Due diligence: The key to long term success in business within Asia-Iran shipping industry
This will uplift the industry as a whole, increase efficiency in the process, attract global investment, and result in improved long-term profits.
September 20, 2017
By Ahmad Alshidiq
The Iran nuclear deal which took effect January 2016, known officially as the Joint Comprehensive Plan of Action (JCPoA), was implemented after United Nations inspectors said that Iran had dismantled a large portion of its nuclear programme. The Iranian economy has grown because of these easing of sanctions and Iran remains one of the last great untapped emerging markets. Now that Iran can return to the oil market, the government hopes to rebuild the country’s energy industry and capture an increased share of the global market by shipping an estimated 300,000 barrels per day. For all parties involved, the continued criminal activity of a few risk sullying the image of an industry working hard to remain transparent and prosperous.
Since the easing of the United Nations’ sanctions on Iran in January 2016, Iran has been making significant efforts to increase trading and business with the rest of the world. Especially within Asia, there remains significant economic potential for growth in pursuing business opportunities with linkages with Iran. Asia is the biggest importer of Iran’s crude oil with the top four countries of China, India, South Korea and Japan, totalling a combined average of 1.60 million barrels per day. Since the sanctions ended, the Iranian government has tried to increase production rapidly to reclaim Iran’s market share, especially in Asian markets. Iran’s shipping industry is one of the main areas which will benefit from the easing of sanctions, as many global companies are increasing their foreign interest and investment in shipping companies and ports within this trade route. However, despite optimism of a corruption-free future within the industry, criminals are still engaging in illicit shipping practices which risk undermining the progress in the industry made to date.
While not an everyday occurrence, as recently as March 2017, Iran was shipping weapons and equipment to Yemen’s Houthi rebels. The Houthi rebels are engaged in a civil war with the Yemeni government. Iran was using cargo ships to deliver these supplies to Yemen either directly or via Somalia, bypassing Western efforts to intercept the shipments. Once arrived at the Yemeni ports, the supplies were transferred from the cargo ships to small fishing boats to complete the final leg of the journey. Policing and enforcement, even if local authorities attempted to interdict, is extremely difficult due to the sheer number of small fishing vessels in these waters.
Reports also indicated that the Islamic Revolutionary Guards Corps (IRGC), under the Iranian military, set up shell companies to facilitate the illegal shipment of weapons and illicit goods. In addition to weapons, the IRGC is suspected of illegally importing other high-profit items such as alcohol, cigarettes and satellite dishes. The IRGC also commandeered some of the commercial ports in Iran to maintain direct control of other illicit activities.
Before the implementation of JCPoA in January 2016, for decades, Iran survived crippling economic sanctions and international isolation. Iran found ways to circumvent and evade sanctions through a host of illegal business dealings, illicit shipping practices and contraband smuggling. For example, Asian buyers of Iranian’s oil paid with their local currency, which avoided the transactions from being registered within the financial systems visible to the United Nations. The funds were then used to buy capital and consumers goods in these Asian countries.
In both instances, illegal modus operandi like forging shipping manifest and bills of lading, and other paperwork in the process, was used to obscure country of origins, and sometimes, destinations. From 2013 to present, criminals continue to find ways to hack the Automatic Identification System (AIS) of shipping vessels to disguise their identities. One of these hacked vessels even entered the water off of eastern Singapore. The AIS, which is a system used to track maritime shipping around the world, remains vulnerable to cyber criminals involved in these same illicit dealings. Despite sanctions being relaxed and the significant potential opportunities everyone can legally pursue, a few recalcitrant parties still engage in these shady practices for monetary gains or other political goals.
Albeit fewer in number when compared to when before sanctions were relaxed, criminal actions of individuals, businesses and/or governments place the improvements in image and transparency made to date in the shipping industry at risk. These criminals operating within the industry deter the crucial foreign investment as required at this time to expand and grow. Executives leading the industry must implement more robust due diligence practices as part of “Know Your Client” (KYC) requirements in evaluating new, and existing, business partners. It is the responsibility of the executives of companies working within this industry to proactively ensure their companies have implemented a framework for checks and balances to best root-out corruption and demonstrate compliance with international law.
While a global problem, executives within shipping companies involved in the Asia-Iran trade routes must more aggressively focus on this problem due to the quickly evolving nature of this emerging market. This will help ensure legitimate companies do not unknowingly become a pawn in shady business dealings by associating with criminal elements. Robust due diligence measures, including investigations and audits, must include any new relationship and also incrementally be incorporated to evaluate existing client relationships. Evaluating representative agents, vendors, suppliers and any international relationships will help reduce the risk of a company unknowingly being involved with a blacklisted or sanctioned foreign government official, state-owned enterprise, or otherwise illicit entity.
The private sector must be the drivers of change to pursue a zero-tolerance, corruption-free working environment which is fully compliant with industry best practices and international law. Working together, this will uplift the industry as a whole, increase efficiency in the process, attract global investment, and ultimately result in improved long-term profits for all who strive to root out the residual corruption remaining in the industry.