The importance of KYC for ship managers

By: Robert Hodge, General Manager, ITIC

The importance of processes around the topic of Know Your Client (KYC) is growing rapidly. Ship managers must ensure compliance with international regulations and protection against various risks. 

KYC involves due diligence processes to verify the identity, suitability, and risks associated with maintaining business relationships. For ship managers, this includes clients, business partners, and other entities involved in maritime transactions.

It also helps in identifying and mitigating risks such as money laundering, terrorism financing, fraud, bribery, and corruption. This is crucial in the maritime industry, where transactions often involve multiple parties across different jurisdictions.

Verifying the identity and intentions of a party during onboarding can help detect suspicious activities early. KYC is not solely about sanctions. Due diligence in knowing who you are dealing with is a good business practice.

Pre-management survey

Conducting a thorough inspection of a ship before it joins a manager’s fleet is a crucial part of the due diligence process. A recent claim involved a bulk carrier, purchased on an “unseen as-is basis,” transitioned to new management without a pre-management survey. The bulk carrier soon found herself detained due to severe deficiencies, unveiling financial and operational difficulties.

Repair costs, claims, and lost earnings amounting to millions of dollars underlined the value of meticulous ship assessments. The ship’s owner claimed that the new ship manager’s mismanagement caused the high repair costs. However, expert evaluations established that the ship’s condition had been deteriorating prior to the management changeover. As a result, the repairs were necessary to meet regulatory requirements, resulting in the ship not being able to operate for 78 days. The manager was, therefore, not liable for the repair costs.

Following the incident, the owner filed a second claim of US$2 million against the ship manager for lost earnings. Further expert analysis indicated that the off-hire period could have been reduced by 35 days if the ship had undergone a thorough inspection immediately. This would have cut the total claim from US$2 million to about US$1 million. 

Practical Implementation of KYC

Implementing effective KYC procedures involves several key steps. Ship managers should start by identifying all parties involved in a transaction, including shipowners, charterers, and sub-charterers. This includes verifying their identities, understanding their business activities, and assessing their risk profiles.

Various tools and resources, such as third-party databases (e.g., WorldCheck, Orbis), registries, and trade press, can aid in this process. Additionally, ship managers can utilise KYC service providers like Marcura or Windward to enhance their due diligence efforts. The level of due diligence should be tailored to the risk profile of each party, with more rigorous checks for entities in high-risk jurisdictions.

Co-assurance

ITIC requires all ship managers to be co-assured with an International Group P&I Club. IG Clubs are rigorous with their own KYC process. This has meant that some shipowners who have failed in this due diligence process to gain entry to an IG P&I Club have resorted to some fixed premium providers. Therefore, if a ship being accepted into management has fixed premium P&I, it should raise a red flag, prompting enhanced checks to understand the reasons behind it.

Continuous monitoring

Ongoing monitoring of business dealings and transactions is essential, as the status of principals can change. ITIC recently settled a case where a ship manager was caught up in a dispute between a supplier of grabs and an insolvent owner.

The ship manager was supervising the build of two new ships in a Chinese yard and had arranged the purchase of two grabs, assuming they were doing so as agent on behalf of the owner. However, the owner had become insolvent and was no longer in existence. The supplier of the grabs held the ship manager responsible for payment, claiming a breach of warranty of authority. The claim was for the cost of the grabs, US$710,000, plus interest. The matter was eventually heard by a court who found in favour of the supplier. This was appealed, and eventually, the supplier settled at US$420,000. ITIC covered this cost as well as legal fees of US$70,000.

Conclusion

KYC is an indispensable process for ship managers, providing a framework for managing risks, ensuring legal compliance, and protecting their reputation. As the maritime landscape continues to evolve, the importance of KYC will only grow, making it a critical component of successful ship management.