By Steve Marshall
December 25, 2021
Global trade today presents a myriad of sanctions compliance issues for every participant in the supply chain. Establishing appropriate sanctions compliance programs in financial institutions that are related to global trade continues to be a primary focus of financial regulators.
By contrast, the enforcement of supply chain and shipment of goods compliance is not often seen as front-page news. And when there is news, it focuses extensively on foreign policy objectives of the country originating the sanctions, such as US sanctions against Iran and North Korea, and illicit shipments of goods like oil and coal. There are exceptions, of course, among them the transport of legitimate goods mixed with drug trafficking that resulted in the seizure in 2019 of the MSC Gayane.
Stemming the tide of illicit goods in the supply chain requires sanctions compliance programs (SCP) for the participants that are well defined, enforced and audited. However, the extent of SCP frameworks overall is much smaller outside financial organizations.
The challenge in the supply chain is the significant number of parties that play a role, as shown in Figure 1.
A buyer in the US, for example, needs to assess the risk present in not only the overall chain but also in each link in the chain. A US seller needs to do the same and be concerned about where the goods may ultimately end up. When it comes to sanctions, the effectiveness of the sanctions program for all participants in the supply chain and the government is only as good as the weakest link in the chain.
Further, a buyer may assess the risk of a product purchased coming from a reputable source as reasonable – the manufacturing materials are reputable and not prohibited, and the means of production and shipping do not include forced labor. But the buyer does not know what goods accompany those purchased when the shipment is less than container load (LCL).
Intermixing Illicit and Legitimate Goods
The intermixing of illicit with legitimate goods is a risk issue in the supply chain. Due diligence efforts by the participants, which typically focus on the documented goods being shipped, also need to assess the risk of the introduction of illicit goods that can be piggybacked in supply chain transit. A maritime shipping company could fall victim to unscrupulous characters or transnational criminal organizations (TCOs). The US Department of Justice Drug Enforcement Agency said in March 2021 in 2020 National Drug Threat Assessment Report that such TCOs “exploit the vulnerabilities of maritime commercial cargo containers” to ship illicit goods such as cocaine.
One could argue that the intermixing of legitimate and illicit goods is not the responsibility of a buyer. But the business impact caused by shipping delays while the container with legitimate goods is held for investigation may be significant. The 2019 seizure in Philadelphia of 17.5 tons of cocaine aboard the MSC Gayane is a case in point. US Customs and Border Protection (CBP) estimated the cocaine had a street value of about $1.1 billion, making it the largest seizure of cocaine in its 230-year history.
First, the ship was seized for a month by US Customs. The two-year-old ship, worth an estimated $90 million, is still, as The Wall Street Journal reported, subject to asset forfeiture. An MSC spokesperson said in a statement: “Aside from a small number of containers, which have been held by authorities as part of their ongoing investigations, all cargoes on the MSC Gayane have been trans-shipped to other MSC vessels and sent on to their respective destinations.” However, the report goes on to say that US authorities temporarily removed the carrier from a list of trusted operators that can move goods through security checks more quickly, which negatively impacts MSC’s customers.
The ship was released after the ship’s owners and operators, JP Morgan Asset Management and Mediterranean Shipping Company (MSC), respectively, posted $50 million, including $10 million in a cash surety bond, according to a report by Safety4Sea. This case highlights some impacts, direct and indirect, on the supply chain and related due diligence.
One of the first steps to address compliance issues in the supply chain is to establish a framework. The Framework for OFAC Compliance Commitments calls for management commitment, risk assessment, internal controls, testing and auditing, and training. Another is the Customs Trade Partnership Against Terrorism (CTPAT) Best Practices Framework.
Both call for due diligence or risk assessment of the entire supply chain. These are by no means mutually exclusive efforts. Achieving compliance and effective due diligence under OFAC’s framework can and should incorporate consideration of CTPAT participation on the part of supply chain participants.
Technology also plays an important role. It is not going to be sufficient to only screen counterparties against a sanctions list. Participants in the supply chain need to dig deeper to establish their counterparties’ reputation and the strength and viability of their cyber security and custody programs.
They will also have to look at their overall due diligence processes, including the hiring of employees and contractors to carry out their work. Technological solutions will need to be explored and implemented to effectively gather and analyze the sheer volume of data in the due diligence process.
Due diligence and risk assessments can help determine areas of focus, but they cannot correct the weak link. Action must be taken when it is identified.
Due diligence must take place on the entire chain and on the individual upstream and downstream components. Consideration must be given to the geography, specifically the location of counterparties; the freight consolidation and deconsolidation points; transit routes; products purchased; and the source of raw manufacturing materials.
Due diligence does not stop with information gathered about the participants, products, and routes. It is ongoing. Using a risk-based approach, consideration should be given to include real-time monitoring of the vessel and route through the Automated Identification System (AIS) maritime vessel tracking system. This information, along with more real time updates to the due diligence performed on counterparties, is essential to supply chain risk management.
Attention should be paid to the US Federal Maritime Commission data-sharing initiative and how it can help with not only logistic issues in the supply chain but also compliance issues. You can keep track of discussions of data available to CBP through its Automated Commercial Environment system. Bringing transparency to this data through a shared risk intelligence database would be a significant step forward in managing supply chain risk.
Cohesive Effort Needed
Supply chain risk management is more than simple name screening. Participants in the supply chain must develop, document and implement a supply chain risk management framework. Once it is implemented, performance must be documented and tested. It must consider not only the goods purchased, sold, and knowingly transported but also the risks associated with becoming entangled in a shipment of unknown, perhaps illicit, goods.
Consideration should be given to calling for and participating in industry initiatives to bring about transparency in shipping and supply-chain risk management data. Shared risk intelligence that comes about from available and reliable data will invariably help to mitigate supply chain risks. Of course, available data and any that may come from shared risk intelligence databases require technology for effective analysis.
Steve Marshall is the director of FinScan Advisory Services at Innovative Systems.