Over the course of decades of work with clients across diverse sectors whose businesses rely heavily on global supply chains, Kroll has noted that many commercial vessels have a heightened level of reputational risk associated with them. In fact, recent in-house analysis has found significant numbers of vessels that are beneficially owned or controlled by politically exposed persons (PEPs). Others are controlled by state-owned enterprises (SOEs), which many banks and financial institutions consider to represent higher levels of risk in transactions.
While the number of vessels and fleets subject to international sanctions is relatively small and easy to identify, there are many more that may fall outside an organization’s risk appetite, possible preventing organizations from doing business with certain fleets or vessels. For example, some U.S. organizations’ policies prohibit the use of vessels that have exposure to Iranian ports.
Bribery and corruption are also endemic issues in the maritime sector, as the industry often relies on commission payments and broker’s fees to facilitate engagements. In some parts of the world, these practices are open to abuse, and Kroll has uncovered several cases of bribery, kickback schemes, and corruption.
These risks can be heightened when a vessel operates in a remote or unfamiliar geography or is registered in one of the many jurisdictions where registers are non-transparent and poorly maintained. Given the multifaceted and insular nature of the maritime industry, standard due diligence on vessels and their related parties may not reveal ties to governments, entities, and individuals that are sanctioned.
As such, it is essential for shipping and logistics organizations to establish and implement a risk-based and tailored approach to vessel due diligence. Based on our experience, we suggest five best practices when shipping and logistics organizations are developing due diligence and compliance programs for onboarding and chartering vessels:
1. Take leadership
According to a 2016 survey of 267 ethics and compliance professionals conducted by Kroll and the Ethisphere Institute, respondents who reported high levels of engagement by leadership in their anti-corruption programs were more likely to express confidence in their ability to detect misconduct in relationships that involve third parties. It is important for leadership at shipping and logistics organizations to support and publicly communicate the organization's commitment to a culture of transparency, especially in regards to partnering with state-owned shipping companies.
2. Use a risk-based and tailored approach
Completing due diligence on vessels can be daunting, especially when your business needs a new partner as quickly as the world of shipping flows. How do you prioritize resources? An effective risk assessment program is the backbone of a strong compliance organization and involves recognizing potential risk factors at the early stages of evaluating new vessels. The goal is to be able to provide a unique risk profile/score based on the risk assessment for each vessel and have policies and procedures in place to act on that information, but to also be adaptable to the demands of business.
Questions to consider when establishing a meaningful risk assessment program for vessels include:
- Who are they? Identify and verify the identity of owners of vessels and the jurisdictions where they are resident and operate.
- What ties do they maintain with others? Look beyond your point of contact and consider business, political, and other relationships that prospective shipping companies maintain.
- When can you use them? Establish their location with manageable AIS data.
- Where have they been? Evaluate the sanction-related risk of their operations and track their movements.
- Why do you need them? Ascertain the nature and purpose of the relationship.
To properly build and implement effective risk-scoring programs, it can be helpful to align with a specialized vendor, such as Kroll, who can advise on the development of a compliance program and best practices for assessing maritime-related risks.
3. Develop a governance program that incorporates clear and actionable policies and procedures
A governance program should be structured to facilitate best practices for vetting and onboarding vessels. A strong governance program would also seek to lay the foundation for consistent due diligence, screening, and approval processes prior to chartering vessels or otherwise engaging with a shipping company.
The goal is to establish guidance on the specific circumstances in which your shipping and logistics organization will engage with new vessels. For example, you may consider outlining parameters for when a new vessel needs to be chartered, as well as guiding principles and controls around how quickly a vessel can be approved. Likewise, you may want to predetermine the heightened levels of risk, whether they be a single charter or as a subcontractor, that would trigger more extensive due diligence.
4. Establish a process for continued monitoring
Assessing risk at the beginning of a relationship allows you to make informed choices about whether or not to engage with a vessel, or how best to engage according to your organization's policies and procedures. However, initial risk-based screening and the subsequent decisions you make based on these findings do not negate the need to undertake an ongoing and routine review of your vessels. The parameters described above are subject to change and, for that reason, you should aim to keep a pulse on the risk profile of your vessels.
Technology-enabled solutions like the Kroll Compliance Portal can help maintain an ongoing screen of vessels and alert you when a vessel’s risk profile changes, allowing you to reassess the relationship. This kind of maintenance due diligence or risk monitoring can be automated so as to help your shipping and logistics organization save time and resources.
5. Invest in the future, be prepared for the worst
Key shipping relationships can be controlled and standardized to an extent through the contracting process. Many organizations insert audit rights and other clauses into their contract terms and conditions to ensure appropriate levels of governance are maintained at the contractor organization. Additionally, they must also ensure that their own ABC policies and procedures are fit for purpose and clearly communicated. This can be challenging to execute across a sometimes vast and mobile shipping network but this upfront preparation helps ensure your company stays mobile.
Should an issue arise, stakeholders expect a rapid response to a crisis, and many organizations now rely on Kroll as their first responders. Kroll’s global investigations team not only has experience in conducting complex supply chain audits as they also have experience handling FCPA and bribery investigations, and responding to whistleblower allegations.
Vessel compliance and due diligence programs are a commitment in supporting not only your central mission, but also your organization’s ongoing ability to carry out that mission. Ultimately, a strong risk-based due diligence program can help ensure your shipping and logistics organization “knows its vessels” and feels comfortable having a relationship with them. Furthermore, should an issue arise, it’s important that your company be prepared to respond swiftly and efficiently.