The Cost of Export and International Trade Compliance Errors Highlights the Need for Robust Denied Party Screening

Taking into consideration the complexity of export and international trade compliance requirements, especially the dynamism of sanctions regulations and volatile geopolitics in recent years, it comes as no surprise that export and international trade compliance sanctions violations and enforcement actions are trending upwards in records published by regulators across the board. However, many of the enforcement cases we have seen were caused by avoidable errors, stemming from a form of compliance negligence on the part of the organization. You could call these unforced errors, and just like in the world of tennis, a key part to winning the game is ensuring you cut down or eliminate unforced errors.

Common unforced errors in compliance include not prioritizing the effectiveness of a denied party screening program, assuming manual sanction screening processes are sufficient, using incomplete data to screen, missing audit logs, wrongly interpreting regulations, and lacking centralized oversight to ensure that processes are being implemented company wide. While none of these errors convey malicious intent to circumvent sanctions regulations, the possibility of them leading to violations and penalties are high.

Sanctioning bodies provide explicit instructions, such as with denied party screening lists. But they also issue directional guidance, found in emerging regulations in which the objectives are clear but there are partial or non-existent lists to screen against. It can be, therefore, more challenging to conduct effective export and international trade compliance sanction screening, especially with rules more recently promulgated such as the following:

• The Military End User (MEU) places restrictions on conducting business with foreign entities determined to be ‘military end users.’
• The Military Intelligence End User (MIEU) imposes similar restrictions to the MEU and extends to intelligence agencies.
• The U.S. Customs and Border Patrol also shared operational guidance for complying with the rules and regulations of the U.S. Forced Labor Prevention Act (UFLPA)
• The OFAC 50-Percent Sanctioned Ownership Rule dictates that any entity with a combined 50% ownership by sanctioned parties is also sanctioned. Similar rules are enforced by the European Union and the United Kingdom.

Companies must also remain on alert for the ongoing Russia-Ukraine conflict which continues to generate new sanctions and enforcement risks.

Export and international trade compliance enforcers will unlikely give warnings for non-maliciously violating sanctions. While the intent is often considered when determining fine amounts and the possibility of criminal charges, a violation by a party acting in good faith can still attract high monetary penalties. Even if your organization avoids paying a monetary fine, such as this company, which misunderstood the screening frequency of its compliance solutions vendor, the bad publicity from enforcement action press releases by the regulatory agency, still puts a dent in your brand value, customer confidence, and potentially harms the bottom line.

As the strength of your reputation and revenue hinges on daily export and international trade compliance choices and actions, you cannot afford to create a culture where mistakes and unforced errors are even marginally thought of as being acceptable. Your organization must bolster its technologies and processes to avoid transacting with denied and sanctioned parties throughout normal business operations. In this article, we’ll provide an overview of imposed fines, highlight the types of costly compliance errors that you should be aware of, and explore the real cost of enforcement actions.

OFAC enforces and publicizes civil fines and penalties for export and international trade compliance violations. The value of fines implemented in the first quarter of 2023 indicates that this may be another record year of monetary penalties.

Table 1: Total OFAC Fines issued per year 2019 - 2023

Year	Total Fines
2023 (Jan-Mar)	$33,384,996
2022	$42,664,006
2021	$20,896,739
2020	$23,565,657
2019	$1,289,027,059

BIS releases annual fiscal year reports detailing total fines for the fiscal year. Individual penalties are publicized throughout the year.

Table 2: Total Civil Fines issued by Bureau of Industry Security per year 2018 – 2021

Fiscal Year	Total Fines
2021	$18,138,887
2020	$32,905,760
2019	$18,072,500
2018	$10,260,996

The U.S. Department of State issues public statements for every penalty and enforcement. Fines and penalties fall into two categories:

1. Civil Penalties: $1 million fine per violation and debarment.
2. Criminal Penalties: $1 million fine per violation, 20 years imprisonment, or both per violation. Debarment is also imposed.

Table 3: Total Fines issued by the U.S. Department of State per year 2019 – 2023

Year	Total Fines
2023 (Jan-Mar)	$20,000,000
2022	$1,000,000
2021	$19,600,000
2020	$10,000,000
2019	$14,400,000

The low monetary fine recorded in 2022, is indicative of the remedial and punitive actions taken by the State. For additional details on the above numbers, review the State’s publicized penalties per enforcement action.

OFSI is responsible for implementing enforcement actions for all financial sanctions violations that occur within its jurisdiction in the United Kingdom. This applies to UK citizens, national and all individuals doing business within the country, as well as all entities constituted under the laws of the United Kingdom.

Historically, there have been low levels of enforcement actions from this sanctioning body, but recent developments point to an increase in enforcement activity in the coming years. Take a look at enforcement actions that have been implemented by OFSI can be found here.

In this section, we’ve chosen examples of sanctions compliance violations that demonstrate unforced errors that you may also be making which could be jeopardizing the compliance status of your business. From the cases examined, integrating a Denied Party Screening solution into the various business processes that are exposed to export and international trade compliance risks is vital to preventing errors and reducing the danger of enforcements.

Violation	Unforced Errors	Penalty
An American data storage manufacturing company violated export control restrictions by providing hard disk drives to a company on the BIS Entity List.	Failed to accurately interpret rules of the export restriction and did not take the necessary precaution. Operated without the relevant license for a period over 12 months	$300,000,000
A multinational Bank violated OFSI/ EU regulations under Ukraine sanctions programs.	Misinterpreted sanctions requirements, performed incomplete denied party screening, and incorrectly exempted sanctioned entities from screening.	£20,470,000 ($25.5M)
A U.S. technology company, breached OFAC sanctions programs and BIS Export Administration Regulations.	Did not fully screen its ultimate end-users, resellers, and agents for denied parties.	$2,980,265
U.S. cryptocurrency payment processor violated regulations related to sanctioned countries.	Did not have a denied party screening program for over 18 months and in that time transacted with multiple restricted entities.	$24,280,829
A U.S. Bank continued to provide services to entities even after they were added to restricted part lists.	Did not rescreen customers frequently and missed export and international trade compliance updates. Misinterpreted the screening results.	FOV (Finding of Violation)
U.S. online money transmitter violation of multiple sanctions related to Specially Designated Nationals (SDN Lists) and sanctioned regions.	Weak denied party screening software that failed to flag blocked persons. Failure to screen complete information such as location and business identifier codes (BICs). Automatically allowing flagged transactions without review.	$1,385,901
International payment processor violated the Foreign Narcotics Kingpin Sanctions Regulations (FNKSR).	Ineffective adjudication and escalation workflow. Lack of centralized oversight. Insufficient human expertise.	$430,500
Puerto Rican bank  violated the Venezuela Sanctions Regulations.	Slow to update its denied party screening content to match new regulations. Inadvertently operated bank accounts for restricted parties for 14 months.	$255,973
The Iranian Transactions and Sanctions Regulations (ITSR) were violated by Hong Kong-based financial institution.	No automated workflows or oversight of the actions taken by non-compliant employees.	$5,228,298

Additional export and international trade compliance violations covering a wide range of industries which were caused by unforced errors can be read in an earlier article in the Export Compliance Journal.

Violating sanctions is not just about the monetary fine. The cost of these penalties will ripple through your business and may even have lasting effects, which can include:

• Erosion of trust and brand value: Non-malicious violations are still violations; agencies make their enforcement actions public. Your company’s partners and clients will be aware of the violation. A lack of confidence in your brand can also have financial implications in the form of stock devaluation.
• Loss of opportunity: Customers, clients and business partners might end agreements or avoid starting new business relationships.
• Impact on revenue: Reputation damage can slow operations down significantly or even make them stand still. Direct costs may already inhibit growth and tie up operational expenses, all while revenue might be slowed due to reputation damage.
• Fines, penalties, and legal fees: The enforcement agency’s immediate monetary fine is often a notable setback.You’ll likely need to pay legal fees to process or challenge these fines.

The short-term and lasting results of a violation necessitate enhancing your denied party screening technologies and practices.

Enhancing processes and tools to better conduct restricted party screening helps you avoid unforced errors that can result in significant consequences.

The BIS outlines red flag indicators to watch out for as you upgrade your practices and technologies to prevent inadvertent violations, including:

• The buyer declines routine and expected installation or maintenance once the purchase is complete.
• The purchaser avoids questions about if the product is intended for export or domestic use.
• The customer’s address is identical to the BIS’ denied party list.
• The buyer hesitates to provide details about the intended end-use of the purchase.

These indicators highlight why all teams and processes must include screening customers for intentional sanction evasion. An unforced error that enables malicious sanction evasion will reflect on your company.

Complying with all sanctions and regulations is undoubtedly vital to the lasting success of your business. Violating export regulations does not require intentional actions — unforced errors resulting from insufficient processes and technologies are all it takes to be the target of an enforcement action.

Descartes provides a suite of premier denied party screening software solutions that help organizations around the world reach the highest export and international trade compliance standards while reducing the risk of negative impacts to the bottom line. 

But don’t take our word for it, see what users are saying about our denied party screening solutions. For more information including a demo and a Trial, Contact Us. You can also learn more about how to select a software solution that fits your needs with this denied party screening buyer’s guide.