Screening suppliers against lists of sanctioned businesses, individuals and entities is a critical part of the vendor management process. Sanctions are typically imposed by governments and international bodies, such as the United Nations (UN), to achieve foreign policy objectives, combat terrorism, prevent money laundering or address human rights concerns. The Office of Foreign Assets Control (OFAC), a division of the U.S. Department of the Treasury, plays a big role globally in enforcing economic and trade sanctions. But there are dozens of lists that a business must check for sanctioned entities. Unwittingly engaging in transactions with sanctioned entities could result in compliance violations, crippling reputational damage and a loss of trust with valued partners and customers.
This article details the concept of sanctions screening, the risks associated with doing business with sanctioned entities, the shortcomings of manual sanctions screening processes, and the role of supplier portals with built-in sanctions screening capabilities in today’s business environment.
What is sanctions screening?
Sanctions screening is the process of determining whether a business, individual or entity is subject to any economic or trade restrictions imposed by governments or international bodies. During the screening process, supplier names and details are compared against lists to identify potential matches.
There are dozens of different lists that businesses must check for sanctioned entities.
There are lots of reasons that an entity may be sanctioned, including national security concerns, counterterrorism efforts, human rights violations and other geopolitical considerations.
No matter the reason, companies cannot do business with sanctioned entities.
What are the risks of poor sanctions screening?
Paying a sanctioned business or individual can create big problems for a business.
- Legal issues. Violating sanctions regulations can result in severe legal repercussions. Governments and regulatory bodies can levy hefty fines, revoke a business’ license, restrict business activities and even file criminal charges. Businesses that violate sanctions could also face legal challenges and lawsuits from stakeholders affected by the sanction violation.
- Financial losses. Sanctions violations can lead to financial losses. Funds or assets involved in prohibited activities may be frozen, seized or confiscated by authorities and the payer may have to reimburse payments, forfeit profits or pay penalties because of the violation.
- Reputational damage. Associations with entities involved in illicit activities or human rights violations can tarnish a brand’s image and erode customer trust. A poor reputation can lead to lost customers, difficulty attracting new clients, and negative media attention.
- Business process disruptions. The discovery of payments to a sanctioned entity can disrupt a company’s operations. Authorities may impose restrictions on the payer, limiting its ability to conduct certain activities or trade with specific countries or individuals. It can take a lot of resources to overcome disruptions to established supply chains and business processes.
- Loss of business. Paying a sanctioned business or individual can cost a company business. Potential partners, suppliers or customers may choose to distance themselves from a company associated with sanctions violations. This can lead to a loss of contracts, partnerships or access to key markets, impacting revenue and growth prospects.
- Regulatory scrutiny. Companies that violate sanctions are likely to draw additional scrutiny from regulators. A business may face more frequent audits, monitoring or investigations, resulting in additional compliance costs. Additionally, increased compliance efforts may be required to rectify deficiencies, remedy violations and restore regulatory confidence.
These are some of the risks of doing business with a sanctioned entity.
The problems with manual sanctions screening
Many AP departments manually screen entities against watchlists.
While manual screening can be effective, it’s not foolproof, and it can create significant problems.
- Slow, time-consuming processes. Manual sanctions screening requires overworked staff to search and review large volumes of data against multiple watchlists.
- Potential for error. No human is infallible. Staff performing screenings may miss potential matches due to oversight, misinterpretation or fatigue. And the accuracy and consistency of screening results will inevitably vary among different individuals performing the task.
- Limited coverage. Manually updating and maintaining watchlists from different authorities is hard. One missed update or addition can leave a business vulnerable to a violation.
- False positives/false negatives. It’s not uncommon for the screening process to generate a false positive or a false negative – instances where a match is not the intended target or where a potential match is missed. A payer could put itself at risk without a way to validate results.
- Lack of scalability. The number of entities that a business must screen grows as it gets bigger. Fast-growing businesses must choose between adding more staff to manually screen businesses and individuals against watchlists or a backlog of entities awaiting screening.
- No tracking. It’s hard for businesses that rely on manual screening processes to provide auditors with evidence of compliance or to demonstrate adherence to screening procedures.
It’s no wonder that more businesses are automating their sanctions screening with a supplier portal.
The benefits of automated sanctions screening
Leading supplier portals digitize, simplify, and standardize the process of screening entities.
Suppliers use online portals to electronically submit information to buyers during the onboarding process. The portal then analyzes the information, routes the information for review and approval based on the buyer’s pre-configured business rules, and creates a vendor record in the buyer’s ERP.
Here are some of the benefits of using a portal with built-in sanctions screening functionality.
- Real-time sanctions screening. Leading supplier portals enable real-time screening of businesses and individuals against dozens of watchlists. As suppliers enter their information into the portal, the portal compares their details against the latest and most comprehensive lists, including those maintained by authorities such as OFAC, the European Union (EU) and the UN. Buyers are immediately notified of any potential matches with sanctioned entities.
- Comprehensive coverage. The sanctions screening built into leading portals provides wide coverage of watchlists to ensure that all relevant lists are reviewed during the screening.
- Increased efficiency and scalability. Automated sanctions screening solutions can rapidly process and analyze large volumes of supplier information against watchlists. Fast-growing businesses or those with a lot of suppliers won’t have to add staff to keep up with the task.
- Enhanced compliance. The sanctions screening solutions built into leading supplier portals document the screening process and results and provide complete audit trails. Users also can instantly access reports on screening outcomes, flagged entities, and actions taken.
- Streamlined supplier onboarding. Automating the screening process enables businesses to proactively assess the compliance status of potential suppliers, eliminating potential delays in onboarding. Some portals also facilitate ongoing screening of existing suppliers to check for any updates to sanctions watchlists that could affect a supplier’s compliance status.
- Seamless integration with legacy systems. Leading supplier portals seamlessly integrate with existing systems, such as enterprise resource planning (ERP) platforms, enabling a streamlined and automated process throughout the supplier management lifecycle.
A supplier portal can significantly improve the sanctions screening process.
Why automate your sanctions screening
The implications of doing business with a sanctioned company, individual or entity can be severe. But comparing vast amounts of supplier data to dozens of ever-changing sanctions lists is not easy. And manual screening processes are time-consuming and error prone. That’s why more businesses are turning to supplier portals with built-in sanctions screening capabilities. These automated solutions improve efficiency, mitigate compliance risk and deliver a better experience to suppliers.
Learn how VendorInfo helps all kinds of organizations keep compliant with OFAC and other critical watch lists–contact us.