Every organization aims to steer clear from associations with denied parties in all their business whether it’s in their transactions or within their supply chain.

Yet, in today’s unpredictable world, every commercial relationship could have hidden risks with the potential to put organizations on the wrong side of the regulatory divide.

Many businesses have outsourced the denied party screening process to consultancies or legal firms but is that the right approach? When should a company consider investing in compliance technology instead? Thomas Lobert, a solutions consultant at Descartes Systems Group, contemplates these questions.

Businesses are required to comply with various international trade regulations and export control laws to operate legally, ethically and responsibly in the global marketplace.

For example, the U.S. has robust export control regulations administered by several agencies including the Department of Commerce, Department of State and Department of the Treasury. These all aim to prevent the unauthorized transfer of sensitive technology, goods and services that could harm national security or foreign policy interests.

Denied party screening, also known as restricted party screening, helps businesses ensure compliance with these regulations by preventing companies from engaging in business transactions with individuals, organizations or countries on denied party lists. Failure to comply with these regulations can lead to severe penalties, fines or, in the worst-case scenario, criminal charges.

Pros and Cons of Outsourcing Your Compliance, Screening and Due Diligence

Outsourcing offers flexibility in meeting fluctuating compliance requirements. This flexibility helps companies adjust to changing regulations and business conditions without needing to restructure internally. Additionally, outsourcing to a consultancy or legal firm can be cost-effective during such peaks, saving businesses from the overhead costs of growing an in-house compliance team, which can be especially beneficial for smaller businesses.

However, outsourcing also carries potential financial implications based on the scope of services, transaction volume, and contractual agreements and costs can quickly add up taking into consideration per-hour legal and consulting fees. There are also data security concerns, as sensitive information is shared with a third party. Companies must ensure that their outsourcing partners have robust data protection measures in place. It’s also worth noting that outsourcing might lead to dependency issues, with potential delays and communication challenges.

And if you have ever outsourced compliance questions you know from experience, that the legal firm or consultancy never gives you a blank cheque response. The ultimate decision responsibility remains with the company.

Legal firms or consultancies provide their expertise and services to help your company comply with applicable regulations. However, if a violation occurs, your company would generally still be held accountable by the regulatory bodies. This is because it is your company’s duty to ensure that all transactions and business activities align with the relevant laws and regulations, regardless of any third-party services employed. Consequently, this mandates the need for some level of compliance expertise in-house.

Pros and Cons of Using Compliance Software for Your Compliance, Screening and Due Diligence

Investing in software solutions, such as Descartes Systems’ Denied Party Screening software, can equip companies to deal with the increasing complexity brought about by geopolitical instability, trade tensions, and supply chain disruptions. Such software centralizes and streamlines the screening process across various business functions, mitigating the risk of disruptions. Having your own compliance team can turn this business function from a cost center to a value creator- helping the business identify new markets and reduce the risk of interacting with a denied party. However, adopting software solutions isn’t without its challenges. It may require certain technical expertise for effective implementation and usage. There may be limitations based on data inputs, and the quality of the output will heavily depend on the quality of the input data.

 Outsourcing to Legal Firms/ConsultanciesUsing Compliance Software (e.g., Descartes DPS)
Pros1.  Flexibility in meeting fluctuating compliance requirements
2. Adaptable to changing regulations
3. Cost-effective for smaller businesses
1. Centralized and consistent screening process
2. Can keep pace with globally changing regulations
3. Cost-effective in long-term with high transaction volumes
4. Turns your business function from a cost centre into a value creator
5.  Responsibility for any compliance violations still lies with your company
6. Ad-hoc availability and ease of retrieving audit trails  
Cons1. Potential financial implications based on the scope of services
2. Data security concerns
3. Dependency issues
4. Scalable solution 
5. Own firm’s ultimate responsibility mandates basic compliance capabilities
1. As with any software there is a learning curve/ training is required
2. Output quality dependent on input data quality
3. Potential limitations based on data inputs

Weighing the Denied Party Screening Options

After weighing up the pros and cons of both options, it becomes clear that the right choice can vary based on the specific needs and resources of each business. Some might find that the control and opportunities that an integrated system provides by a third-party risk management vendor suit them best. In contrast, others might prefer the personal attention and broader services that can come with outsourcing to a legal firm or consultancy.

When evaluating software solutions, businesses should consider ease of use, integration with existing systems, updates, and customer support. A thorough cost-benefit analysis should also be done, factoring in both short-term and long-term costs, potential savings, and the financial impact of non-compliance. Our buyer’s guide can help you with this.