PIRATE FISHING, SLAVERY and THIRD PARTY RISK by Valerie Farabee

EXPERT TALK

PIRATE FISHING, SLAVERY AND THIRD PARTY RISK by Valerie Farabee

There is growing international concern about the emergence of slavery In 2015 the Maluku chain in the Arafura Sea was a hotbed of illegal and environmental crimes in supply chains. These are multibillion-dollar fishing, environmental crime, and slavery. The waters are vast, and the illegal trades that are attracting a great deal of attention from lawmakers island of Benjina within the chain is an isolated spot with very little and the media. For organizations with a large network of suppliers, the connection to the outside world. A cell phone tower was only recently challenge of complying with new legislation targeting these crimes is installed there in early 2015. Weather and sea conditions make it difficult significant. To simplify supplier due diligence and supply chain assurance, to get to the island for most of the year, and the isolation potentially in 2015 Thomson Reuters added a new specialist research unit for creates a perfect environment for criminal activities, including chaining World-Check focused on trafficking, which is already showing some unwilling workers in a cage in the island’s one office complex.2 startling results. For example, a recent Associated Press investigation1 of slave-caught fish Figure 2: Exposed regions and industries from a supply chain risk standpoint, in the international food supply chain quickly drew World-Check attention reflected in World-Check data. to a flurry of foreign-owned companies flagged by Indonesia for illegal, Indonesia: Fisheries, fish processing units, fish transporting units unreported, and unregulated (IUU) fishing and other crimes in the Arafura (vessels), shipping companies, vessel owners, and vessel Sea. A search on one of the companies that had its license revoked traced operators. ownership back to a family-owned business in China. Another search Thailand: Fisheries, fish processing units, fish transporting units revealed that same company owned a number of other local companies (vessels), shipping companies, vessel owners, and vessel cited for IUU fishing, illegal transshipment at sea, and falsification of operators. Researchers found one shipping company directly documents. These red flags led to an exhaustive search that has resulted supplied slave-caught fish to a Politically Exposed Person in nearly 700 new profiles in World-Check related to environmental (PEP)-operated (and other) major global food distributors. crime and forced labor. China: Fish markets, corporate fish buyers, restaurants, pet food Research that started with a single article led to a veritable sea of suppliers, shipping companies, shareholders, vessel owners, open-source data relating to the Arafura shelf, with network connections vessel operators. The state where there is state-invested interest. extending from a small region in Indonesia outward to the global International: Shareholders, NASDAQ, all people and businesses that use supply chain. fish or fish byproducts in production. Risk Aspects: UBO, PEP, Environmental/Wildlife Crime, SOE/SIE, Labor Figure 1: Stars on the map represent known illegal fishing and labor activity. Crime.

1 http://bigstory.ap.org/article/98053222a73e4b5dab9fb81a116d5854/ap-investigation-slavery-taints-global-supply-seafood 2 http://www.thejakartapost.com/news/2015/05/02/bkpm-revoke-license-benjina-firm.html

The views and opinions expressed in this paper are those of the author and do not necessarily reflect the official policy or position of Thomson Reuters. PIRATE FISHING, SLAVERY AND THIRD PARTY RISK

ARE SLAVES CATCHING THE FISH YOU BUY? CASE STUDY 1: THIRD PARTY RISK IN THE ARAFURA SEA

MAJOR FOOD DISTRIBUTOR – UK MAJOR FOOD DISTRIBUTOR – USA MAJOR FOOD DISTRIBUTOR – AUS

SELLS SELLS SELLS SLAVE-CAUGHT SLAVE-CAUGHT SLAVE-CAUGHT FISH FISH FISH

SELLS GLOBAL FISH MARKET SELLS MAJOR FOOD DISTRIBUTOR – ASIA SLAVE-CAUGHT SLAVE-CAUGHT MAJOR FOOD DISTRIBUTOR – EUR FISH (in Thailand) FISH

SELLS SLAVE-CAUGHT FISH

COMPANY C THAI SHIPPING COMAPNY COMPANY A COMPANY B INDONESIAN FISHING OWNS INDONESIAN FISHING COMAPNY COMAPNY

OPERATES OPERATES

OWNS OWNS REFRIGERATED REFRIGERATED CARGO SHIPS CARGO SHIPS

DELIVERS DELIVERS SLAVE-CAUGHT SLAVE-CAUGHT FISH FISH SLAVE-CREWED SLAVE-CREWED REFRIGERATED SLAVE-CREWED SLAVE-CREWED TRAWLERS TRAWLERS CARGO SHIPS TRAWLERS TRAWLERS

SLAVE-CREWED SLAVE-CREWED TRAWLERS TRAWLERS

Case Study: A fishing company in Indonesia is part of a large-scale Records show that a third of that US$1.6m was billed to a vessel that ring of illegal fishing and labor crime with branches extending out reporters later witnessed transshipping fish from slave-crewed trawlers.4 to the global food supply chain. The slave-caught fish was then tracked on the ground, via satellite, and Seven years of financial records demonstrate a long-term business through U.S. customs records ultimately tracing it from the trawlers in the relationship between an Indonesian foreign investment fishing company Arafura Sea to major food distributors in Asia, the U.S., mainland Europe, and a Thai shipping company that markets to international food and Australia. distributors. These companies operate a large network of vessels that 3 The fishing and shipping company regularly profited from flouting local are crewed predominantly by unwilling or unpaid workers. and international laws regarding labor, illegal fishing, and environmental Fishing vessels owned by the Indonesian company are brought to the crimes5 while pushing slave-caught food into the unwitting international island of Benjina. There, the illegally fished catch is offloaded onto food supply,6 exposing the participants of the supply chain to a number refrigerated cargo ships owned by the Thai company and bound for of possible legal and regulatory actions worldwide.7 Major retailers in the Thailand, where the fish are sold at market. U.S. are currently facing class-action lawsuits for their failure to disclose 8 The fishing company regularly sent monthly invoices to the shipping slavery in their supply chains. company for US$500,000 for fish, one month billing them for US$1.6m.

3 http://www.thejakartapost.com/news/2015/08/14/indonesia-nabs-ship-believed-carry-slave-caught-fish.html 4 http://bigstory.ap.org/article/c2fe8406ff7145a8b484deae3f748aa5/ap-tracks-missing-slave-fishing-boats-papua-new-guinea 5 http://www.thejakartapost.com/news/2015/06/23/govt-revokes-licenses-six-major-fishing-firms.html 6 http://www.seafoodsource.com/news/supply-trade/27883-associated-press-links-slave-fishing-labor-to-thai-union-prominent-u-s-firms 7 https://www.undercurrentnews.com/2015/08/28/thai-union-named-in-slavery-lawsuit-filed-against-nestle/ 8 http://www.nytimes.com/2015/09/14/world/consumers-and-lawmakers-take-steps-to-end-forced-labor-in-fishing.html PIRATE FISHING, SLAVERY AND THIRD PARTY RISK

WHO STANDS TO PROFIT? CASE STUDY 2: CONNECTING IUU FISHING TO THE FOOD SUPPLY CHAIN

Case Study: A Chinese-owned fishing company in Indonesia which is Through an opaque network of shell companies, the Director owns a traded on an international stock exchange reaps 90% of its profits refrigerated cargo ship caught illegally fishing protected species, illegally from pirate fishing in the Arafura Sea. transporting protected birds, sailing without a license, transshipping without a license, and illegally transshipping cargo from other fishing One of the largest global fishing companies in China is led by an 19 individual (“the Director”) who is the CEO, director, and the majority boats. This vessel was supplied with fish and animals by local Indonesian 9 companies that are in actuality owned and controlled by the Director and shareholder. In February 2015, a Chinese agriculture-centered, state- 11 owned entity invested tens of millions of dollars for a stake in the his family. company’s operating company. The fishing company is also traded on In September 2015, Interpol issued a purple notice for this vessel, citing a major U.S. stock exchange. illegal imports and exports, transporting hammerhead sharks protected This company does 90% of its fishing in the Arafura Sea.10 Indonesia’s by the Convention on the International Trade of Endangered Species of Ministry of Marine Affairs and Fisheries has cited its agents and vessels Wild Flora and Fauna (CITES) from Indonesia to China, and deactivating a number of times for illegal fishing, transshipment at sea, foreign crew, monitoring and identification systems. falsification of papers, and other crimes.11, 12 Indonesia fisheries law states The vessel has been convicted in Indonesia for the illegal fishing and that if a fishing company engages in IUU fishing or any other violation of transportation of CITES-protected sharks,20 and the company’s local its fishery law while in its Exclusive Economic Zone (EEZ), its catch and agents have had their business licenses revoked for illegal fishing and equipment are also illegal and at risk of seizure.13, 14 other crimes. 21 To date, the company has not been charged in any official Through his family, the Director of this global fishing company owns investigations for slavery or forced labor issues, yet there are a number of hundreds of vessels facing related fines in Indonesia.15, 16, 17 All entities in indicators which bear continuous monitoring: the presence of a foreign Indonesia that are known to be controlled by this individual and his family crew, transshipment at sea, and false papers. are alleged to engage in illegal activity in the Arafura Sea.18

9 Majority Shareholder. http://www.sec.gov/Archives/edgar/data/1517130/000114420413066384/v362493_ex99-1.htm 10 114 out of 126 vessels are in the Arafura Sea. Ibid. 11 http://www.thejakartapost.com/news/2015/06/20/susi-continues-legal-fight-against-hai-fa.html 12 http://www.thejakartapost.com/news/2015/01/16/ministry-use-captured-ships-benefit-fishermen.html 13 Article 73a, Paragraph 1j; Article 76c, Paragraphs 1-6 of Law No. 45/2009 on Fisheries (Amendment to Law No. 31/2004) http://faolex.fao.org/docs/pdf/ins97600.pdf 14 Article 104, Paragraph 2 of Law No. 31/2004 on Fisheries http://faolex.fao.org/docs/pdf/ins51065.pdf 15 Companies owned by Xinrong Zhuo and family http://www.sec.gov/Archives/edgar/data/1517130/000114420414047364/R26.htm 16 Ownership of PT DRA and charges http://citraindonesia.com/susi-gugatan-4-perusahaan-kapal-asing/ 17 http://kkpnews.kkp.go.id/index.php/menteri-susi-beberkan-sindikat-pencurian-ikan-perusahaan-china/ 18 http://kkp.go.id/index.php/pers/kkp-umumkan-perkembangan-kasus-iuu-fishing/ 19 http://www.interpol.int/content/download/29513/388749/version/5/file/PN%20354%20Jakarta_EN.pdf 20 http://en.tempo.co/read/news/2015/09/18/055701669/Illegal-Fishing-Ship-MV-Hai-Fa-files-lawsuit-Minister 21 http://www.thejakartapost.com/news/2015/09/17/minister-susi-take-chinese-corporation-court.html PIRATE FISHING, SLAVERY AND THIRD PARTY RISK

RED FLAGS: IUU FISHING AND SLAVERY IMPLICATIONS: SUPPLY CHAIN THIRD-PARTY RISK FOR FOOD INDUSTRY, BANKS AND INSURERS “When you are talking about illegal fishing, you are also talking IUU fishing and other animal trafficking represent a potentially serious about human smuggling.” risk to environmental protections, sustainable fisheries, and human rights. Weak monitoring and little governmental oversight may contribute toward - Gisa Komangin, from Papua New Guinea creating the perfect recipe for the exploitation of people and natural National Fisheries Authority resources to potentially disastrous ends. The loss of subsistence and sustenance via overfishing and Foreign crew: In Indonesia the Fisheries Act makes it illegal to have environmentally harmful fishing practices depletes a critical natural a predominantly foreign crew on a fishing vessel. This protects jobs resource in regions where communities depend on it for survival, and and natural resources and prevents exploitation from foreign entities. has the potential to lead to humanitarian crises that could destabilize a Many jurisdictions have laws requiring entities operating within regional region. fisheries to have local crews when fishing within an EEZ in order to get a Regulation in response to modern slavery is increasing worldwide to license to operate within it. ensure that the entities involved are subject to the necessary penalties. Transshipment: The practice of unloading a catch from a fishing vessel The California Transparency in Supply Chain Act of 201022, 23 requires to a refrigerated cargo ship allows the vessel to stay at sea for as long all retailers and manufacturers with annual global revenues of more as a year. Transshipment at sea enables operators to evade regulatory than $100m that do business in California to disclose information about authority and launder illegal catches, while also preventing crewmen their efforts to eradicate slavery and human trafficking from their supply who are victims of trafficking from contacting authorities or organizations chains. Recently, the UK Modern Slavery Act of 201524, 25 introduced to render aid. These people are kept at sea for extended periods with no measures compelling organizations that operate entirely or partly within access to the outside world – a key indicator of enslavement. the UK, supply goods or services, and have a minimum annual turnover of Falsification of papers/forged documents: False papers for the crew, GBP36m or more, to prepare a Slavery and Human Trafficking Statement indicating a name and nationality other than that of the crewman, allow for each financial year. vessel operators to skirt around jurisdictional regulations regarding labor laws. A fake or forged license to fish gives the operator access to an area where it wouldn’t normally be allowed, leading to overfishing and environmental degradation. False papers and forged documents are red flags indicating further investigation for possible IUU fishing and slavery is merited. Source of labor: Below-deck workers for fishing vessels are often sourced from third-party labor brokers. A possible indicator of forced labor is migrant workers being supplied and recruited through unknown third-party crewing agencies. This adds another layer of uncertainty for companies that are sourcing goods or labor and worried about supply chain risk.

22 http://www.dol.gov/ilab/child-forced-labor/California-Transparency-in-Supply-Chains-Act.htm 23 http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0651-0700/sb_657_bill_20100930_chaptered.pdf 24 http://www.natlawreview.com/article/uk-modern-slavery-act-2015 25 http://www.legislation.gov.uk/ukpga/2015/30/contents/enacted

AUTHOR BIO: Valerie Farabee is a research analyst and anti-trafficking specialist at Thomson Reuters World-Check’s newly formed Trafficking Specialist Unit.

Originally published in Thomson Reuters Regulatory Intelligence 19 January 2016.

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