Access Denied

Automating denied party screening can help U.S. exporters avoid painful non-compliance penalties.    Ask a purveyor of trade compliance software what drives most customers to their solutions and the answer is generally “penalties.”

   Like homeowners who only get flood insurance after finding their basement under three feet of water, many companies begin to get smarter about how they handle critical compliance processes after they’ve been caught doing something wrong.

   And one of the major no-no’s for exporters is dealing with people, companies, organizations, or countries on the U.S. Bureau of Industry and Security’s Parties of Concern lists, or equivalent lists in other nations. The lists contain companies and individuals for which engaging in trading activities is either severely restricted or outright prohibited.

   BIS even published a document in July called “Don’t Let This Happen to You: An Introduction to the Consequences of Violating U.S. Export Control Law.”

   The report is a 64-page step-by-step guide of what not to do when it comes to exporting, and it includes a host of egregious offenders who purposely worked with entities or nations on the U.S. “no-no” list. But for most companies, running afoul of export laws happens by accident, not by purposely trying to evade regulations.

   “The heaviest fines are for willful, criminal convictions (currently up to $1 million, increasing to up to $10 million or 10 times the value of the export when the new Export Administration Act is passed),” according to the compliance software provider Visual Compliance. “Civil penalties are not as harsh, but still consequential. In addition to fines and prison terms under criminal and civil sanctions, there are administrative sanctions (including denial of export privileges and exclusion from practice), statutory sanctions, seizure and forfeiture, cross-debarment, denial of licenses or approvals, and suspensions of the right to contract with the United States government that can ruin a company.”

   Understanding who and what are on these lists is an onerous task for exporters, and some may be doing business indirectly with such entities or persons without even realizing it. So companies increasingly turn to automated restricted or denied party screening solutions to help fine tune their processes.

   These solutions, offered by a host of global trade management and trade compliance software providers, essentially help exporters keep up to date on the ever-changing lists in one of three ways:

By allowing the exporter to import content pertaining to the lists into their pre-existing enterprise or global trade management systems.

By screening all known trading partners of a company, including prospective customers or suppliers, against the denied party lists, a service commonly called “bulk screening.”

By dynamically screening all entries on a real-time transaction-by-transaction basis.

   The degree to which each exporter needs to screen depends on a few key variables, namely the breadth of its export operations, the items being sold to foreign markets, and whether the company’s suppliers and customers are consistent.

   But every exporter needs to be proactive in its use of such tools, since denied party screening is considered a foundational element of modern trade compliance. In many cases, it’s one of the first processes to be automated (along with product classification) by companies that have previously handled trade compliance in a manual fashion.

   “The big challenge is the scope of lists,” said Ken Harris, head of denied party screening for the logistics and trade compliance software provider Descartes. “Twenty-five years ago, there were three lists that changed infrequently. There were maybe monthly updates. Now our team of analysts reviews 550 different URLs on a daily basis. There are 350,000 names on Descartes compiled list.”

   Harris came to Descartes in the summer as part of the company’s acquisition of MK Data Services, a point solution that provided denied party screening products direct to shippers, but also supplied content to global trade management systems providers, including Descartes.

   Descartes Chief Executive Officer Ed Ryan called the deal “a unifying acquisition,” as it provided both individual Descartes customers with a broader denied party screening solution and benefitted its Global Logistics Network platform of users and their connected trading partners.

   “It’s very challenging for customers,” Harris said. “A lot of times, it’s an ‘a-ha’ moment. ‘We should be screening visitors.’ The fines are there and that’s always a driver. It’s still a learning curve.”

   Beth Pride, president of the global trade advisory group BPE Global, estimates that around one in five exporters are using some level of automation to tackle restricted or denied party screening.

   “My gut is if you include the people who do manual screening, batch screening as well as real-time screening, you won’t even hit 20 percent of shippers,” she 

said.

   The most recent American Shipper Export Benchmark Report found denied party screening was no higher than fifth on the list of functionalities that exporters were planning to add in the next year, trailing other priorities like record keeping or Automated Export System (AES) filings.

   Part of the challenge, inevitably, is that compliance is often seen by companies as a cost center, not a revenue driver. Automated restricted or denied party screening can reduce costs and reduce risk, but it is rarely seen from an executive level as an investment that yields returns. Pride, however, said it should be considered both a return-on-investment and best practices-based decision. 

   “The ROI comes from automating a manual process,” she said. “If I currently manually screen my orders (as Pride is doing for one of her clients), I can do about 30 screenings in an hour.  If I automate it, I can do thousands and only worry about resolving the potential matches.  And, I can be much more detailed on the resolution and review process if I’m not having to cut and paste names and addresses into a website. 

   “It is also a best practices-driven decision.  If I automate RPS, I am significantly reducing the risk to my company. One of the screenings that I did closely matched an arms dealer in Taiwan. The guy was actually located less than a seven-minute drive from the company that was buying my customer’s product. We ultimately cleared the shipment, but I did a lot of research to make sure it was a legitimate transaction,” Pride said.

   Harris said the motivation should come from avoiding penalties, fines, and even jail time. Just ask PayPal. The online payment platform self-reported 486 violations of dealing with restricted parties earlier in 2015 and agreed to pay a $7.7 million fine to the U.S. Treasury Department’s Office of Foreign Assets Control. The violations accounted for less than $44,000 in transactions, but cost the company dearly. 

   “This is one of those areas in life where trying goes a long way,” he said. “The government wants to see robust compliance. Using a service and maintaining an audit trail demonstrates that there are mitigating circumstances even when a customer accidentally ships to a party on the list.”

   In fact, the whole export control list issue can get pretty murky. Take the case of John Bean Technologies, a maker of aircraft ground support equipment that agreed to the pay a fine of $391,500 for violating Iran sanctions by transporting equipment to a Chinese company by way of an Islamic Republic of Iran Shipping Lines vessel.

   If that sounds straightforward, the blog ExportLawBlog noted in June (www.exportlawblog.com/archives/7047) that the original shipment for which JBT settled (in June 2009) occurred prior to the Iran sanctions coming into effect, and that JBT was likely hit with penalties because it later sought to reimburse its foreign subsidiary for payments the subsidiary had made to its freight forwarder in connection with the shipment.

   “Hence, the violation occurred here when the U.S. company presented the blocked letter of credit, along with the required bill of lading from IRISL, to a U.S. bank,” the author of the blog, Clif Burns, an attorney with Bryan Cave in Washington, D.C., wrote.

   In other words, when the shipment was made, IRISL was not subject to Iran sanctions, but when the company later tried to repay its subsidiary for those services, it was, and thus subject to the sanctions.

   The JBT story is an example of how convoluted multi-party foreign transactions can become, and how quickly sanctions and controlled party lists can change — sometimes within the lifespan of a shipment and its documentation. 

   In terms of which approach an exporter should take, Harris sees companies generally screen by using either a transaction- or customer-based approach.

   “It depends on their level of risk,” he said. “How many transactions, what parts of the world? Dynamic screening is generally used by companies that we work with that are conservative, screening every transaction, and every party to the transaction. If you have 10 shipments a day and five parties to those transactions, you may want to take a customer approach. We’d take your customer name and reverse-screen that every night.”

   Getting coordinated on denied party screening is also important. Web-based compliance tools, whether from Descartes or other providers like Amber Road or Integration Point, allow companies to tap into a single instance of screening across what may be disparate compliance departments in different regions or even countries. Other providers, like Livingston, Thomson Reuters ONESOURCE, SAP and Oracle also provide screening products and services.

   Pride said a critical part of tackling screening automation is having compliance take the lead in vendor selection and implementation, due to the specific nature of the data being analyzed.

   “One of the biggest challenges is having IT as the lead of a [restricted party screening] project,” she said. “They don’t understand enough of the process, so requirements can easily be missed. We’ve just joined a project very late in the cycle and there are basic things, like not being able to put an order that requires a license on hold. We’ve been able to find workarounds for the issues, but the solution won’t be optimal. The key to a successful and efficient RPS implementation is to build your requirements and document your business processes. Define what the GTM system and your ERP (enterprise resource planning) system statuses should be and then write your test scripts early so everyone has the same expectations. 

   “We’re also finding that project management is key. Having a concise list of open action items and making sure people from every team (trade compliance, the software vendor, IT, and order management) are all working to resolve issues,” Pride added.

   As for which industries denied party screening is most relevant, Harris  said exporters of dual-use products or technology (where the exported entity can be used for both military and civilian applications), high-tech products, chemicals, and the aerospace industry have traditionally been the core customers for such solutions.

   But companies in the food sector (where a business might need to screen suppliers and franchisees, for example), employment agencies, and even universities are finding screening automation software increasingly important. Harris also noted that denied party screening allows exporters to perform due diligence on potential mergers and acquisitions, since “as you buy a company, you inherit their compliance history.”

   Pride dutifully noted every exporter is exposing itself to some level of risk if it doesn’t pay enough attention to complying with the restricted and denied entities lists, whether using a system or not.

   “We’ve actually been working with a retail client who sells beauty tools,” she said. “They’re getting inquiries from around the world, including Iran and Sudan. They’re reviewing all of their international orders and not just sending them to their fulfillment company. We’re also working with high-tech companies with restricted encryption products. They use their screening engine to identify potential government end-users who would require a license.”

   The threat of non-compliance is real, but as Harris said, putting a plan in place and showing process robustness goes a long way toward proving that an exporter is serious about dealing with restricted parties.

   “It’s sort of a misnomer because some companies use scare tactics,” he said. “The government through AES gives you a heads up. It’s the repeated things that are going to raise a red flag.”