Failing to Understand Restricted Party Screening in 2022 Means Increasing Risk Exposure
The supply chain turmoil that has befallen U.S. importers and exporters since the outbreak of the COVID-19 pandemic has put a new emphasis on supply chain visibility. Businesses of all sizes are looking for tools to give them clearer insight into how, where and when their goods are moving.
This is perhaps truest for larger shippers with complex supply chains involving multiple trade lanes and numerous supply chain partners. Smaller shippers, though affected, have fewer resources to invest in this level of monitoring and have felt less pressure to do so as they may only be dealing with a single foreign buyer or supplier (and in many cases only occasionally at that).
However, the outbreak of hostilities in Ukraine and the associated sanctions placed on Russia by Western nations is now pushing businesses of all sizes to put their supply chains under the microscope lest they find themselves in breach of the sanctions imposed. To this end, businesses are engaging in a practice known as Restricted Party Screening or RPS.
What is RPS?
Put simply, RPS is a tool that enables businesses to screen partners and/or products in their supply chains to ensure they are not listed as restricted by a government entity. It involves plugging in the names of supply chain partners into a global database of restricted parties to see if there’s a match. The process is usually automated as the number of sanctions against various parties globally runs into the thousands with no central directory of restricted-party lists, so the process can be prohibitively onerous if done manually. Many exporters will often mistakenly assume that if a party is not listed in one list, they are safe to do business with.
Who should do Restricted Party Screening?
All businesses that engage in import and export should engage in Restricted Party Screening, regardless of business size, destination of their goods or perceived reputability of their supply chain partners. According to U.S. law, it is the responsibility of the importer or exporter to ensure goods are not finding their way into the hands of restricted parties. For larger businesses, the RPS process is often integral to the evaluation of new and existing supply chain partners. However, for the 96% of U.S. exporters that are small businesses (and represent about one-quarter of total export activity), RPS remains somewhat of an unknown and under-
Why is this important?
RPS ultimately offers businesses peace of mind that the entities with which they are doing businesses overseas are not in breach of sanctions. It also allows businesses to demonstrate “reasonable care” to the government that they have done their due diligence to ensure they are not willfully engaging in commerce with restricted parties. Governments put sanctions in place to protect their own national security, or that of their allies. Breach of sanctions is
interpreted as a national security threat and can result in the significant fines, criminal charges, imprisonment and loss of export licensing. In recent months, the United States and other Western nations have imposed hundreds of sanctions against Russian companies and individuals known to be, or suspected of being, supportive of Russia’s invasion of Ukraine.
These sanctions have put RPS into the spotlight, but the entities targeted by sanctions prior to the war in Ukraine still numbered in the thousands and included businesses and individuals in
countries with which U.S. exporters often do business, such as China, Iraq, North Korea, etc.
What constitutes being in breach of sanctions?
In many cases businesses mistakenly believe that as long as they are confident the businesses to which they are selling goods overseas is legitimate and reputable, there is no need for them to be concerned. That’s not exactly true. If a businesses is found to be supplying goods to an overseas party who then re-sells those goods or incorporates them into a new product that is then sold to another party and again re-sold or modified and then sold to a restricted party, the original seller in the U.S. could be considered in breach of sanctions. This is true even if the restricted party was not a restricted party when the relationship began.
Do all sanctions work the same way?
Sanctions ultimately fall into one of two categories – primary or secondary. Primary sanctions are those directly imposed on businesses and individuals. U.S. businesses found to be engaging
in commerce with restricted parties within or outside the U.S. could be considered being in breach. Secondary sanctions take this one step further. These sanctions leave foreign-based companies with the ultimatum of having to do business with the U.S. or with a party in a sanctioned country, but not both. For example, a company in Turkey cannot sell goods to a party in a U.S.-sanctioned country (e.g., Iran, China, North Korea, Syria, etc.) and also sell goods to the United States. U.S. importers who knowingly purchase goods from foreign entities who are also selling goods to sanctioned countries could be considered in breach of secondary sanctions.
How does the RPS process work?
As mentioned above, the RPS process is usually automated. The names and addresses of entities and the associated export controls are entered into a proprietary software. At Livingston, if a party is identified as a potential restricted party, the party is entered into a
queue and then researched and reviewed by compliance experts.
Not a “one and done” process
As restricted party lists are frequently updated and supply partners can change, it is recommended that all exporters – but particularly those with multiple trading partners and/or multiple destination countries or countries of origin – do screening on a regular basis so that newly listed restricted parties or a change in a party’s status can be identified in real time, and guidance can be offered on the associated degree of risk. This process is also helpful as a means
of vetting prospective buyers and suppliers.
Many businesses don’t learn of RPS or the importance of sanctions compliance until it’s too late and they find themselves under federal investigation. They’re often unaware they were ever at risk or that their supply chain partners were a liability to them. That’s why it’s best to think of RPS as a kind of safety net – a nominal upfront cost to mitigate far greater future expense.
The onus is on the exporter or importer to be proactive. A reactive approach to RPS is ultimately a failed approach.
Khaled (Cal) Jamalalldeen is a Global Trade Consulting Executive at Livingston International. He is responsible for assisting businesses with the identification and resolution of trade compliance and commodity tax issues. He has more than 17 years of industry experience with particular skills in and extensive knowledge of commodity/indirect taxes, international trade compliance and financial recovery.
Leave a Reply