Do you know who your vendors and customers are? You should. In
this QAD Precision Report, we look at counterfeit goods, forced
labor, money laundering and the importance of restricted party screening.
It is no secret that complying with international trade regulations
can be a bureaucratic nightmare. However, trade laws are not merely
red tape — they are vitally important. Import laws and export controls:
Protect consumers from counterfeit and substandard goods
Restrict companies from profiting from forced labor
Prevent money laundering and profiteering from organized crime
Curb terrorism financing
Prevent the proliferation of weapons of mass destruction
As a result, companies must know who they are trading with — both
vendors and customers. This is why restricted
party screening is necessary to remain in compliance with
international trade regulations.
We will look at some recent examples of trade violations.
The advent of the Covid-19 pandemic meant that the global demand for
PPE, virus test kits and other necessities to fight the spread of the
disease far outstripped the supply.
Companies ramped up supply to meet the demand. Unfortunately, they
were not the only ones — counterfeiters did too.
According to a recent report
from the US Customs and Border Protection (CBP), officials
seized a number of counterfeit items related to the pandemic. These
seizures included more than 12.7 million counterfeit masks — including
fake medical grade masks.
Furthermore, criminals exploit e-commerce platforms and marketplaces
to sell counterfeit and substandard goods. In December alone last
year, CBP seized a large number of popular gift items such as shoes,
belts, handbags and headphones as well as $1.3
million worth of counterfeit toys.
The danger counterfeit products pose is clear. Toys and electronics
made with unsafe materials can cause harm.
Counterfeit masks are especially egregious given the coronavirus
pandemic. Should substandard masks make it into medical settings,
doctors, nurses and other healthcare professionals will not have the
level of protection they need. It is not too dramatic to state that
such counterfeit masks should cause serious harm — or even death.
The United States has strict laws preventing the trade in goods made
with forced labor. CBP does not need conclusive proof that the goods
were made under these circumstances. Instead, if it is possible to
reasonably conclude that forced labor was used, CBP can seize goods.
According to CBP’s Trade
and Travel Report for 2020, the agency issued 13 new withhold
release orders last year. This was a new record. Furthermore, the
estimated value of these seized goods was almost $50 million. This was
a significant jump from $1.4 million worth of withheld goods in 2019.
It’s not just manufacturers, retailers and distributors that need to
worry about import regulations and export compliance. Any company that
processes payments, or offers financial services needs to know who
they are trading with too.
International organizations, such as the United Nations, as well as
governments produce Restricted Party Lists (RPLs) or Denied Party
Lists (DPLs). Companies may not process transactions from anyone on a
“denied parties” entity list.
The aim of these restrictions is to prevent companies doing business
with anyone profiteering from organized crime or the proliferation of
nuclear weapons, or involved in terrorism.
A company that fails to comply with these laws can suffer financial
penalties, loss of export privileges, greater government oversight and
reputational damage. Officials can also seek custodial sentences for
Similarly, anti-money laundering laws help prevent financial fraud,
terrorism financing, or profiteering from the trade in illegal
narcotics. Banks in many countries — including the US and the EU —
must be able to properly identify and verify who their customers are.
In January this year, OFAC
issued a fine of $8.57 million to a bank that facilitates trade
between Europe, the Middle East, Africa and Asia. OFAC alleged that
the bank had committed 127 apparent violations of Syrian sanctions.
This fine could have been much higher. OFAC determined that the
violations were not egregious. Furthermore, the bank had voluntarily
disclosed the sanctions violations. In one well known case, in 2014
OFAC fined an international bank $8.9 billion for violating
sanctions against Syria, Iran and Cuba.
As the above examples illustrate, all kinds of companies need to
perform due diligence when trading internationally.
One of the first and most important steps of ensuring compliance, is
restricted or denied party screening. This means checking each and
every customer or vendor against DPLs.
Depending on where you trade, there may be a number of DPLs that
you’ll need to screen against. Again, depending on the nature of your
business, you may also need to screen against “Watch Lists.” These are
lists of people who have been convicted of ethics, criminal or
financial violations. Done manually, this is time consuming.
Manual screening processes are also prone to human error. This is
because these lists change frequently. Thousands of names can be added
or subtracted from any given list over the course of a year.
Therefore, it is vital to use the most up-to-date information to
ensure that your screening results are accurate.
However, it is possible to automate this process. Using software
solutions, companies can automatically validate that their trading
partners do not appear on any DPLs, or that the sale of their goods
does not violate any sanctions.
It is not enough to automate this process. Your solution should also
offer daily updates to trade content data.
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