What should you do if your supplier is in a sanctioned country?

Nov 24 2022, 9:31 AM6 min read

The Russian invasion of Ukraine has led to a list of sanctions on imports and exports from most countries. This is the latest example of companies caught up in geopolitics that disrupt procurement flows and add to the pressure of day-to-day operations.

What should you do if your supplier is in a sanctioned country?

In the case of the Russia-Ukraine war, sanctions happened rather suddenly. The disputes are long-standing in other cases, such as North Korea and Iran.

In our Procurement Under Pressure report – created in partnership with iValua – 86% of procurement and supply chain leaders cited supply disruptions and shortages, including sanctions, as a top concern.

In the case of the Russia-Ukraine war, 59% of respondents said the invasion had a major impact on their business. It’s no surprise that 78% of European respondents said the conflict had a major impact, compared to 53% for North America and 51% for APAC.

Make due diligence a part of your supplier relationship management

Procurement leaders must regularly evaluate supply chain and trade operations to ensure companies are meeting compliance expectations. Compliance is a crucial part of a risk management strategy that relies on tools and experts to ensure compliance.

One of the foundations of a compliance program is knowing which countries, organisations, and individuals are under sanction. But keeping up to date with the list of sanctions can be a daunting task.

Sanctions can be applied to individuals as well as companies and other entities. It may be easy to overlook the involvement of a sanctioned Russian oligarch in the regular activities of a valued supplier.

Lack of knowledge or fraud is no excuse, either. For example, a cosmetics company agreed to pay a fine of $1 million to settle violations of U.S. Office of Foreign Assets Control (OFAC) sanctions for importing false eyelash sets from North Korea. The company said it was duped into believing the items were manufactured in China.

Australia’s Department of Foreign Affairs and Trade maintains the Consolidated List of Individuals and entities under sanction, currently with more than 8,000 entries.

OFAC administers US sanctions but does not maintain a master list because sanctions programs vary in scope.

Some are broad-based and oriented geographically, such as Cuba and Iran. Others are targeted at specific issues, such as counter-terrorism and counter-narcotics, and focus on particular individuals and entities. The sanctions may encompass broad prohibitions at the country level, as well as targeted sanctions.

To stay up to date, companies must consult the Department of Treasury’s online resources and/or engage experts with compliance experience.

In addition, the US Department of Commerce and Department of State conduct independent oversight regulating the export of technology and other high-risk goods and services which are either prohibited or may require licensing.

Know your vendor or supplier best practices

While some industries have Know Your Customer and Know Your Supplier regulations, it’s a best practice regardless of whether it’s mandated or not.

For example, Walmart’s sanctions policy places responsibility on suppliers to:

Know where their products originated
Know who provided the products and components to the products.

Compliance experts recommend these best practices to help your compliance programs be effective:

Due Diligence. Collect and evaluate information to identify the ownership and activities of your vendors through vendor due diligence. The process can’t stop at onboarding – it takes continuous monitoring to ensure vendors comply with the dynamic regulatory environment.
Automation. Countries around the world continuously update their sanctions lists, and events can happen quickly, such as the case of the Russia-Ukraine conflict. Manual lists and spreadsheets can’t keep up. Automated tools enable users to monitor sanctions on a continuous basis and receive timely alerts about events. Your procurement and compliance teams can focus on higher-priority tasks.
Enhanced Due Diligence. High-risk vendors or individuals may require in-depth research and vetting. Shell companies and false identities make it difficult to know who actually owns the business. Self-reporting can fail when nefarious motives are involved.
Mitigate Risks. Use automated tools to monitor public records, news, social media, and other open information sources to reveal risk factors with suppliers. It’s not only good for sanctions but also for supplier financial health and market activity. You may be able to mitigate the risk of association with a vendor that’s about to be in the news for all the wrong reasons.
Maintain Records. Keep verifiable proof of your compliance efforts, including due diligence, staff and vendor training, audit reports, employee communications, etc. These records will become part of your defence if a supplier commits a violation. The regulatory agencies will want proof your due diligence and monitoring efforts were consistent and effective. These records could help avoid fines, settlements, and other financial impacts.

No excuses compliance

Simply put, sanctions compliance leaves no room for error. There is no safe harbour from complying with regulations and being subject to enforcement action.

Individuals and organisations that violate sanctions could face serious consequences, including personal and criminal liability and reputational damage. It doesn’t matter if the violation was due to a legitimate mistake or misunderstanding of the law. One software company faced penalties for selling technology that eventually wound up in Iran and allowed customers in Iran to access cloud-based services in violation of U.S. sanctions.

If you find your organisation may be doing business with a sanctioned entity or individual, the intelligent course of action is to contact your country’s relevant authority and, perhaps, an experienced attorney. Following the proper procedures may help your organisation avoid penalties for violations.

For example, Australia offers a sanctions permit. If you know or suspect your organisation has assets owned by an entity or individual on the list, contact the Australian Federal Police.

In the US, OFAC may issue a licence to proceed with a transaction that might otherwise be prohibited. Exceptions for humanitarian reasons, such as donated goods to relieve human suffering, are also available.

E.U. sanctions on Russia have specific exclusions for food and food production items such as fertiliser to help maintain food supplies in Europe and Russia.

Anti-boycott regulations

To make matters more complex, the US has antiboycott regulations in place for some countries. Export Administration Regulations bar US companies from acknowledging or obeying requests by foreign entities to boycott Israel and certain other countries.

That means one country may implement sanctions on a specific country, and in most cases, a US organisation would be compelled to comply. But when it comes to these particular countries, such as Israel, the US company may be caught between the proverbial rock and a hard place. The regulations protect US companies from being forced to implement other countries’ foreign policies when those policies conflict with US policy.

The Office of Antiboycott Compliance reports that some US companies unknowingly violate these regulations because the antiboycott provisions are conveyed in the fine print of a foreign purchase order or sales contract and are overlooked until it’s too late.

As your procurement organisation builds relationships with suppliers, developing a comprehensive process to understand your exposure to sanctioned entities and individuals is critical.

It requires ongoing oversight and commitment to ensure your organisation abides by these strictly enforced regulations.

To understand more about the pressures currently facing procurement and supply chain professionals, the outlook for 2023, and what you can do to tackle these market challenges, make sure you download our ‘Procurement Under Pressure’ Research report. We teamed up with Ivalua to survey 170 procurement and supply chain leaders on the pressures and conditions they’re experiencing in 2022 and their outlook for next year. Click the link to download Procurement Under Pressure.

Find more Supplier Relationship Management news, insights, and best practises at Procurious.com.