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In February 2021, Senior General Min Aung Hlaing and other military leaders staged a coup in Myanmar. The Junta, officially called the State Administration Council, detained and charged leaders of the opposition. As a result, massive protests erupted nationwide in the southeast Asia country.

Following the coup, the global community imposed several resolutions and sanctions to prevent responsible parties, or those connected to the military, from accessing the financial system and trading certain goods, such as weapons. This article focuses on the trade of weapons to Myanmar, specifically the actions taken to prevent this activity, current evasion techniques and what firms can do to thwart this.

Key Global Requirements – The United Nations Guiding Principles The United Nations Guiding Principles on Business and Human Rights is a framework that outlines the responsibilities of businesses in respecting human rights. The principles emphasise the need for due diligence, transparency, and accountability in business practices to protect and promote human rights globally.

The United Nations Office on Drugs and Crime (UNODC) Protocol against the Illicit Manufacturing of and Trafficking in Firearms, their Parts, and Components and Ammunition (Firearms Protocol) provides a framework for States to control and regulate illicit arms and arms flows, prevent their diversion into the illegal circuit, facilitate the investigation and prosecution of related offences without hampering legitimate transfers.

As members of the United Nations, countries must implement the Resolutions passed by the United Nations Security Council (UNSC) through their respective laws and adhere to the UNSC Consolidated List to implement sanctions, which usually includes sanctions related to arms embargoes and nuclear-related goods.

However, even with these measures in place, the United Nations Human Rights Council (UNHRC) contends that there are international arms networks linked to human rights violations in Myanmar that have been found operating through several countries, evidencing that regulations are being evaded.

Recent UN findings

The UNHRC shared a report in June 2023 that Myanmar has imported at least USD1 billion worth of arms and related goods to support the military’s domestic arms manufacturing.₁ Five countries have been identified as key facilitation hubs – Russia, China, Singapore, Thailand, and Indonesia for allegedly shipping arms and military-related goods worth at least USD 1 billion to the Myanmar military between February 2021 and December 2022.₂ The article noted that both corporate companies and financial institutions based in these countries have been extensively used for arms dealers’ operations within and outside of the countries. These companies are often one link of the entire arms shipment supply chain.

How does this trade occur?

Various entities have allegedly served as intermediaries for the Myanmar military since the coup. Common methods to evade detection include:

1. Use of front companies as third-party payment providers to secure supplies
2. Use of shell companies or registration of new companies
3. Use of phoenix companies₃
4. Larger military purchases/sales are broken down into smaller transactions to avoid government sanctions enforcement efforts and due diligence by international banks

There are other deceptive shipping practices commonly used including, but not limited to, the following:₄

1. Falsification of documents:
   • Fictious invoices: fake invoices for non-existent goods/services
   • Over-invoicing and/or under-invoicing₅
2. Ship-to-ship transfers to conceal the origin and/or destination of the goods
3. Spoofing where signal identification systems are intentionally disabled to disguise a ship’s movements
4. Voyage irregularities where vessels take unscheduled detours or transit cargo through third countries

What measures have companies implemented todetect trade to sanctioned locations?

Recognising the risks associated with trade finance transactions, maritime companies and financial institutions have carried out various mitigation measures to detect sanctions evasion.

Maritime companies

Maritime companies have been placing more efforts into enhanced due diligence measures to ensure they meet regulatory requirements and are not used as a platform for facilitating illegitimate trade.

Traditionally, due diligence has always been conducted on direct counterparties, but now this obligation has extended to the entire supply chain, where it is vital for companies to execute appropriate due diligence beyond the vessels themselves to include the company, business owners, and ownership fleets.₆

The use of technological tools has become popular to identify counterparties and facilitate ship and container tracking. Commonly used systems include the Global Positioning Systems (GPS) and Automatic Identification Systems (AIS). Ship tracking systems allow for increased safety, visibility, and efficiency within the industry. They enable maritime companies and freight forwarders to be in control of their shipments and locate freight at any point in time. Such technological advancements in maritime trade are key in helping corporations monitor if goods have been shipped to sanctioned countries and allow them to act immediately.

Financial Institutions

With 80% of the world trade being open account trade, banks have a limited visibility of trade transactions that do not use trade finance products. For financial institutions providing financing and other services that facilitate international trade transactions, they serve as the initial line of defence against trade-based money laundering and act as gatekeepers to deter illegal money from entering the global financial system. Through comprehensive due diligence and strong internal controls, financial institutions have been performing enhanced due diligence to monitor trade transactions and assess the parties involved before processing any transfers. Prior to handling a transaction, the financial institutions would have identified and verified the customer as well as understood its business, counterparties, countries of the counterparties and the goods and services transacted, and estimated annual transaction amount and frequency.

Vessel checking can also be conducted by financial institutions to monitor the vessels, especially those associated with higher risk jurisdictions. Good practices by banks would include screening the vessel that is used to transport the underlying goods, the shipping company, and any agents or third parties present in the transaction. Based on a risk-based approach, some banks would also check the previous voyage history of the ship to know if it had stopped at any sanctioned country and check the ports of call of the vessel for the particular transaction flow where possible.

Why is illegal trading activity difficult to prevent and detect?

Despite these measures, there are several reasons why detecting illicit activity can be a challenge for organisations operating in the trading sector. These include, but are not limited to:

1. The identification of dual-use goods can be challenging, and responsibilities are not clearly defined - identification of these items requires a degree of technical knowledge with trained staff. Financial institutions are not explicitly required to identify dual-use goods in trade finance transactions, however, given how proliferation financing has intensified in recent years, it has become an industry best practice to do so.₇
2. Complexity of supply chain - efforts to conduct due diligence to identify companies that are owned by sanctioned individuals and entities are resource-intensive. Ultimate beneficial ownerships are usually masked in layers of corporate structure using shell companies and/or front companies. In addition, tracking the movement of goods via various countries and entities, can be challenging and expose firms to wider sanction risks, such as the EU 11th Sanctions package.
3. Limited visibility - 80% of world trade is conducted on open account terms.₈ In such cases, financial institutions have limited visibility of the trade transactions and will not be able to carry out enhanced due diligence checks.
4. Reliance on third parties - financial institutions rely on the documentation provided by third parties to perform due diligence. Hence, it remains a challenge for the financial institution to manage the risk associated with the legitimacy of documents.
5. Inconsistency of Sanctions - countries that have imposed sanctions since the political coup in Myanmar include the United States, the European Union (EU), the United Kingdom (UK), Canada, and Australia, however the extent of their sanction regimes differs. Faced with differing and rapid changes to sanction regimes, corporates must ensure that they are always compliant with the applicable Myanmar sanctions in their respective jurisdictions.
6. The prevalence of established trafficking routes in Asia - The UNODC has also highlighted that firearms trafficking often uses the same established trafficking routes and circumvention methods as other illicit trafficking.₉ For example, the Golden Triangle region bordering Myanmar, Thailand, and Laos is a key narcotics hub where 113 tonnes of methamphetamine were seized in 2022 alone.₁₀

Looking to the future, what can entities do to reduce the trafficking of weapons to Myanmar?

How can both maritime companies and financial institutions do more to ensure that they prevent trafficking, while keeping costs reasonable? Below is a non-exhaustive list of recommendations:

Maritime companies:

1. Know your supply chain – undertake due diligence on all relevant parties within the supply chain. Understand the trading routes and the ultimate end user of goods to ensure no exposure to parties or countries which contravene sanction requirements.
2. Perform adequate due diligence – identify ownership structures and perform screening. If the ship ownership looks overly complex, is registered under a flag of convenience, or is part of a single ship fleet, take extra steps to manage your risk, such as enhanced due diligence and escalation to senior management.
3. Track container and ship movements – invest in technology to ensure you have adequate visibility over the goods and their transit route. Understand and monitor transit routes flagged as high risk. Look out for voyage irregularities, signal disablement, and physical identification alteration.
4. Know your cargo – move away from reliance purely on HS codes, undertake audits on cargo to ensure documents correctly reflect what is being shipped.
5. Train staff – educate your specialists on how to effectively look out for fraudulent documents, dual use goods, and sanctions exposure.

Financial Institutions:

1. Maintain a strong control framework – ensure controls over trade finance / trade-related transactions are comprehensive and reflect current industry best practices. Deploy continuous training to the different teams in the three lines of defence that perform activities related to trade finance. Conduct internal and external audits to ensure your framework remains fit for purpose.
2. Implement technology to strengthen current controls - for example, utilising machine learning to strengthen transaction monitoring.
3. Update existing typologies – monitor high-risk shipping routes, examples of known sanctions evasion, and build these new typologies into transaction monitoring controls. For example, shipping via the Commonwealth of Independent States (CIS) region, known ship-to-ship transfer locations, flags of convenience.
4. Participate in industry sharing – be actively involved in any initiative related to Public-to- Private or Private-to-Private Partnership to share intelligence to prevent trafficking.
5. Identify and understand the roles of different parties involved in the transaction – make sure the information collected aligns with the customer ’s nature of business. Check that all aspects of the trade make sense economically and logistically. Implement robust customer due diligence processes to identify dual use goods and/or weapons.

Conclusion

As key players in international trade, the maritime and financial industries have a vital role in preventing the illegal trade of weapons. If companies can stop the facilitation and shipment of materials to Myanmar, the impact on the Myanmar military would be significant in the short to medium term. All the parties involved must play a part to ensure they carry out sufficient measures so as not to become a facilitation tool in any part of the supply chain.

* Claire Franklin is Director – Deloitte Forensic. She can be reached at: cfranklin@deloitte.com

Deloitte provides industry-leading audit and assurance, tax and legal, consulting, financial advisory, and risk advisory services to nearly 90% of the Fortune Global 500 and thousands of private companies. Our professionals deliver measurable and lasting results that help reinforce public trust in capital markets, enable clients to transform and thrive, and lead the way toward a stronger economy, a more equitable society and a sustainable world. Building on its 175-plus year history, Deloitte spans more than 150 countries and territories. Learn how Deloitte’s approximately 415,000 people worldwide make an impact that matters at www.deloitte.com

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