Flag Risks: A Rising Priority in Maritime Due Diligence and KYC Protocols

Flag risks are emerging as a key determinant in maritime due diligence, significantly influencing regulatory oversight, financial liabilities, and operational continuity. The deliberate use of high-risk flags in evasive practices—such as flag-hopping and the deployment of shadow fleets—reflects the growing complexity of compliance within the global shipping landscape. To navigate this evolving environment, organizations must enhance their risk assessment frameworks and incorporate robust, data-driven evaluations of flag jurisdictions.

Key Insights

• Compliance Challenges on the Rise: Over 5,000 vessels—equating to 14.5% of the global fleet—sail under flags from jurisdictions that have ratified fewer than 10% of IMO/ILO conventions. This significantly increases vulnerability to enforcement measures.

• Surge in Sanctioned Activity: Since early 2023, the number of sanctioned vessels operating under high-risk flags has doubled, with over 600 such ships facilitating trade in restricted crude from Russia, Iran, and Venezuela.

• Tighter Financial Scrutiny: Insurance and financial entities are tightening their policies. Premiums are climbing, vessel detentions are rising, and funding is being curtailed for ships flying flags from jurisdictions with weak compliance standards.

• Flag-Hopping Fuels Evasion: Evasive shipping tactics often rely on rapid flag changes, allowing sanctioned vessels to bypass regulatory detection and maintain commercial operations.

Why Flag Risk Screening Is Now Essential

Maritime due diligence frameworks are being stretched thin as inconsistencies in flag state compliance increase both financial and legal exposure. Flag registries serve as primary regulatory authorities, but many fall short in upholding global maritime standards. Notably, a significant portion of flags have ratified less than 10% of IMO and ILO conventions—leaving shipowners and charterers open to:

• Elevated sanctions violation risks

• Increased Port State Control (PSC) inspections and detentions

• Operational delays and financial penalties

Recent data from Kpler reveals that 14.5% of the global fleet operates under low-ratification flags, including the Marshall Islands, St. Kitts and Nevis, and Palau. These jurisdictions often selectively adopt international conventions, creating uncertainty in compliance obligations.

Critical Data Point: Afghanistan, Somalia, and South Sudan have yet to ratify key IMO frameworks, while countries like Bahrain, Brunei, and Qatar remain non-compliant with ILO standards, putting seafarer welfare at risk.

A systematic approach to flag risk screening enables stakeholders to measure exposure to non-compliance and embed these insights into their KYC and broader risk management practices.

Flags, Sanctions & the Shadow Fleet

The February 2025 spike in sanctions brought renewed focus to the role of high-risk flags in concealing illicit maritime activity. Within that month alone, 51 vessels were added to sanctions lists, underscoring the urgency of flag-focused scrutiny.

Current Trends Include:

• Flag-Hopping as an Evasion Strategy: Vessels carrying sanctioned crude regularly switch flags to hide ownership and avoid tracking.

• Emergence of Alternative Registries: Jurisdictions like Panama, Barbados, and Curaçao continue to serve as havens for high-risk fleets.

• Ship-to-Ship Transfers in Loosely Regulated Waters: STS operations under flags with poor oversight are making global energy flows harder to trace.

Sanctioned vessel numbers under the top 10 high-risk flags have doubled since early 2023, indicating a trend toward more sophisticated evasion methods.

Financial and Reputational Implications

Flag-related risks directly affect vessel valuations, insurance costs, and access to capital. Shipowners operating under low-ratification flags are increasingly facing:

• Stricter Underwriting Standards: Insurance providers are raising premiums—up to 30–40%—for vessels flying high-risk flags.

• Greater Enforcement Pressure: PSCs are targeting these registries with increased inspections and detentions.

• Reduced Financing Opportunities: Banks are incorporating flag risk scoring into pre-screening processes, limiting funding for non-compliant fleets.

Integrating Flag Risk into Compliance Workflows

To reduce exposure to flag-driven disruptions, organizations should adopt proactive, intelligence-led compliance strategies. Kpler recommends:

• Prioritizing vessels from jurisdictions with strong ratification records.

• Using real-time tracking tools to identify flag-hopping patterns.

• Embedding flag risk checks into sanctions and KYC screening to detect evasive practices.

By leveraging structured flag evaluations, stakeholders can strengthen due diligence, improve regulatory preparedness, and protect against financial and reputational loss.

Explore Kpler’s Risk & Compliance solutions to learn more.

flag risk, maritime due diligence, high-risk flag states, flag-hopping, shadow fleet, sanctions evasion