Sanctions Compliance Today: How Should Companies Protect Themselves?

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Will the landscape of sanctions compliance change as we enter 2020?

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Run a quick internet search on the word “sanctions,” and it is inevitable that you’ll find news about an enforcement action. Take the example of e.l.f. Beauty, which agreed to pay nearly $1 million in fines this year, after importing false eyelash kits from two suppliers located in China, who had sourced materials from North Korea. Had the company been more focused on knowing who its partners were doing business with and implemented timely supply chain audits to verify the origin of the goods, it may have avoided the fine.

As demonstrated by e.l.f. Beauty, the Office of Foreign Asset Control (OFAC) and the Department of Justice have taken an increased interest in stopping North Korean labor from permeating into U.S. supply chains, oftentimes through Chinese and Russian manufacturers. But their attention is equally acute to ensuring that companies do not supply buyers in sanctioned countries. OFAC has shown that even recently, a seller or lessor may be responsible for their goods after they have been transferred across multiple parties and eventually arrived in a sanctioned party’s hands.

Staying compliant with sanctions regulations is more complex and challenging than ever. After all, OFAC guidance clearly states that simply screening transactions is not enough. In the face of these complexities, it’s crucial to regularly evaluate your supply chain and trade operations, in order to make sure that your company is meeting compliance expectations. Both the supply chain and global trade operations are extremely complex and require a thoughtful sanctions setup. No matter whether you employ a robust compliance department, or this is the job of just one person, the first place to start is understanding who your customers are.

Digging Into Due Diligence

Nasdaq recently released its 2019 Global Compliance Survey, which examines some of the greatest concerns that compliance officers have for their industry. Fifty-seven percent of the 187 professionals queried in Nasdaq’s survey said they recently invested in Know Your Customer (KYC) improvements and more than 40% of respondents said they use automated processes and specialized technology in their KYC program. That’s certainly a start.

A strong KYC process should, however, be able to vet customers, suppliers, and intermediaries.

This ensures that any goods moving through the supply chain are fully examined through the full product and service life cycle, which requires going beyond just your buyers and suppliers. Beneficial owners and third parties need to also be examined. If you aren’t doing that, you are multiplying your compliance risks.  

The best practice for a business is to create a comprehensive questionnaire for your suppliers and buyers to answer:

1.   Where do you source your goods?

2.   Who are your distributors, and are they in high-risk areas?

3.   Is there a “reason to know” your buyer will be shipping goods to a sanctioned country?

4.   Does your supplier source origin goods from a sanctioned country?

While having answers to these questions straight from the source is valuable, you should not stop there. You must complement the answers from third parties with your own, intensive due diligence.

Know Where Your Shipment Is

Depending on your company’s geographic profile and risk tolerance, it’s also important to know where exactly your shipment is and the route it will take to get to its final location. Though not as frequently discussed as knowing who your buyer and supplier are, the shipment of goods can be a key vulnerability in the supply chain process. Goods can be diverted and introduced to sanctioned third parties, in which case any transaction that involves carriage by a vessel can be risky.

By implementing robust sanctions controls throughout your company, you can prevent these types of issues from occurring. For instance, vessel tracking software to track shipment movements allows analysts to review alerts in real-time, preventing accidental sanctions violations or a delay in the shipment.

Sanctions compliance is based on strict liability, and no set of actions provides a safe harbor from enforcement action. Self-reporting is helpful, which, in fact, e.l.f Beauty did. Government regulators will look positively on that when determining punishment. Indeed, the Department of Justice just published new guidance which can significantly reduce penalties, if any, if your company self-discloses the transaction and maintains a robust compliance program. But as we approach 2020, even if your company’s compliance program is considered industry standard, it’s important to take note of the recent enforcement actions and apply relevant lessons to your program. OFAC heightens compliance expectations on a regular basis, so it’s crucial you ensure your program isn’t judged substandard next year. Now is the time to evaluate what your company is doing to monitor its supply chain. By doing that, you may well avoid the ire of regulators and protect your brand.

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Will the landscape of sanctions compliance change as we enter 2020?

Getty

Run a quick internet search on the word “sanctions,” and it is inevitable that you’ll find news about an enforcement action. Take the example of e.l.f. Beauty, which agreed to pay nearly $1 million in fines this year, after importing false eyelash kits from two suppliers located in China, who had sourced materials from North Korea. Had the company been more focused on knowing who its partners were doing business with and implemented timely supply chain audits to verify the origin of the goods, it may have avoided the fine.

As demonstrated by e.l.f. Beauty, the Office of Foreign Asset Control (OFAC) and the Department of Justice have taken an increased interest in stopping North Korean labor from permeating into U.S. supply chains, oftentimes through Chinese and Russian manufacturers. But their attention is equally acute to ensuring that companies do not supply buyers in sanctioned countries. OFAC has shown that even recently, a seller or lessor may be responsible for their goods after they have been transferred across multiple parties and eventually arrived in a sanctioned party’s hands.

Staying compliant with sanctions regulations is more complex and challenging than ever. After all, OFAC guidance clearly states that simply screening transactions is not enough. In the face of these complexities, it’s crucial to regularly evaluate your supply chain and trade operations, in order to make sure that your company is meeting compliance expectations. Both the supply chain and global trade operations are extremely complex and require a thoughtful sanctions setup. No matter whether you employ a robust compliance department, or this is the job of just one person, the first place to start is understanding who your customers are.

Digging Into Due Diligence

Nasdaq recently released its 2019 Global Compliance Survey, which examines some of the greatest concerns that compliance officers have for their industry. Fifty-seven percent of the 187 professionals queried in Nasdaq’s survey said they recently invested in Know Your Customer (KYC) improvements and more than 40% of respondents said they use automated processes and specialized technology in their KYC program. That’s certainly a start.

A strong KYC process should, however, be able to vet customers, suppliers, and intermediaries.

This ensures that any goods moving through the supply chain are fully examined through the full product and service life cycle, which requires going beyond just your buyers and suppliers. Beneficial owners and third parties need to also be examined. If you aren’t doing that, you are multiplying your compliance risks.  

The best practice for a business is to create a comprehensive questionnaire for your suppliers and buyers to answer:

1.   Where do you source your goods?

2.   Who are your distributors, and are they in high-risk areas?

3.   Is there a “reason to know” your buyer will be shipping goods to a sanctioned country?

4.   Does your supplier source origin goods from a sanctioned country?

While having answers to these questions straight from the source is valuable, you should not stop there. You must complement the answers from third parties with your own, intensive due diligence.

Know Where Your Shipment Is

Depending on your company’s geographic profile and risk tolerance, it’s also important to know where exactly your shipment is and the route it will take to get to its final location. Though not as frequently discussed as knowing who your buyer and supplier are, the shipment of goods can be a key vulnerability in the supply chain process. Goods can be diverted and introduced to sanctioned third parties, in which case any transaction that involves carriage by a vessel can be risky.

By implementing robust sanctions controls throughout your company, you can prevent these types of issues from occurring. For instance, vessel tracking software to track shipment movements allows analysts to review alerts in real-time, preventing accidental sanctions violations or a delay in the shipment.

Sanctions compliance is based on strict liability, and no set of actions provides a safe harbor from enforcement action. Self-reporting is helpful, which, in fact, e.l.f Beauty did. Government regulators will look positively on that when determining punishment. Indeed, the Department of Justice just published new guidance which can significantly reduce penalties, if any, if your company self-discloses the transaction and maintains a robust compliance program. But as we approach 2020, even if your company’s compliance program is considered industry standard, it’s important to take note of the recent enforcement actions and apply relevant lessons to your program. OFAC heightens compliance expectations on a regular basis, so it’s crucial you ensure your program isn’t judged substandard next year. Now is the time to evaluate what your company is doing to monitor its supply chain. By doing that, you may well avoid the ire of regulators and protect your brand.

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