Determining beneficial ownership and closing the gaps in sanctions lists

In our age of globalized trade, products can touch more than 100 people, businesses, or organizations as they move along the supply chain before reaching the consumer.

According to Vans, the American manufacturer of skateboarding apparel, 78 unique suppliers are involved in the international production journey of its iconic checkerboard slip-on sneaker. In accordance with international enforcement agencies, each of these suppliers must be screened against available records of sanctioned parties to avoid penalties or loss of export privileges.

Increasingly, government agencies are watching closely for violations of this nature and levying fines and penalties that can have dire consequences for violators.

For example, the Office of Foreign Assets Control (OFAC), which is responsible for creating, implementing, and imposing United States economic and trade sanctions, issued its first fine to e.l.f. Cosmetics on January 31, for violating the Countering America’s Adversaries Through Sanctions Act as it applies to North Korean labor under the North Korean Sanctions Regulations list. The initial statutory maximum monetary penalty amount for the apparent violations was in excess of $40 million.

The penalty also underscored how all parties under OFAC jurisdiction must abide by the sanctions lists — on which the OFAC names restricted parties that have incurred sanctions or have been embargoed for wrongdoing — and their associated regulations, or risk legal and financial repercussions.

Companies involved in international trade are therefore required to demonstrate due diligence and take steps to ensure their products are not handled or manufactured by sanctioned parties anywhere along their supply chain. The more complex the supply chain network, the greater the risk involved in production.

If companies are audited by an international agency, such as OFAC, they need to be able to demonstrate that they performed an acceptable level of due diligence in regard to determining the status of the entities along its supply and production chain. To remain compliant, global regulatory professionals often turn to denied party screening services, which compare shipping and supplier information against sanctions lists to ensure that a company is not working with a sanctioned organization. Screening for denied parties and being able to provide a screening history helps demonstrate that a company is doing its due diligence to maintain compliance. OFAC recognizes denied party screening as a mitigating factor that may protect a company from facing fines or penalties if a violation occurs. For instance, e.l.f. Cosmetics was able to reduce their incurred OFAC penalty to $996,080, citing their established screening process in addition to having no prior history of violations in the past five years.

Currently, some companies choose to integrate blockchain functionality into their global trade management strategies in order to improve product traceability and manually screen against sanctions lists. Other companies may partner with logistics suppliers to utilize global trade management software that incorporates an automated denied party screening function into their export and import management interfaces. However, some caution is warranted, even when taking these steps. For instance, denied party screening functions are useful in screening against government agency lists of sanctioned or embargoed parties, but they historically fall short of screening against companies that are owned, totally or in part, by those denied entities.

OFAC defines “ownership” as direct or indirect possession of 50% or more of a company’s interests. These entities, however, are not necessarily named on government sanctions lists or associated with a specific denied party. Instead, this information may only be obtained by a third party that mines and analyzes data from multiple sites, agencies, and databases.

While government agency lists of sanctioned parties are an important element of all denied party screening processes, sanctioned parties may still be concealed because of insufficient data. Although screening against these government lists is a necessary part of the export process, it is no longer the minimum standard. In addition to these lists, it is imperative that companies are screening their suppliers, vendors, end-users, and all parties in each import and export transaction for beneficial ownership.

Indeed, companies would benefit from having access to a sanctions beneficial ownership list that links denied entities with companies owned by those individuals or parties. Access to this detailed information offers a more robust screening process for compliance professionals that could minimize penalties and demonstrate due diligence.

The responsibility to demonstrate due diligence and eliminate denied parties and entities from supply chains ultimately falls upon companies. Linking denied party screening functions with detailed information about who owns them can together act as another net to catch embargoed persons that may slip through the cracks in any global trade management strategy.

When it comes to compliance, insufficient data is neither an excuse nor an option, especially when regulatory enforcement is concerned.