based outside the EU for example is not a straightforward task. “If you've got an office in Europe, but you're based in the middle east of the Far East, or you've got some connection with Europe, that might not be clear to start with, then you need to work out whether the UK sanctions impact on what you're doing, then you need to work out if the US sanctions and any other sanctions where you based impact on what you're doing. Having done that analysis, then you may work out actually it's okay for me as a non-EU shipowner to do this particular trade.”

Insurance cover and banking

But even then there are questions on the broader chain of parties involved in the transaction – will insurers provide cover? Will banks process the payments?

Salthouse expands on the issue. “Just because it's lawful for you, it may not be lawful for your insurance to do it. It may not be lawful for your banks to cover it. There's differentiation between what an insurer can insure and what a shipowner can do, even if they're of the same nationality, and it's particularly the case within European Union sanctions.

Related:Sanction effects make it ‘very difficult for insurance contracts to function’

“So, you can sit there say, 'Well its lawful for me to do this trade', we might not find that your banks can't finance it, or your insurance can't provide cover for it. So that in itself is going to be an impediment to you doing it because you prejudice your insurance cover that will have commercial applications.”

An added complexity is that Russian sanctions have targeted oligarchs rather than specific businesses leading to a grey area as to whether it is legal to do business with an entity or not. Church says: “It's not as straightforward as even being able to say, well, I can look at a list of companies and see that this company is sanctioned or not, because if the, if they're controlled by an oligarch who is sanctioned, then there's challenges there.” The challenge of dealing with a mid-sized Russian company will be trying to decide who controls and runs that company, and whether they are sanctioned or not.

To business or not?

With all these complexities in mind should shipowners undertake contracts with Russian companies and what do they need to be aware of?

For some it has simply taken the form of a moral decision not to do business with Russian companies rather than a question of whether it is legal to do so or not. Salthouse comments: “That's the third dynamic on sanctions, with this particular programme which you haven't really seen before i, which is partly just taking a principled position about Russian trade.”

Risk appetite

However, for those looking to continue to do business with Russian entities with the framework of the sanctions regimes it comes down to an appetite for risk and carrying out as many checks as possible. Church says: “It comes down to risk appetite at the end of the day. I mean, there's so many grey areas, and it's very, very, very rare that a sanctions lawyer will be asked a question and we'll come back and say there's no risk involved here, it's fine. Which is obviously the answer that the shipowner wants. But generally, it's a question of degree, and levels of levels of risk.

“And I think all we and others can do is to guide our members on what we think on the on the basis of what we know what the level of risk is.”

Even once the level of risk is determined the best it can be he warns that it will “never be foolproof”. “It's a really messy picture, because you end up with the EU, UK and US all having broadly similar goals, but the precise nature of the legislation, and exactly what sectors, and how the UK and EU and the US are a targeting is different. It's sufficiently different to make it really, really complicated for shipowners to try and navigate their way through,” he warns.

A question of enforcement

And if you do have the misfortune to fall foul of the sanctions, what will happen is question no-one really knows the answer to yet as we are yet to see significant enforcement actions. Salthouse explains: “We’ve just had a raft of legislation with everybody scrambling around to interpret it…but we actually haven't seen any significant enforcement action. Of course from enforcement comes also a sort of clear understanding as to the intent, purpose and the behaviours that are deemed unacceptable. But we’ve just moved so quickly we haven’t got to the enforcement stage.”

Read North P&I's latest sanction update here