The Registry Information Sharing Compact is a major step forward in sanctions enforcement

On 21 February 2020 details were first published of an historic and unprecedented information-sharing agreement among the world’s three biggest open shipping registries – Panama, Marshall Islands and Liberia. The Registry Information Sharing Compact (RISC) creates a process for flag states to notify each other if they de-register, or deny registration to, a merchant ship on suspicion that it is in breach of sanctions. Now joined by four smaller registries, with more predicted to follow, the new Memorandum of Understanding is a communications channel allowing flag registries to tip each other off if their Know-Your-Customer due diligence work suggests a violation of UN Security Council Resolutions. This is the first agreement of its kind, and a significant step toward the goal of effective implementation of sanctions.1,2.

In an environment in which ship registries, particularly the open registries (those flag states which do not require ship owners to be a national or resident of the state), compete against each other for business, such collaboration and mutual support follows the example set by other key branches in the maritime sector, such as the International Group of P&I clubs.
It is worth examining how RISC may bring about benefits to those registries that belong and contribute to it; to the shipping industry’s broader efforts to comply with sanctions; and what impact it may have on sanctioned trade, particularly that assessed to fund North Korea’s nuclear and missile programmes.

Specifically, the sharing agreement answers, or partially answers, the requirement laid out in UNSC 2321, adopted by the UN Security Council on 30 November 2016 in response to a North Korean nuclear test two months earlier. In Paragraph 24 the Council “decides that all Member States shall de-register any vessel that is owned, controlled, or operated by the DPRK, and further decides that Member States shall not register any such vessel that has been de-registered by another Member State pursuant to this paragraph”. Implicit in this are requirements for due diligence and information sharing. Yet until now, no formal mechanism has existed to support the information-sharing element.

In theory at least, RISC goes some way towards fixing this problem. Merchant ships suspected of being controlled by, or working for, a country subject to sanctions (such as North Korea) will find it harder to obtain a flag (from RISC flag states at least). RISC members will no longer have to rely solely on their own due diligence systems or hope that the ship’s owners would voluntarily declare that they had been denied a flag elsewhere.

Much remains to be clarified on how this new information-sharing mechanism works, but clearly it needs to have the following characteristics: it ideally includes as many international ship registries as possible, to create a united front; it should be fast – responsive enough to defeat applications made to multiple registries in parallel or in quick succession; and it needs to operate on a ‘pull’ as well as a ‘push’ basis, so that members can request information as well as receive tip-offs other members choose to circulate.

Improved Information-Sharing
Increasing the membership should take into account that most open registries are much smaller than RISC’s three founding members, Panama, Marshall Islands and Liberia, which together flag 41.8% of the world’s merchant shipping tonnage. As of March 2020, at least four other registries had joined: St Kitts and Nevis; Comoros, Honduras and Palau34. Such an arrangement clearly benefits from widening its membership – there is more information to share, and a greater percentage of the market is encompassed. However, market share is perhaps not the most helpful metric, as it is often the smaller registries whose ships most regularly feature in UN reporting on sanctions breaches. The March 2019 UN Panel of Experts report on North Korea, for instance, describes two cases involving each of the relatively small flag states of Sierra Leone and Togo, compared to two involving the far larger Panamanian registry, and none involving either Liberia or Marshall Islands.5 This suggests that the RISC agreement, while it has been set up by those registries more able or willing to resource sanctions compliance work, would perhaps be of greatest benefit to those (smaller) registries more vulnerable to exploitation by North Korean sanctions evasion networks. The current criteria for joining the agreement are not clear, but it is evidently in the interest of effective sanctions enforcement for the most exposed registries to be included, even if they cannot contribute many resources to it.

Furthermore, the shared data would be of benefit not only to open registries, but to other practitioners across the merchant shipping sector. Firstly, it is not just open registries, but all flag states, that are at risk. As the cases of the Vietnamese-flagged Viet Tin 01 (IMO 8508838, which delivered petroleum products to North Korea in 2018-2019) and the Russian-flagged Patriot (IMO 9003550, which conducted a ship-to-ship transfer of petroleum product to the Wan Heng 11) clearly illustrate, the use of entities in non-sanctioned countries to conceal sanctioned activity is a risk to all flag states, not just those that operate open registries.6 Beyond flag states, the IMO, the UN Panels of Experts, and risk management and compliance teams across the industry would all find this information directly relevant to their work.

This begs the question of what steps might be required to make the data more widely sharable. Currently, sharing will understandably occur only on a confidential basis. It may be feasible to strip off some of the more sensitive and proprietary information, such as the source of the tip-off, or the date of the alleged offence, but it is hard to see what trade-off there would be for the registries going out of their way to do that. A harder problem still is the threshold for reporting. Risk management judgements are commonly based on degrees of suspicion, aggregations of concerns, seldom on clear breaches of sanctions. To release such suspicions beyond the strict confines of the agreement’s members would potentially open the door to appeals, even legal action. For RISC to benefit the industry as a whole, the challenge for the RISC information sharing system is to make information available to any users that need it, without compromising those that supply it.

Reputation of Registries
For registries it may be about maintaining the reputation and integrity of their brand. For others, it is about forcing North Korea to abandon its current path and negotiate. If registries are primarily motivated by commercial and reputational concerns, rather than by any desire to have an impact on North Korea’s WMD programs (and it is clear from the article referenced above that the Palau registry sees its reputation enhanced by belonging to the group), this should in no way dismay governments, international bodies or NGOs concerned with sanctions enforcement. On the contrary, RISC represents an area where the interests of sanctions enforcement and shipping registries align, a happy convergence of political and commercial interests. Whilst there has always been a theoretical risk to the reputation of flag states should they provide services to sanctions evaders (for instance through removal from port state control whitelists, or through being named in UN reporting) such damage has appeared minimal in practice. RISC may change that, by offering substantial reputational benefit to members, and corresponding risks to non-members.

For non-members, being outside the club will increasingly become a disadvantage, particularly as membership grows. UN reporting suggests that sanctions evaders flag predominantly with open registries. Those outside RISC may therefore become increasingly exposed to sanctions evasion, as evaders’ options narrow. RISC will create an increasingly uncomfortable environment for those registries that do not perform effective sanctions due diligence. They have two options: improve practices and join the club; or remain outside, living off increasingly disreputable business.

For RISC to enhance its members’ reputations more effectively it needs to become more widely recognised. The International Chamber of Shipping publishes an annual Flag State Performance Table, in which the world’s flag states (open and closed registries alike) are measured against criteria such as whether they have ratified maritime conventions such as SOLAS747,8. Until now, no metric has existed for judging a flag state’s performance in respect of sanctions. RISC is the first such metric. Other sanctions-related metrics spring to mind: whether the flag state conducts sanctions compliance due diligence on its existing and prospective clients, or whether the flag state makes use of screening and tracking tools. This may be the first sign of a world in which maritime industry practitioners can eschew flag registries that expose them to sanctions-related risk. Finance and insurance sectors may opt to provide services only to vessels flagged to a whitelist of countries.

Impact on North Korea and its weapons programmes
An important proof of RISC’s effectiveness will be the impact on the illicit trade that resources North Korea’s nuclear and ballistic missile programmes. A direct consequence is likely to be that sanctions evaders are driven towards registries not in the compact. Such registries should expect their exposure to increase, and should seek ways, if not to join RISC, then at least to institute due diligence practices.

Reporting suggests that North Korea has responded to the imposition of sanctions by seeking to evade them rather than by complying with them. According to UN reporting from August 2019, evasion had allowed North Korea to exceed its annual cap on petroleum imports by the end of April.9 Coal exports, too, have flourished: one member state reported to the UN Panel of Experts that North Korea had exported 930,000 tonnes of coal during the first four months of 2019, despite a total ban.10 Tactics described include the use of front companies, transfer of cargoes at sea, deactivation of ships’ transponders to conceal their whereabouts, and the use of false documentation. This suggests that we should expect new evasion tactics to emerge that will help North Korea to register ships with RISC member registries, conscious though these may be of compliance. Specifically, we are likely to see the increased use of complicit overseas companies and individuals never-before-linked to North Korea and other sanctioned countries.

There are signs that North Korea is attempting to avoid the flag state system altogether. Several of the ships on the UN list of vessels prohibited from port entry now appear as “Flag Unknown” in maritime databases that use IMO data11.The Forever Lucky (IMO No. 9003653), the Lucky Star (IMO No. 7942843) the Oriental Treasure (IMO No. 9115028) and the Hua Fu (IMO No. 9020003) are other examples of ships reported for involvement in sanctions evasion that now appear to be stateless (whereby no flag state has reported to IMO that it has taken them on). This, along with deactivation and manipulation of the onboard Automatic Identification System (AIS) contributes to the “phantom fleet” recently described by RUSI. 12
Ultimately if the cargo can be de-linked from North Korea, evasion will succeed. If RISC protects diligent flag registries from exposure to North Korea, it may not help attempts to use legitimate shippers by falsifying goods’ origin or destination. The enforcement community will need to be alert to a risk potentially heightened by the introduction of RISC, namely the displacement of North Korean illicit trade to other carriers. Such moves would presumably rely on a cadre of complicit brokers based outside North Korea – work going forward must be to identify and publish these.

Source: By Steve Osborne, King’s College London *
*The views expressed hereby are of the author’s and do not necessarily represent or reflect the views of Hellenic Shipping News Worldwide (www.hellenicshippingnews.com).