Every year, it is estimated that millions of public and private global organizations change their ownership and control structures. While the majority of these changes are for legitimate reasons, a minority occur to benefit so-called ‘bad actors’ (also known as denied, restricted, or debarred parties) by obscuring their relationship with these organizations.
These complex forces make the work of complying with Sanctioned Ownership regulations, such as OFAC’s 50 percent rule, all the more challenging. These regulations specifically prohibit companies from dealing with organizations whose ownership by sanctioned parties exceed defined percentage thresholds. The thresholds vary depending on where you are in the world. In the U.S., the Treasury Department’s Office of Foreign Assets Control (OFAC) sets it at 50 percent. In other jurisdictions, such as the European Union, the figure could be lower.
Sanctioned Ownership Compliance Challenge
While laws exist that bar companies from transacting with organizations with significant sanctioned party ownership, there are no lists published by governments or global regulatory bodies that identify these organizations. Some businesses have resorted to undertaking manual checks, reviewing only their biggest suppliers and customers, or relying on specialized consulting and legal firms to do the work on their behalf. But there is a downside to this manual approach to sanctioned ownership risk mitigation.
As we know in other ‘Know Your Customer’ contexts, an organization can be cleared to do business with today, but end up sanctioned or restricted tomorrow. This risk also exists at the ownership level as shareholding and control structures change can change overnight. These changes can include an aggregation of ownership by two or more restricted parties and adjustments in complex minority ownership structures.
Complexity aside, clear guidance has been provided by government regulators on what is expected of organizations doing business globally, such as the following from OFAC with regards the 50 percent rule:
- Ownership screening guidelines that must be complied with;
- Methodology for engaging with organizations in which a sanctioned party or multiple parties have shareholding of less than 50 percent but large enough to raise red flags; and
- Enforcement actions against non-compliance (Barclays and TD Bank).
As demonstrated by the third point (above), non-compliance can result in monetary penalties, in addition to damaged corporate reputation and degrading of business opportunities.
Top Three Ways to Mitigate Sanctioned Ownership Risk exposure for your organization
Effective compliance is easier said than done but here are three ways to comply with sanctioned ownership rules while minimizing burden on staffing resources and budgets.
- Screen for sanctioned ownership when onboarding new trade chain partners. This is in the same vein as “Know who your customers, vendors, and others are.” For full compliance, this means screening for denied parties at the entity level and also at the ownership level. Making that determination at the outset is crucial to averting potential trouble down the road.
- Continually assess sanctioned ownership risk over time. The makeup of an organization’s ownership structure can switch from green to red at any point of the business relationship. To proactively be aware of potential changes, organizations must consider proactive, ongoing sanctioned ownership screening.
- Leverage technology to strengthen compliance while saving time and budget. The right technology allows for proactive compliance, providing companies with the intelligence they need to understand ownership and shareholding structures involving parent companies and their subsidiaries and associated entities. Screening can be automated covering transactions on an ongoing basis, maximizing risk mitigation, and saving time, resources, and money.
The business benefits of sanctioned ownership compliance include maintaining a smooth-running supply chains, and, because there are no legal disruptions, keeping customers happy via the delivery of goods on time. Compliance also provides strategic and competitive advantage in terms of driving existing and new business growth.
How Descartes can Help
Descartes Enhanced Risk Management Solutions help organizations strengthen their compliance programs by reducing the need to research and compile information related to sanctioned party ownership. By leveraging data provided by industry-leading research firms, the solutions screen for Ownership by Sanctioned Parties, and other risk-related areas.
These solutions help maintain compliance with international trade regulations and avoid reputational damage that could be associated with working with organizations that may be involved in illicit activities.