Shipping due diligence: more at risk than piracy on the high seas

October 02, 2019 by Mark Dunn

According to the patriotic British song "Rule, Britannia!" originating from the poem by James Thomson, Britannia Rules the Waves.  However Britain last ruled the waves in the early 19th Century, when it had the largest fleet in the world.  Britain's shipping industry has since declined, with ownership of maritime assets more globally distributed.  While no country may 'rule' the seas by fleet size, there are maritime regulations, which in reality make legality at sea much more complicated.  Indeed jurisdiction over ships crossing the seas has long been a subject of debate and controversy and whilst ruling the seas has historically been the desire of many maritime nations, the freedom to pass unhindered across oceans was established in the early 1600s.

Governing the high seas
Since 1958 international law of the high seas has been the subject of an international treaty.  Amongst other important subjects such as piracy and outlawing the transportation of slaves by sea, the 'Convention on the High Seas' clarified rules on flag states.

A flag state is the country where the vessel is licenced or registered.  This governs the inspection, certification and insurance of the ship as well as the specific country law that applies should a vessel be involved in an incident of Admiralty Law.  Since all countries, even those that are landlocked, have the right to be a flag state, there have been incidents of ships being registered under 'flags of convenience' or 'international' – where ship owners register their vessel in a country where regulation is less strict than that of the ship's (or ship owner's) country of origin.

Clouded ownership risks due diligence good practice
Whilst the public might see piracy and bad weather as the primary risks to ships at sea, the reality for large financial institutions such as banks and insurance companies is far more complex. Ownership of ships is a highly complex business that often involves several entities, including the ships registered owner, its operator and often its financier.  Each of these in turn could be made up of a host of different companies from different international territories that may equally have no connection to the ship's flag state.

All of this would matter less if it were not for the critical role that the shipping industry plays in international trade.  Banks and insurance companies often provide the credit or finance to enable this trade to take place through the shipping industry.  Yet the muddled and often confusing footprint of ownership and operation of vessels within the shipping industry can make it extremely difficult to identify the organisations ultimately responsible for an individual ship.  Without an effective due diligence programme these companies are at risk of inadvertently breaching sanctions or financing the movement of components used in the illicit global arms industry, both of which could lead to significant fines as well as huge reputational damage.

A clear source of accurate information
With an industry as vast as shipping, access to accurate and up to date information on the companies, vessels and ports where they operate is essential to building a clear and effective diligence programme.  It is vital to ensure that information trails go beyond the ships themselves and into the companies that own and run them as well as the cargo that they carry.  Whilst the ownership of any particular vessel can seem to involve multiple entities in several countries, those that invest in the industry need to be able to follow the chain of ownership and management to ensure that they remain compliant with international law.

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