By Brian Hodgson, General Manager, Global Trade Intelligence, Descartes Systems Group
Denied party screening and global trade compliance has never been more business critical.
Transacting with a new customer, supplier, or partner without the right processes in place to screen them against global sanctions is all it takes to make an unforced error that can quickly create significant issues for your business.
You will have heard the term “unforced errors” in sports, especially in tennis. It’s used to describe mistakes that could have been avoided through better training and playing intelligently with focus. The concept applies to many aspects of business, including export and international trade compliance, because knowledge, processes and focus will allow companies to adhere to the straight and narrow, and, in doing so, actually enable growth.
Enforcement actions taken by regulatory agencies and sanctioning bodies can result in heavy fines and potentially criminal penalties — and those actions have effects far beyond the monetary value. Every agency publicizes enforcement actions, meaning your partners, competitors, and clients will be aware of sanction violations, even if they were non-malicious errors.
- Export and International Trade Compliance Fines from Global Regulatory Agencies
- Potentially Avoidable Export Compliance Violations That Resulted in Fines and Penalties
- The True Cost of Export and international Trade Compliance Violations
- The Margin of Error Has Never Been Thinner
- Export and International Trade Compliance Has Become More Complex — Descartes Can Help
The Russia-Ukraine conflict rapidly resulted in new sanctions and regulations that companies worldwide must understand. Practices, policies, and technologies must protect organizations against inadvertently violating these sanctions. Sanctioning bodies have long provided explicit instructions, such as denied party screening lists. But more recently, these bodies have also begun to publish directional guidance for which the objectives are still clear but there are partial or non-existent lists to screen against.
An example of directional guidance is the Military End User (MEU) and Military Intelligence End User (MIEU) that place additional restrictions on transacting with foreign parties determined to be ‘military end users,’ which also extends to ‘military end-use.’ Another example is an area of regulation that is gaining increased focus the U.S. Forced Labor Prevention Act (UFLPA) for which the U.S. Customs and Border Protection (CBP) has provided operational guidance and its interpretation of the UFLPA laws and regulation. Additionally, the OFAC 50-Percent Sanctioned Ownership Rule which further complicates identifying sanctioned parties, as any company with a combined 50% ownership by sanctioned parties is then sanctioned by extension. Similar ownership rules are also enforced in other jurisdictions, including the European Union and United Kingdom.
Agencies involved with export and international trade compliance enforcement will generally consider intent when determining the number of fines and whether criminal charges will also be imposed. However, unforced errors will not be overlooked.
It is vital to upgrade your processes and technologies to identify any sanctioned or denied parties you may accidentally or unwittingly transact with. Keep reading to learn the severity of fines and penalties imposed by key agencies to help understand the true cost of an unforced export and international trade compliance error.
Export and International Trade Compliance Fines from Global Regulatory Agencies
Office of Foreign Assets Control (OFAC) Fines and Penalties
The U.S. Department of the Treasury’s OFAC frequently publicizes civil fines and penalties imposed on specific companies for sanction compliance violations. We can see how fines have steadily increased since 2020.
|Year||Total Fines (USD)|
Table 1: Annual Sum of Monetary Penalties from OFAC Enforcement Actions 2019 – 2023
Bureau of Industry Security (BIS) Penalties
The Bureau of Industry Security (BIS), an agency under the U.S. Department of Commerce, releases annual fiscal year reports detailing total fines, among other policy updates and changes. In April 2023, the BIS imposed a $300 million penalty – the largest standalone administrative penalty in the agency’s history – to an American company for violations that stemmed from unforced errors such as unjustifiable assumptions made about items subject to Export Administration Regulations (EAR).
|Fiscal Year||Total Fines (USD)|
Table 2: Annual Sum of Monetary Penalties from BIS Enforcement Actions 2018 – 2021
U.S. Department of State
The Department of State does not publish aggregated reports of annual fines, rather issuing public notices for each fine and penalty. The fines and penalties fall into two categories:
- Civil Penalties: $1 million minimum fine per violation and debarment.
- Criminal Penalties: $1 million minimum fine per violation, 20 years imprisonment, or both per violation. Debarment is also imposed.
You can review the State’s publicized fines and penalties per company for additional details about their actions.
HM Treasury Office of Financial Sanctions Implementation (OFSI) UK
For organizations that are subject to UK sanctions and regulations, the Office of Financial Sanctions Implementation is responsible for enforcing criminal and monetary penalties for sanction compliance violations.
A look at enforcement actions that have been taken over the last 4 years by OFSI can be found here.
Potentially Avoidable Export Compliance Violations That Resulted in Fines and Penalties
Mistakes, originating from human error or system failure, have been the cause of many sanctions violations, rather than malicious intent to breach regulatory obligations. Below, you can see notable sanction compliance violations that may have been avoided with the proper tools and processes in place. These examples emphasize the need for a robust denied party screening solution that can protect the organization on a daily basis.
Global Enforcement Actions Resulting from Unforced Errors
|Violation||Unforced Errors||Penalty Amount|
A U.S. data storage company violated export control laws by shipping hard disk drives to a company listed on the BIS Entity List
-The company misinterpreted the Foreign-Produced Direct Product rule and made unlicensed sales
A multinational technology company, headquartered in the U.S. violated OFAC sanctions and BIS Export Administration Regulations.
-Failed to perform complete denied party screening of its ultimate end-users and third-party relationships (such as resellers and agents).
U.S. based cookware coating manufacturer fined for doing business
-Erroneously thought they could do business with Iranian firms as long as there were no direct connections between it and the sanctioned Mideast nation.
U.S. cryptocurrency payment processor breached multiple regulations related to sanctioned countries.
-Operated for nearly two years without a denied party screening program.
Hong Kong-based financial institution violated the Iranian Transactions and Sanctions Regulations (ITSR).
-Lacked robust workflows / centralized visibility into the actions of non-compliant employees.
U.S. online money transmitter violation of multiple sanctions related to Specially Designated Nationals (SDN Lists) and sanctioned regions.
-Weak denied party screening software that failed to flag blocked persons.
International payment processor violated the Foreign Narcotics Kingpin Sanctions Regulations (FNKSR).
-Ineffective adjudication and escalation workflow.
Puerto Rican bank provided services which violated the Venezuela Sanctions Regulations.
-Slow to update its denied party screening content to match new regulations.
A Bank in the UK breached OFSI/EU Ukraine regulations and made funds available to sanctioned entities.
-Did not implement proper denied party screening according to its risk profile.
Here is a digest of other companies (highlighted in an earlier article in the Export Compliance Journal) which also unwittingly broke export and international trade compliance rules and were penalized.:
- An oilfield services organization had the appropriate export compliance policies and procedures in place, but did not adequately train its personnel on those processes.
- An electronics company, using eBay, unknowingly sold a device that converts pressure into an analog signal which also had a dual use application in nuclear explosives technology.
- An oscilloscope manufacturer who failed to properly screen the buyer and ended up engaging in business dealings with a Chinese organization listed as a denied party.
- A pump maker failed to obtain export licenses to ship products that were controlled for reasons of chemical and biological weapons proliferation to China and Russia.
- Another pump and valve maker failed to get authorization to transport EAR99 items to the embargoed nations of Syria and Iran.
- A scientific equipment and supplies vendor sold a lubricant for cutting tools to China, Hong Kong, Thailand, India, Brazil, and Israel without the required export licenses. The substance is listed as controlled for chemical/biological, anti-terrorism and chemical weapons reasons.
- Two freight forwarders shipped EAR99 items (scrap steel and machinery that produces spiral ducts for ventilation systems) to denied parties in Pakistan and China.
- A thin film and vision sensor technology company breached deemed exports regulations by releasing controlled blueprints and drawings without the required export licenses.
- In another deemed export violation, an integrated circuit designer and manufacturer inadvertently exposed classified technology to Chinese and Iranian national employees without first applying for export licenses.
The True Cost of Export and international Trade Compliance Violations
What does violating sanctions really cost your business? It’s not just the direct monetary fines. There are other issues that can affect the organization and which can have long-term effects, including:
- Fines and penalties: The immediate fine imposed by the enforcement agency can often be a significant setback for your organization.
- Legal fees: Your business will likely need to pay legal fees to process or challenge the imposed penalties.
- Business interruptions: Enforcement actions taken by regulatory agencies can result in the organization falling out of compliance and losing the ability to operate entirely. Your licenses may be suspended, or you may be unable to transact with necessary vendors.
- Reduced trust and reputation: All enforcement agencies publicize their actions. This public notice can damage your organization’s reputation, and you’ll need to take significant public steps to assure partners and clients that you have corrected the issue. You will also incur costs from PR and marketing to repair your public image.
- Loss of opportunity: Your industry peers, partners, and customers will know about the compliance violation. Many of these parties may wish to distance themselves from you. Inadvertent violations are still violations; and third parties will wish to avoid tarnishing their reputation by association.
- Impact on productivity and revenue: The financial costs and the reputational damage can bring your business to a crawl or stand-still. The ensuing disruption is a distraction that will divert corporate attention away from the core business mission and objectives.
The Margin of Error Has Never Been Thinner
Abiding by sanctions and restrictions has never been more crucial, and a single error, even unforced, can significantly impact your business. Adopting technologies and processes to improve your restricted party screening practices can go far in helping your business reduce the risk of fines and other penalties.
The BIS details several red flag indicators to consider as you improve your denied party screening practices. Red flag indicators include:
- The customer or business address is the same, or similar to the BIS’ denied party list.
- The purchasing agent hesitates to offer information about the end-use of the item.
- Customers decline routine installation, maintenance, or training after purchasing the product or service.
- Packaging is inconsistent with the stated shipping method or destination.
- The buyer attempts to evade questions regarding whether the product is for domestic, export, or re-export usage.
You can see how these indicators require your teams and processes to know how customers intentionally trying to evade sanctions may act. If they’re successful, your company will make an unforced error that would have otherwise been avoided.
Export and International Trade Compliance Has Become More Complex — Descartes Can Help
You don’t need malicious intent to violate export regulations; you may inadvertently violate them by lacking the right processes and technologies.
Descartes offers restricted party screening and global trade intelligence technologies to help your company avoid making unforced errors that can significantly impact your organization.
Descartes Visual Compliance and Descartes MK solutions are flexible and modular, allowing organizations to pick the specific and exact functionality and content they need for their particular compliance needs and scale up later as and when necessary. Also read what our customers are saying about Descartes Denied Party Screening on G2 – an online third-party business software review platform.
Ready to bolster your export and international trade compliance practices to mitigate the risk of costly fines and penalties? Contact us today to speak to a global trade compliance specialist. You can also read this essential buyer’s guide to denied party screening to help you select a solution that fits your needs.
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