False Positives - Not at all Positive

The use of sanctions by the US Government, particularly under the current administration, has proved an immense compliance headache for our sector, with shipping, commodity trading, banking and insurance sectors all having to react quickly to initiatives put in place with little warning. While some industry participants proved somewhat adept at “working around” such issues, the increased surveillance of sanctioned and non-compliant activities, particularly over the last 12 months, has reignited a focus on compliance.

The legitimate concerns of the economic and reputation impacts of being found non-compliant (as discussed in our earlier blog), has resulted in a boom in the provision of compliance software, some basic, some claiming to be state-of-the-art. However, over the same period, there has (perhaps naturally) been an increase in the number of clients reporting false positives generated by such software. Such false positives can be an irritation in stable markets. In the volatility seen over the past six months, false positives can be the difference between securing a profit, or making a loss, from a trade as compliance alerts are investigated further and opportunities are missed.

 

False what?

The nature of false positives we have seen tend to focus on inaccurate definitions of flags/country of registries and corporate affiliations. For a time, Liberia-registered single-ship owning companies were flagged on certain systems as having "Enhanced Country Risk", causing certain banks to withhold payments to or from the owners concerned. With Liberia being one of the most popular jurisdictions for ship owners and operators in the shipping industry, you can imagine the brows raised (and made fairly sweaty) by such a move. Certainly the time and costs of proving such trades were compliant (and tracing responsible people in banking systems), proved a significant irritation to our clients.


Some compliance alerts just seem to be down to a lack of understanding of corporate structures. As a number of major Russian and Chinese commodity traders and shipowners will attest, the sanctioning of a single company in a group does not apply to the whole group (a position often made very explicit in the wording of the OFAC sanction itself – the usual boilerplate being “blocking sanctions do not apply to XXX or other subsidiaries or affiliates, provided that such entities are not owned 50 percent or more in the aggregate by one or more blocked persons or otherwise explicitly designated or identified by OFAC”). However, compliance products have been seen to conflate the two, one even describing a sanctioned entity as being “AKA” an affiliate. Equally, such software can find it a challenge to follow beneficial ownership changes, many of which can be totally legitimate, but others involving sham sales, executed purely to assist the avoidance of sanctions.

Even understanding the sanctions themselves can be problematic. When systems flag everything from sanctions brought against companies by individual US states, to sanctions that only target certain currencies, transactions or commodities, or have a wind-down period, it can take time to establish whether you are on the right side of the law for that specific transaction.

 

Is everything too risky?

Clearly “avoid everything” isn’t practical or desirable, particularly in our sectors, where niche trades and personal relationships enable the vast array of profitable, low profile business to thrive. This is not to say that there is a surfeit of plain vanilla activity being unfairly tagged. Indeed, if anything, we have found the bad actors have doubled-down on the creation of ever more exotic corporate structures and trades (particularly, it seems, in the tanker market) in order to capitalise on the very significant premiums available in dealing with high-risk or sanctioned regimes or companies. In almost every case, these structures would result in zero “hits” on a compliance platform – obviously what happens next comes down to the willingness of the parties concerned to put the reputation and finances of their firm on a “Computer says Yes”.

 

White noise

Sometimes securing accurate picture of corporate structures and Ultimate Beneficial Ownership (UBO) in the shipping and commodity trading industries, where there is such complexity, can be like finding patterns in white noise. It takes experience to build a case quickly enough to make a meaningful impact on how a trade is structured, or whether it takes place at all. The ability to take a fully-informed, and rapid, commercial decision on whether a trade involving complex structures can go ahead has real financial benefits. Equally, the ability to show the presence and implementation of enhanced due diligence to banks or regulatory bodies can assist companies in pushing through transactions which may raise flags on less nuanced systems.

Infospectrum’s global analyst team has spent over 20 years building up the experience to assist its clients in navigating complicated compliance issues. We’d encourage you to get in contact if you have concerns about your current and potential counterparties.

If you are interested in discovering how our expertise can support your organisation with compliance, credit reporting, and risk management, download our KYC Fundamentals booklet now.

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Published on 3 Jul 2020

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