Restricted Party Screening to Minimize Risk in Developing Markets
Entering new markets is exciting, filled with new opportunities, fresh starts, and hopefully an endless new customer list. Whether establishing a physical location, using third parties, or simply expanding the demand base by allowing customers from new countries to order your product on-line, new markets come with new obligations.
Doing business in developing markets, such as Eastern Europe, can be especially challenging. Not only are there tax regulations, product standards, and languages to consider, these markets also come with additional compliance requirements to be followed. One obligation that is sometimes forgotten is restricted party screening (RP screening or RPS). In a region where politics and economics are closely intertwined, RP Screening is critical.
It is the responsibility of every organization to know its customers; if the organization engages in global trade, part of that obligation is to ensure that who you are selling to or, in an even broader sense, anyone you are partnering with, is not on a restricted party list. And that is where things can potentially become difficult. On a global basis, the number of RP lists has grown dramatically over the years, and the number of people, parties, and entities on the lists is easily over 60,000. Lists are maintained by the State Department, the Treasury Department, and the Department of Commerce, as well as international entities such as the United Nations, the European Union, and Interpol. Failure to comply can lead to civil or criminal prosecution resulting in hefty fines and potential prison sentences, as well as denial of exporting privileges.
Fortunately, RP screening is mostly the straightforward lists; when there is a match you definitely cannot do business with the named party. A potential match, where the RPS engine matches a name on a given list to one in the transaction, can be identified as a true or false positive fairly easily – either by determining the quality of the match or by performing additional research to identify whether the person or company matched is truly the one you are about to do business with.
It gets more challenging when a match is made with a name that is on a list of exposed parties, not necessarily fully restricted parties. In short: what do you do when the person or party you are about to enter into business with is known to have political ties, thereby significantly increasing corruption and fraud risks associated with the transaction, possibly leading to violation of the Foreign Corrupt Practices Act (FCPA) or other regulations?
In many Eastern European countries where politics and economics are closely tied together, whether that dates back to state-owned enterprises or not, it is a challenge to properly assess if the potential match is to lead to an allowed or denied transaction. Major corporations are sometimes still government-owned, have board members in the government, or major stakeholders are related to government officials. Disallowing all those flagged transactions would result in not much of a market presence. So, where is the line drawn between an approved and a denied transaction? How do you assess, mitigate, document, and continue the risk analysis?
The use of RP screening should not be seen as the end station in these situations, but as the beginning point of a compliance trail. If a match is made based on a list politically exposed person (PEP) list, it does not suggest that you cannot legally do business with this person. It is, however, an indication to tread much more carefully and lower the threshold for discontinuation of the current transaction or future business. In case of doubt, the best course of action is to deny the transaction. If after careful assessment, which should include a local inquiry and perhaps conversations with US compliance officers, it is concluded that the transaction can continue, it should not be assumed that the green light is on forever.
Most restricted party applications facilitate approving or denying transactions and/or parties anywhere between once and indefinitely. When in doubt, approve only once. Another option is to use continuous screening, also known as reverse RP or ongoing screening, in which case if the party is showing up on additional lists, it will get flagged right away, even if it was approved earlier.
It is imperative to document the entirety of your restricted party screening process carefully – add notes to the records, if conversations outside of your organization were had, document those as well. If the situation locally changes, the company must be able to change the relationship as well, meaning any contracts should have provisions for various compliance requirements. It is difficult to change direction if there is no contractual basis for it, and the named party is not present on a denied listing. Other than in false positive matches or true positives that are denied indefinitely, these grey areas require ongoing attention. Continuous monitoring of changes to RP lists, local information, feedback from legal counsel, and common sense are the key ingredients to making the right decisions when it comes to knowing and doing business with your customer.
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