This is the second of a three-part series on LNG sanctions evasion and the emerging shadow fleet and focuses on masking of cargo origins and use of fraudulent documentation in shipping.
Sanctions compliance firms have reported growing interest from companies in conducting Russian business and in assessing risks involved in trading, cargo blending and transshipment of sanctioned fuels, all of which could be used to obfuscate LNG cargo origins in the coming months.
“As long as there are compelling incentives to circumvent sanctions, there will be enterprising, resourceful market participants willing to take on the risks of legal prosecution, penalties and reputational damage,” John Driscoll, former oil trader and head of energy consultancy JTD Energy, said.
“LNG is relatively new compared to crude and product trade, but prospect of higher profits will inevitably tempt bolder players to bend the rules,” he added.
Masking the origin of a seaborne cargo has been used for decades to evade regulatory oversight and disguise off-spec fuels to dupe inspectors or produce fraudulent documents for common types of commodity frauds, such as obtaining multiple financing or multiple buyers for the same cargo.
Certificates of Origin, which are generally issued as part of the stack of invoices called Bills of Lading, go through independent inspectors that are easily influenced, and cargos that pass through many locations and storage terminals can lose their original identity in confusing paperwork.
Even customs data of governments have incorrectly registered LNG cargoes passing through transshipments ports like Zeebrugge to have originated from Belgium instead of the country of production, or cargoes passing through the Suez Canal to have come from Egypt.
Driscoll, who has worked on shipments of a range of petroleum products, said the reissuance of Certificates of Origin and related cargo documents is quite common in crude oil and products.
“Legitimate applications may involve volumes blended in tank or on a vessel, breakbulk shipments from larger to smaller vessels or makebulk shipment from smaller to larger vessels. These are driven by economics and logistics,” he said.
“It gets murkier when traders deliberately conceal the origin of a sanctioned cargo using tactics like chartering aging ‘shadow fleet’ tankers, turning off ship responders, transferring volumes via ship-to-ship transfers in remote locations, engaging inspectors and/or authorities to create a new identity for a sanction cargo or simply forging shipping documents,” Driscoll said.
“With sanctioned oil and products, schemes to disguise cargoes could be very elaborate and complex. The paperflow is designed to elude scrutiny and detection from regulators and auditors,” he said, adding that the advent of sophisticated analytics and tracking systems has made it is easier to identify potential violators.
“However, uncovering fraud with irrefutable documentary evidence is more challenging,” Driscoll added.
Deceptive practices
A few years ago, executives pooh-poohed the idea of a dark fleet of LNG carriers as the industry was dominated by large corporations with stringent compliance procedures. But this notion has now been dismissed as the industry becomes more fragmented, and many small and medium sized companies join the supply chain.
Traders like Driscoll said this could mean that the sanctions game between regulators and violators becomes a Whac-A-Mole or a cat and mouse game, including the maritime space.
The International Maritime Organization’s reference to “shadow fleet” or “dark fleet” means ships that are engaged in illegal operations for the purposes of circumventing sanctions, evading compliance with safety or environmental regulations, avoiding insurance costs or engaging in other illegal activities, Karnan Thirupathy, Partner for Kennedys Legal Solutions, said.
“General features of such vessels are that they tend to be older, are flagged in less common “flags of convenience” states, are not insured by the more reputable international insurers and they tend to operate in a manner that avoids port state control and other inspections,” he said.
Additionally, ownership structures tend to be opaquer, and the vessels are often involved in deceptive shipping practices such as manipulating AIS transmissions, flag hopping and falsifying cargo documentation, Thirupathy added.
Byron McKinney, director for trade finance and compliance solutions at S&P Global Market Intelligence, said single ship fleets will also be employed to manage these ships, and they will probably not be grouped into larger fleets, and will likely be owned and managed by newly registered companies with no background in the maritime sector.
“I think the tactics of the LNG shadow fleet will be similar to those on the oil side – aging tankers, owners unknown and domiciled in India or the UAE, flagged with nationalities where regulation is light-touch – and they will identify new ways to circumvent sanctions when delivering cargo,” he said.
The use of a shadow fleet of tankers and longer shipping distances, leading to higher boil-off and shipping costs, squeeze projects margins, and Russian LNG from the Arctic may incur shipping costs as high as $3/MMBtu, which is around three times more compared to projects not under sanctions like Yamal LNG, Sara Pourghorbani, Director, S&P Global Commodity Insights, said in a September report on the long-term prospects of Russian LNG.
Rust buckets
Old ships meant for demolition being reused and cargoes coming under OFAC regulations have traditionally raised challenges for maritime safety and security.
There are examples of fuel oil cargoes that need to be kept heated, or mineral ores that liquefy due to exposure to the atmosphere, coming under dispute and being delayed until they caused the vessel to sink, causing environmental disasters.
This becomes a more serious problem for LNG vessels that require more specialized maintenance and have lesser shelf space.
McKinney said instances of transporting a potentially dangerous commodity in harsh conditions included sanctioned LNG carriers travelling the ice-covered Northern Sea Route without the necessary permits.
