STS Transfers off Malaysia’s Coast and Sanctions: Balancing Legal, Environmental, and Reputational Risks

Recent industry reports suggest that ship-to-ship (STS) transfers of crude oil off the Malaysia's coast – which often facilitate sanctioned oil movements – are expected to surge in the coming months. Lucrative freight rates, persistent demand in major importing countries, and the possibility of cargo origin concealment all point to a potential uptick. For Malaysia, this forecast places the nation in a delicate position: while it has long served as an important maritime hub, it now faces the challenge of ensuring that STS transfers in its waters remain above board. The risk of sanctions is looming.

Malaysia’s Critical Role

Observers note that Malaysia has frequently exported more oil than it actually produces, raising the possibility that its vessels and port facilities are handling shipments for third parties – including sanctioned oil from countries like Iran. Malaysia’s strategic location and efficient maritime infrastructure have historically attracted tankers to its coasts for STS operations. However, if an anticipated rebound in these transfers indeed materializes, as suggested by analysts recently, it could expose Malaysia to heightened regulatory and diplomatic scrutiny, not merely as regards STS transfers, but in general.

Recent Sanctions: From Semiconductors to Labuan Entities

In November 2024, six Malaysian semiconductor companies were sanctioned by the United States for alleged links to restricted technologies, causing considerable alarm among Malaysian businesses and policymakers. The news dominated headlines and prompted urgent discussions about Malaysia’s role in global supply chains.

“The Malaysian government remains fully committed to international norms and all relevant sanctions regimes. We are working closely with our industry partners to ensure that Malaysian-registered entities, including those operating in Labuan, observe the highest standards of compliance and transparency.”

– Official Spokesperson, Ministry of International Trade and Industry (MITI)

November 2024

Despite the heightened awareness brought on by the semiconductor sanctions, a subsequent event on 24 February 2025 drew practically no public attention: a Labuan-based company was sanctioned under Executive Order (EO) 13846. The company, which is classified as organization type “sea and coastal freight water transport” and thus seemingly related to STS transfers of Iranian oil, was one of 30+ entities around the world slapped with sanctions.

To recall, EO 13846 reimposes certain U.S. sanctions on Iran – particularly targeting entities and individuals who facilitate significant transactions involving Iranian oil, banking, or shipping sectors. Passed by President Donald Trump during his first term in 2018, the Order has remained in effect since and effectively grants U.S. authorities the ability to penalize foreign companies and persons (i.e., non-U.S. entities) if they are found to be involved in business that violates or circumvents Iranian sanctions.

Because of the lack of media coverage, many Malaysians remain unaware that yet another domestic entity has come under U.S. sanctions. This underscores a broader issue of uneven attention to sanctions enforcement and a potential underestimation of how future sanctions could affect not only the targeted companies, but the nation’s standing in the international community.

Tariffs, Sanctions and the Risk to International Relationships

Engagement with sanctioned oil flows carries inherent risks. If foreign governments, especially major trade partners, detect systematic evasion of sanctions in Malaysian waters, they might retaliate through tariffs or even impose sanctions of their own. Aside from legal complications, Malaysia’s standing as a reliable and compliant maritime nation could suffer. In a global economy that increasingly values transparency, any hint of complicity in sanction-busting activities can undermine investor confidence and strain diplomatic ties. This holds even truer when considering that Malaysia has come under closer scrutiny by the US because of its closer ties to BRICS.

Environmental Concerns at Open Sea

STS transfers, particularly those carried out offshore, entail a heightened risk of accidents. Because vessels must operate in close proximity, even minor operational errors – such as a misaligned hose or a collision in rough waters – can cause catastrophic oil spills. These spills threaten marine biodiversity, harm local fisheries, and can jeopardize the livelihoods of coastal communities. They also expose Malaysia to significant cleanup costs and legal liabilities, as well as potential reputational damage.

Strengthening Legal and Operational Oversight

To safeguard against these multifaceted risks, Malaysia should consider several approaches:

1. Refine Regulatory Framework
   • Enact clear guidelines governing when, where and how STS operations can take place. Further, Malaysia should mandate robust documentation of cargo origin and ownership.
   • Impose stringent penalties for failing to abide by these rules, ensuring shipping and logistics players have a strong incentive to comply and enforce these rules without any exception.
2. Enhance Monitoring and Enforcement
   • Stricter enforcement requires the deployment of maritime patrols and radar or satellite-based surveillance, particularly in areas known for STS activities.
   • Work closely with insurers, banks and global maritime intelligence providers to identify suspicious vessels and verify cargo legitimacy.
3. Promote Transparency and Accountability
   • Require continuous AIS (Automatic Identification System) signals from vessels under the Malaysian flag. Too often, ships simply turn off the signal to avoid detection of their activities.
   • The authorities cannot do this on their own. The must encourage insurers and port operators to conduct thorough “know-your-customer” checks on charterers and cargo owners.

Securing Malaysia’s Future in Global Shipping

Malaysia’s status as a major maritime and trading nation is built on its strategic geography and robust infrastructure. Yet the potential rebound in sanctioned-oil STS transfers underscores the importance of upholding high compliance and safety standards. Any regulatory or environmental lapses could not only invite international reprisals but also damage the nation’s long-term reputation.

By reinforcing legal frameworks, bolstering enforcement, and collaborating with industry stakeholders, Malaysia can protect its economic interests, maintain diplomatic goodwill and preserve the marine environment for future generations.