How sanctioned ownership adds challenges to business partner screening

Awareness for global trade compliance and export control requirements has significantly increased over the years. In today's globalized markets subject to dynamically changing global trade rules and restrictions, companies are well aware of their basic trade compliance screening obligations. 

So, this chapter is easy. Nowadays, especially in politically unstable times and under market uncertainties, no company takes its legal trade compliance obligation lightly. And most companies know by heart that it is prohibited, for example, to provide economic resources to any persons or organizations listed on official embargo lists from the EU.

Most traders are familiar with the EU's "Common Foreign and Security Policy" list – or short, the CFSP list. It is the official EU database and contains all the persons, groups, and entities in the lists of names and anti-terrorism regulations at EU level and in the embargoes at the national level. But bans on provisions are also found in the embargoes against individuals (“anti-terror regulations”) – not just in the EU’s embargoes against countries. 

And there are many more official sanctions lists by different authorities across the globe that must be checked and complied with when trading. Of course, there are too many lists and each is too long to check it manually, so most companies work with automated screening solutions. If you don't, take a look at AEB's Compliance Screening for your best option to manage secure and efficient business partner screening. 

Now it gets more tricky. Because official regulations do not only prohibit direct provisions to sanctioned parties – they also prohibit any indirect provisions. The term itself already indicates that this may not be something that obvious and compliance in this area is a great challenge in everyday business.

In fact, many companies and responsible executives are not even aware of their obligation when it comes to bans on indirect provisions. These restrictions refer to financial or economic resources that are made available to an entity that is not listed on a sanctions list itself but it is owned or controlled by a listed entity. 

Compliance with bans on indirect provisions on all applicable transactions across business units from procurement to fulfillment is consequently based on and involves: 

• Knowledge of all involved companies' ownership structures to identify if sanctioned ownership regulations apply, and 
• Screening of all such companies (as all others directly involved in relevant business transactions) again relevant lists, and 
• Stopping any relevant transactions that would violate either direct or indirect bans on provisions in line with EU and US regulations.

So: Do you and your teams really know who owns or controls (full or in parts) the suppliers, partners, agents, customers, and prospects that your company engages with every day? How can you meet the challenge to comply with bans on indirect provisions?

A picture speaks a thousand words. So take a look at the following illustration that visualizes an example of ownership structures based on four interconnected companies. In words, this visualization displays: 

• Company B and company C are owned with over 50 percent by company A. As a result, if company A is sanctioned, company B and company C are sanctioned by extension, too – even if they do not appear on a sanctions list themselves.
• Company D shows a more complex ownership structure: company A owns 25 percent, company B 15 percent, and company C 20 percent. The example demonstrates how the 50 percent rule applies also for accumulated ownership shares: If company A is sanctioned, then company D with an accumulated ownership share of over 50 percent by sanctioned companies (direct or by extension), is consequently sanctioned as well.

Basically, it means that screening all business transactions against all relevant sanctions lists still leaves risk exposed. Comprehensive compliance includes an understanding of the ownership structures of all business partners – from the very top in the chain of parent companies to all involved natural entities (shareholders) – and screening of all relevant parties.

Today, ownership structures of businesses across the globe can be quite complex – and they’re not necessarily transparent either. Identifying them requires serious – and repeated – research as ownership structures are not set in stone and can develop quite dynamically.

There are many discussions on this topic in business communities across markets and regions worldwide: Considering the complexity of the task, can companies really be required to manage such background checks in daily business? Is this reasonable or even feasible? Fact is, unless applicable courts rule differently, it’s the law and compliance is required.

How do you manage trade compliance screening in your organization? Do you cover both direct and indirect bans on provisions? Contact us if you would like to discuss your software requirements. In partnership with Dow Jones Risk and Compliance, AEB delivers comprehensive screening packages to meet your due diligence requirements.