Restricted party screening software should be viewed by U.S. exporters as one tool within a multidimensional export compliance approach.
Big-name U.S. exporters will confidently tell you that they have automated systems in place that regularly screen their business transactions against the myriad Commerce, Treasury and State department export control and sanctions lists.
That’s all good, but do these systems on their own screen well enough?
Despite the money spent on implementing these third-party screening tools and promises from the service providers that their information is up to date, there remains a margin of error to commit violations of U.S. export control regulations.
A couple of companies — an exporter and a bank — recently learned this lesson the hard way with their initial restricted party screening software.
This week the Treasury Department’s Office of Foreign Assets Control (OFAC) announced an $87,500 settlement with Virginia-based Cobham Holdings for three violations of the Ukraine Related Sanctions Regulations.
The violations, which occurred with Cobham’s former subsidiary Aeroflex/Metelics Inc. between July 31, 2014 and Jan. 15, 2015, involved the shipment of electrical switches through distributors in Canada and Russia to Almaz Antey Telecommunications, a partially owned subsidiary of Almaz-Antey, a Russian entity on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) List for allegedly violating the Ukraine Related Sanctions Regulations.
More specifically, Cobham’s breakdown in export compliance resulted in the first OFAC case settled related to a violation involving the Ukraine Related Sanctions Regulations’ so-called “50 percent” rule, meaning that U.S. exporters must be aware of whether restricted individuals and/or companies hold equity of 50 percent or greater aggregate interest in a property.
Cobham blamed its compliance failure on its third-party screening software to properly flag Almaz Antey as a conflict with the 50 percent rule. However, Cobham’s export compliance personnel would have had to look beyond the various export control lists to determine whether the company’s owners or investors exceeded the 50 percent threshold. A review of the Dow Jones or Dun and Bradstreet business records would have shed light on these details, resulting in Cobham pausing the shipments.
In early October, OFAC reached a $5.26 million settlement with JPMorgan Chase Bank (JPMC) for violations involving the processing of 87 transactions for the airline industry worth about $1 billion, which included about $1.5 million for U.S.-sanctioned individuals and entities.
The illicit financial transactions, which occurred between Jan. 3, 2008 and Feb. 8, 2012, were made on behalf of an airline industry billing clearinghouse.
Among the numerous airlines within the billing settlement activity, eight were found to be at various times on OFAC’s List of Specially Designated Nationals and Blocked Persons, blocked pursuant to OFAC sanctions or located in countries subject to the sanctions programs administered by OFAC.
JPMC voluntarily self-disclosed the violations to OFAC, which involved the Cuban Assets Control Regulations, the Iranian Transactions and Sanctions Regulations and the Weapons of Mass Destruction Proliferators Sanctions Regulations.
According to OFAC, the bank did not appear to have a satisfactory process in place before January 2012 to properly screen participating member entities for U.S. sanctions risk. The agency said JPMC “appears to have acted with reckless disregard for its sanctions compliance obligations.”
“JPMC engaged in a pattern of conduct throughout the relevant period during which JPMC missed red flags and other warning signs on several occasions, including two separate occasions in 2011 when the bank received express notification from its client regarding OFAC sanctioned entities participating in the settlement mechanism,” the agency added.
The root of JPMC’s export compliance breakdown traced to its use of a third-party screening software between 2007 and October 2013 that failed to identify six airline customers as potential matches to the SDN List.
Specifically, the system’s screening logic capabilities failed to identify customer names with hyphens, initials or additional middle or last names as potential matches to similar or identical names on the SDN List.
Despite strong similarities between the account holders’ names, addresses and dates of birth in JPMC’s account documentation and on the SDN List, the bank maintained the accounts for, and/or processed transactions on behalf of, the six sanctioned airline customers.
Both companies, which alerted OFAC to their noncompliance through voluntary self-disclosures, have since acquired new screening software, according to the agency.
While third-party screening software providers offer companies a valuable export compliance tool, it is just that, a tool, and like any tool, it should be one of a number utilized from the compliance tool chest.
Even companies with occasional exports, no matter how small they are (i.e. samples and repair parts), or those that cannot afford third-party screening software, the federal government provides free access to a daily-updated, online Consolidated Screening List (CSL) (https://www.export.gov/csl-search) that compiles together for screening the multiple restricted part lists of the Commerce, State and Treasury departments.
Competent freight forwarders and consultants might also lend a hand to meeting small company export compliance requirements.
However, what all companies must keep front and center when approaching export compliance is that regulations and requirements are ever-changing and require a constant and acute attention to those details regularly released by Commerce, Treasury and State departments.
Commentary: Are you screening well?
