Four Challenges in Denied Party Screening Requirements

As compliance risks in global trade multiply, denied party screening (DPS) is a critical capability. Here are the four main challenges driving DPS growth:

Complexity is increasing for denied party screening rules

Trade has always been complicated, crossing borders and time zones with multiple physical handoffs of goods under different tariff, duty, tax and regulatory frameworks. Over decades free-trade agreements, rulings by the World Trade Organization and other multilateral bodies, as well as the modification of customs procedures have made trade freer and fairer but also add complexity in reporting and compliance.

More recent laws to constrain human trafficking, forced labor, conflict mining and similar activities, along with increased use of economic and trade sanctions against individuals, companies and countries, have shifted attention beyond the terms of a transaction to its participants. The result has been a dramatic expansion in number and scope of “denied party” lists, with associated potential monetary or retaliatory penalties in the event of violations.

Sanctions add a further layer of complexity: The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and the European Commission’s Directorate-General for Financial Stability, for example, extend sanctions against a blocked entity to include other entities in which it has more than a 50% ownership interest – a provision known as the 50% Rule. Detail about blocked entities on the Specially Designated Nationals (SDN) or Sectoral Sanctions Identifications (SSI) lists is not publicly available, and the lists are subject to frequent change.

Due diligence requires an audit trail of DPS activity, including all relevant information and a record of actions to prevent and report DPS violations. Reliability of public and third-party data is key, given the risks of false negatives or positives.

Daily headlines of supply-demand dislocation, along with announcements of new sanctions, have elevated the role of compliance staff and highlighted the need for automation. “The compliance team can now get a foot in the door of the C-Suite and get the budget for automation and tools to help manage risk,” explains Virginia Thompson, senior product manager for Thomson Reuters ONESOURCE Global Trade, “because there’s a heightened understanding of the risk of not complying and of why this is so hard.”

Denied party screening lists are constantly updating.

OFAC alone has more than 35 active sanctions programs involving more than 75 denied party lists relating to specific countries, country groupings and illicit activities. Worldwide, more than 700 published lists — with more than 25,000 entities updated since February 2022 — target denied parties for due diligence screening.

Recent US and EU sanctions against Russia and actions against China over the treatment of Uyghurs in Xinjiang province, such as the U.S. Uyghur Forced Labor Prevention Act, take screening to a new level, touching on banking and affiliate ownership relationships, trade in strategic Russian exports from oil and natural gas to rare earths and metals, and the textile, apparel, tomato and semiconductor exports from China to high-net-worth individuals with ties to strategic industries.

Russia sanctions have already led to the closing of operations in that country by major Western financial, energy, foodservice and retail firms. Apparel, technology, and other firms with contract manufacturing in western China face difficult calculations about not just sanctions compliance and forced labor remediation, but potential retaliatory actions and the cost, quality, and logistical aspects of relocating production.

Although denied party screening provides clarity that mitigates the level of risk, compliance with screening measures adds a layer of uncertainty to these calculations, especially given the lag time from enactment of legislation to drafting of implementing regulations to publication of denied party lists. “You might negotiate a deal and be okay, but by the time you ship the good in two weeks, that’s no longer true,” says ONESOURCE product manager Fernando Aliaga. “So now you have to constantly check to see if you are still compliant.”

Global trade requirements keep shifting.

It isn’t just that the rules and penalties are expanding and tightening – they’re continuously changing. Consider just a few major events in recent years: China military and technology sanctions; Global Magnitsky sanctions following Russia’s 2014 invasion of Crimea and eastern Ukraine; reinstatement and escalation of Iran sanctions after US withdrawal from the Iran nuclear deal (JCPOA); Brexit implementation; and renegotiation of the US-Mexico-Canada Agreement (USMCA), with its complex country of origin and local content provisions. Layer onto those COVID, the rapid rise of e-commerce, extreme climate events and associated congestion, including blockage of the Suez Canal.

Beyond the major disruptions, new environmental, sustainability and governance (ESG) considerations require distinct new screening criteria, focusing on current and prospective suppliers and their suppliers, based on standards set not only by regulators but by private companies in their internal policies and practices.

E-Commerce poses special obstacles: internal processes and safeguards are needed to manage due diligence for global orders from unknown customers, affiliates, subsidies and third-party service providers. This is not only the case for products subject to country sanctions but also in strategically sensitive areas such as dual-use technology exports.

The quickly changing landscape of lists, products, screening parameters, amendments and waivers is already beyond the capability of most companies, regardless of size or resources, to manage with manual staff – especially in the current tight labor market.

Denied party screening is tedious.

DPS is essential in safeguarding companies from monetary and reputational damage. But too many firms fall into the trap of thinking that denied party screening is simply a box to be ticked, or that all screening is the same.

Manual DPS search is increasingly becoming unmanageable amid the sheer volume of new rules, screening criteria, denied parties and lists, and the growing complexity of due diligence. Faced with this challenge, the initial reaction is to look for workarounds using existing capabilities or the lowest-cost solutions. Companies may add staff to manage an increasing workload; screen only when placing a purchase order or preparing to ship to a customer; neglect more granular screening of blocked entity ownership and affiliation; or settle for screening regulatory lists with an outdated search engine.

Responsibility for compliance rests with the firm doing business. Depending on the transaction, fines can add up to tens of millions of dollars. There are simply too many variables in constant play for manual screening. The good news is that a range of commercially available software solutions, increasingly affordable to most businesses, can automatically screen against restricted countries, organizations, and individuals from a customized set of lists, with a high degree of accuracy.

Even then, solutions vary, and businesses need to protect themselves. At minimum, they should screen as frequently as the volume of supply chain partners and denied party lists allows – daily, if possible. They should insist on an ability to drill down and screen for ownership and controlling interest relationships. Search engines should apply sophisticated queries and multi-step algorithms to compare names and addresses and adjust for spelling, abbreviation, punctuation, and other anomalies. These features help minimize false positives without missing real hits. Finally, solutions should generate reporting which satisfies know-your-customer (KYC), anti-money laundering (AML), and combating the financing of terrorism (CFT) regulatory standards.

A Comprehensive Denied Party Screening Solution

Whether layered as a standalone product over client systems or operating within the broader ONESOURCE® Import Management and Export Management platform, ONESOURCE® Denied Party Screening offers clients DPS access to more than 700 denied party lists tracking 300,000 entities in 60 languages across 240 countries and territories.

Data compiled from publicly available and proprietary partner sources is continuously monitored, validated, and updated 24/7 by an in-house team of 450 multilingual researchers. Coverage is customized to distinct client risk profiles and business rules. Complex and configurable search engine settings deliver more granular data, with secondary identifiers like gender, original language names, identity numbers or birthdates and birthplaces, to minimize false positives and wasted search time.

Additionally, screening results create an audit trail compliant with due diligence best practices of the U.S. Departments of State and Commerce, and global agencies; and the software enables standardized reports, extracts, queries, and built-in email capabilities for managing and sharing information. With this tool, you can rest assured your company is compliant with the latest denied party screening requirements and lists.

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