Corporate Due Diligence, Due Diligence, Supply-Chain
One of the most important aspects of any company is the supply chain. The supply chain is comprised of a range of suppliers who offer raw materials as well as deliver finished products either directly to warehouses or to the client. The supply chain typically includes several companies. Companies that offer only services like medical offices can access a supply chain that supplies them with all the basics of office supplies to more specialized items. In the context of Executive Due Diligence, understanding the supply chain’s complexity is critical for identifying risks and ensuring smooth operations. Certain large companies could possess several hundred thousand vendors in their supplier chain.
With the number of vendors involved in the supply chain, it may be difficult to perform due diligence for each one of the vendors. This is even more of an issue when a chain supplier has a supply chain that is its own and has third and second-tier suppliers. It is possible to purchase the finished products from a seller, however, the vendor must obtain the different components and equipment for the production of those items via their supply chain. While you are able to vet the company you deal directly with, you are not able to examine the supply chain of their business.
There are numerous dangers you run into by not thoroughly vetting suppliers. One of them is the possibility that you could find yourself working with vendors operating within restricted countries. These could lead to sanctions and fines from government officials and serious harm to your image. We’ll review the sanctions, what they mean, and how you can perform due diligence on your supply chain as well as what Infortal can assist you in avoiding the penalties for violations of the sanctions.
What Are Sanctions?
Economic sanctions refer to a set of regulations imposed by a nation against another response to a decision taken by the country. An example of recent economic sanctions took place in the event that Russia entered Ukraine in 2022. In 2022, the U.S. and many other countries swiftly implemented economic sanctions which were expansive. The sanctions included restrictions on the payment of debt towards U.S. banks, a prohibition on the import of gas and oil imports from Russia as well as penalties against oligarchs as individuals as well as Russian businessmen.
The purpose of sanctions is to harm the economy of the country, and reduce the flow of cash available in order to pressure the country to alter its policies or, with Russia and China, to stop fighting the other nations.
Sanctions have been on a variety of nations over time which include Iraq, China, Iran, Syria, North Korea, and others. At the time of 2022 there were sanctions in place against there were sanctions in place against the U.S. had sanctions in the country against six nations: Cuba, Iran, North Korea, Russia, Syria as well as Venezuela. Certain sanctions have been in effect for decades. The sanctions against North Korea were introduced in 1950 as a result of human rights abuses as well as nuclear weapon research and other issues.
Alongside sanctions against another nation, the U.S. can also issue sanctions on specific corporations or people. Numerous Russian businessmen operating out of Russia were sanctioned over the last year, for instance.
When both the president and Congress make the final decision on which countries will be affected by the impact of sanctions the U.S. Department of the Treasury is charged with applying and enforcing them. To accomplish this to do this, there was the Office of Foreign Assets Control was established. The office will also conduct investigations and, in the event of a need sanction companies who break sanctions.
Sanctions and the Supply Chain
Sanctions can play a crucial role in the supply chain due to the way they affect exports, imports as well as other types of trade. When a country has strict sanctions, it could become nearly impossible for a U.S. firm to trade with any of the nations. It is possible that you will not be allowed to import goods or other materials and could be denied payment to corporations in these nations. If you violate these sanctions, it could cause fines as well as additional penalties.
It’s possible to not contract with a company that is an approved firm, but what would happen if one of these vendors had a relationship with an individual from an unrestricted nation? Indirectly, you’re working on behalf of a vendor from the country that is sanctioned, which could cause you to be sanctioned. That means that you’ll need to check your vendors as well as their suppliers cautiously. This takes time however it’s well worth the effort.
If your suppliers reside in the US They are likely to not have to deal with businesses that are sanctioned or risk sanctions. But there are certain countries that are sanctioned by the U.S. has sanctioned that others haven’t. As an example, there is a case where the U.S. currently has sanctions against Cuba and the EU has lifted sanctions against Cuba in the year 2008. That means that the company you are dealing with from Spain might be able to contract vendors from Cuba with no issues however, this could cause problems for you. Be aware of the entire supply chain in, as well as the countries they’re working out of and conducting business in.
The Risks of Operating in a Sanctioned Country
Sanctions for violating the law generally include the issuance of a fine. They can be large. In the month of October 2022 Bittrex, Inc., an American company with its headquarters in Washington was found to violate sanctions of 116,421 when it allowed users from Iran, Syria, Sudan, Cuba, and the Crimea area of Ukraine to access its currency exchange online services between 2014 and the year 2017. Bittrex was fined an amount of $24 million in penalty. It’s among the highest fines imposed in 2022. However, it’s not the only one that was more than a million dollars. The companies that have to pay high fines are Danfoss A/S (over $4 million), Toll Holdings Limited (over $6 million) as well as Sojitz Limited (over $5 million).
Some penalties do not result in a fine. In July 2022 MidFirst Bank was issued a Finding of Violation rather than an amount of fine, for conducting transactions with sanctioned persons. The bank maintained accounts of those individuals and made 34 of their payments prior to determining they had been sanctioned. Since the issue was caused by an issue with the method by which MidFirst scrutinized names that were added to the Specially Designed Nationals and Blocked Persons list, and then took action to rectify the issues the company was issued the warning, not an actual fine. The Finding of Violation has become public information which implies that it could have a negative impact on MidFirst’s credibility. It is possible that they will lose customers or customers or business partners as a result.
One of the most severe penalties that the Treasury could impose on an organization is monitorship. Monitorship is when the Department has an outside watchdog on the business. The monitor will be in charge of every aspect of the business’s finances to check they’re not violating the law or violating any sanction. They can make any allegations of misconduct known to the Office of Foreign Assets Control or the Department of Justice. The firm is generally ordered to pay for the monitor’s fees, which could be very expensive. If the violation results in an administrative fine as well as a monitorship The impact on the finances of the company is often severe.
Sanction violations involving the supply chain happen frequently. It is estimated that 90 percent of infractions are a result of violations under the Foreign Corrupt Practices Act relating to misconduct by suppliers. Although you could still be subject to sanctions, revealing that a vendor within your supply chain may be violating sanctions could help lower the penalty.
How Do You Determine if Your Vendors Work in Sanctioned Countries?
Vendors working in countries that have been sanctioned will not be able to reveal the facts. There are some who may not have performed an adequate investigation of their vendors as they may not have any idea if certain businesses are in violation of laws.
To determine whether the vendor or their suppliers is operating within a sanctioned nation or is associated with sanctioned businesses or individuals, you have to conduct thorough due diligence. This isn’t enough just to go through the list of sanctions available from the Department of Justice, although it’s a great place to begin. Even if you go through the list above, you’re not likely to discover every single thing. This is because all you’ve got is a list of approved organizations. It is impossible to know which vendors or vendors work with.
This is why Infortal can help. We conduct due diligence regarding these vendors and compare them against the 1700+ worldwide watch lists that we keep. We’ll delve into the background of each vendor as well as the nations they’ve operated in, the countries they’ve collaborated with, as well as other details. We’re looking for any indication of fraud, whether that’s a violation of laws, bribing and engaging in human drugs, weapon trafficking or other illicit activities. This isn’t something that can be detected with standard investigations, especially when they involve acts that haven’t been examined or reported to the authorities.
We apply our decades of due diligence experience for your suppliers reviewing their history, and looking over their business operations throughout all of the U.S. and the world. It’s more than just looking up the place where they are located or the location of their offices. Certain companies operate under different names, and it’s crucial to discover this information as well as check the different names to determine the possibility of hiding the fact that they operate in countries with sanctions. When we dig deep into the past as well as the present operations, we’ll offer you the data necessary to figure out whether you’re still in an association with that business.
Contact Infortal to Learn More About Supply Chain Due Diligence
If you’re about to begin working with a new company You must conduct the necessary due diligence to ensure that you’re not in violation of penalties. To do this it is necessary to conduct an in-depth analysis of their actions, and it requires the appropriate equipment and expertise. Infortal provides both of these and is prepared to assist. Call us today to find out more.
