Managing Counterparty Risk in the Era of Sanctions

James Wilson
James Wilson

The war in Ukraine and the resulting comprehensive trade sanctions targeted against the government of Russia (and to a limited extent Belarus), along with companies domiciled in or with ties to Russian entities, and individuals tied to Putin’s inner circle have unleashed a flurry of “What Ifs” as it relates to counterparty risk within the supply chain and customer base. As the conflict unfolds, more and more

Managing Counterparty Risk in the Era of Sanctions (1)

sanctions seem to be leveled daily by a multitude of countries in an attempt to cut off the flow of funds to Russia. Within this global landscape, companies are now having to manage the risk of compliance against a rapidly changing list of prohibited counterparties, in multiple languages, that may or may not be fully comprehensive or accurate. Unfortunately, balancing this risk is no guarantee that you won’t violate a sanction or inadvertently deny legitimate counterparty access to their own funds. Understanding how to protect your company from the financial, reputational, and ethical risks in this veritable minefield of sanctions will be critical in the “New Normal”.

Unfortunately, the penalty for tripping a sanction can be severe with companies facing financial, civil, and even criminal penalties including jail time years after the violation was determined to have occurred.

KYC (Know Your Customer) now needs to read “Know Your Counterparty”.

The "What Ifs" of Non-Compliance

What happens if my payment or delivery of goods is directed to an entity or individual under sanction?

Could my payments or goods be frozen at home, within an intermediary transit country, or even in Russia?

What process exists for retrieving frozen funds or goods if any?

Will I be fined, criminally penalized, or even investigated as a result of inadvertently breaking sanctions?

How distracted will management be as a result of an investigation related to the inadvertent breaking of sanctions?

What ethical or reputational risk could occur as a result of violating sanctions or denying innocent party access to their funds?

A Way Forward

Unfortunately, there is no perfect solution, but there is still a way to manage the risk. The perfect solution is elusive because governments continue to enact sanctions sometimes weeks before they are officially published which means your ability to identify a restricted party within your supply chain or distribution network in a timely manner is limited. In addition, intermediaries within your supply chain or distribution network may lack the ability to identify who is actually on a blacklist which can still yield exposure in a worst-case scenario. Stopping all payments or shipments to parties in Russia or Belarus is also not ideal as some counterparties may not be under sanction and are legitimately owed funds or goods.

But doing nothing is also not a solution. This is where FinTech can play a role in actively managing your counterparty risk. Many Procurement, Treasury, and Working Capital solutions now offer counterparty screening which will cross-check your counterparty against published lists from the Office of Foreign Assets Controls (OFAC), Excluded Parties List System (EPLS), and the Excluded Individuals and Entities (LEIE) list. This is to ensure your counterparties are not sanctioned entities or denied persons or have been debarred, suspended, excluded, or disqualified. The tech also has the ability to verify the name, address, Tax ID, tax determination, banking information, and other custom validations to ensure your payment or delivery instructions are verified before execution or revalidated at any time.

In this rapidly changing environment of global sanctions, the solutions are not foolproof but are an affirmative hedge for compliance versus doing nothing. Using this tech in addition to using a bit of common sense provides a best-case solution to ensure your compliant supply chain and customer base don’t get impacted by sanctions meant to punish offending parties. It’s just another example of how tech provides win-win solutions for B2B transactions.

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