Stay afloat: The importance of conducting due diligence for ship agents

ITIC knows that ship agents work in a fast-paced environment and often need to make quick decisions before a ship’s call. Commercial pressures can make it tempting to move forward without carrying out basic checks.

In shipping, transactions include parties from different countries, and conducting proper due diligence helps agents spot risks like money laundering, terrorism financing, fraud, bribery, or corruption. This is why skipping these checks can lead to unpaid invoices, and severe regulatory and even criminal penalties. This could be avoided by taking a moment to ask the below three questions:

Question 1: What information is available regarding the ship, parties, and cargo?

When considering a ship appointment, especially with a new principal, it is important to gather information beyond the standard checklist. This not only includes the principal and the ship information, but also all other parties involved, such as charterers and cargo interests, as well as the cargo itself.  Agents can subscribe to third-party databases such as Lloyd’s List Intelligence, World Check, or Orbis to identify whether any parties are subject to sanctions. Providing services to a sanctioned entity, ship or in a sanctioned trade can have serious consequences, which vary by jurisdiction. For example, EU restrictive measures adopted in response to Russia’s invasion of Ukraine have prohibited listed ships from accessing EU ports or receiving maritime services. Failure by ship agents to adhere to these prohibitions could expose them to significant administrative penalties, including fines and suspension of authorised activities.

Besides checking for potential sanctions, agents could also check the ships available records on these databases. These can reveal ownership structures, recent movements, flag history, port call records, and any incidents. For example, if the ship is arriving with mechanical issues, agents should proceed with caution. Depending on the instructions provided, such issues can lead to delays or liabilities for port dues.

The ship should also ideally be insured with a club within the International Group (IG P&I Club). These clubs are reputable and financially secure. For example, obtaining a letter of undertaking (LOU), is often required when settling claims without immediate cash payment to the agent, and is easier if the ship is covered by an IG P&I Club.

Question 2: Who is the principal?

It is not unusual for there to be confusion about the principal at the time of appointment.

The agency appointment should be clearly identifiable, usually in the form of an email from the principal. Even if the appointment is agreed by phone, written confirmation is strongly recommended.

The party issuing instructions is not always the ultimate principal, they may simply be representing the entity requiring services. When invoices remain unpaid, identifying the true legal debtor becomes critical, and this should be clear from the outset.

Agents should establish whether they are acting on behalf of the owner or the charterer. If the principal is the charterer, the owner should also be identified, as charterers may not have full authority over all matters affecting the ship. If the appointment comes from a charterer, the agent should check whether the owner has appointed a protecting agent. Without one, the agent acting for the charterer may, in legal terms, be considered the agent for the ship itself, potentially assuming liability for unpaid port charges or damages.

Agents should also be cautious if the principal named looks like an offshore company. In the event of a debt collection claim, tracing the true principal before pursuing them can be time-consuming and costly, sometimes exceeding the value of the outstanding invoice.

Question 3: What are the payment arrangements?

Before accepting the appointment, the agent should clarify who will be responsible for paying their fees and the costs of any third-party services arranged on behalf of the principal.

Is the appointing party signing off “as agent”? The agent should then ask who appointed them and who will pay the bill. If this information is not provided, this might be a sign that payment may not be straightforward and should be investigated through internet searches. This is important for sanctions checking as well. Should the principal have outstanding debts, the agent could become involved in a ship arrest.

For new principals, the prefunding should be 100% of anticipated costs. It should be clearly stated in writing, both in the email and the pro forma disbursement account (PDA), that the PDA does not represent final costs and is just an estimate. All rates, especially higher weekend rates should be clearly stated. Disputes over the final disbursement account (FDA) are common, so taking these extra steps provides some protection. Agents should also refuse requests for FDAs to be split between charterers and owners; the principal should pay everything and then seek contribution from their counterpart.

If there are still concerns about the principal’s identity or financial standing after completing these steps, ITIC recommends declining the appointment without hesitation. Even one problematic appointment can result in significant liability and financial loss.