Businesses have always had a variety of risks to contend with, but no one could have anticipated the economic circumstances of 2022. Specifically procurement challenges and sanctions. The risk exposure in global markets has increased drastically in recent years and is coming to a head. From the sanctions against Libya in 2011, to the historic and near absolute sanctions against Russia and Belarus in 2022. Supply chains, already complex and dependent on international cooperation, have seen disruption after disruption in the face of COVID-19 and the war in Ukraine. Companies now face more concerns than ever, from shortages of materials to adverse environmental impacts, sanction regulations, and much more.
With sanctions rules often changing, any company participating in the international community must stay on top of the latest information and ensure that they’re compliant. Compliance teams, already facing an uphill battle, are often not equipped to meet a market undergoing a digital revolution.
The reality of regulation compliance looks less like checking a list of restrictions and more like identifying and handling risk at every stage of global manufacture and trade. This can include sourcing materials, the sale of goods, and even specific ports and countries that ships will pass on their routes. Even shipping vessel companies themselves can be the target of sanctions. When sanctions or other disruptions occur, the organizations that once traded with these sanctioned or otherwise disrupted markets (e.g. Russia) must no longer operate or compete in those markets. This means that the global market becomes smaller, while demand stays relatively unchanged.
With all of these risks and the potential for exposure, having a compliance team combined with a third-party procurement system remains the best solution for any international-facing company. With that in mind, here are five ways digital procurement systems can handle sanctions and supply chain disruptions for your team:
While effective, unilateral sanctions from the United States remain one of the most prevalent supply chain risks for organizations in 2022. Sanction enforcement and administration in the U.S. fall under the authority of the OFAC (U.S. Treasury Department’s Office of Foreign Assets Control).
OFAC handles both primary and secondary sanctions, with primary sanctions stopping Americans from doing business with sanctioned entities and secondary sanctions targeting non-Americans who in some way engage with sanctioned entities.
As a result, businesses and vendors need to consistently consult government trade resources or secure the services of trade compliance attorneys to ensure that they’re staying within the bounds of new restrictions. Since penalties can include heavy fines or even jail time, coordination between vendors is crucial. Procurement software has the capability to both communicate these requirements instantly between procurement teams, and handle the supporting documentation that arises when sanctions are implemented. Instead of hassling with endless email chains, phone calls, meetings, miscommunications, and missed deadlines, digital procurement software will provide a single-source-of-truth in times of turbulence.
The contracts of almost all global organizations have clauses that expressly prohibit contracting with, transferring goods to, or cooperating with vendors and countries that are under sanction by the UN Security Council and large trade organizations such as NATO. While adherence to unilateral sanctions by the United States for foreign companies is not required, virtually all companies still follow them. The U.S. remains a major player on the world stage and exerts an outsized influence, leading to many international organizations adhering to their sanctions.
Many corporate entities (up until now) have had to rely on an avalanche of apps and spreadsheets to keep track of sanctions compliance and track the numerous vendors, shipping partners, and other assorted third-party actors that participate in their operations to ensure that they are no dealing with entities in breach of those sanctions. If a company within your supply line comes under sanctions, or operates with countries under sanctions, it can mean chaos for your procurement teams and decimate your bottom line.
In the last several years, compliance has only become more complex as economic sanctions have become a trusted geo-political and economic tool. Far from endorsing the behavior of sanctioned entities, many organizations named as non-compliant have simply not found a way to centralize and reconstitute all of their operations information—something that procurement systems inherently excel at.
Screening all vendors, customers, shipping companies, and other affiliated entities in the operations process may seem straightforward, but it’s anything but. Changes from regulating bodies are near-constant, making complacency in compliance a grave (and costly) mistake.
According to recent reports from Dow Jones, sanctions lists from OFAC, the UN, HMT, and EU saw updates every 22 minutes on average.
With that type of regular and rapid change, organizations need to start looking beyond in-house compliance teams and an assortment of cobbled-together solutions. Now, businesses must look toward procurement systems that simultaneously solve the problems of coordination and compliance.
Procurement systems can help with challenges like:
It's also important to consider soft benefits to adopting procurement software such as employee moral and time efficiencies.
Here are just some of the risks inherent in a decentralized compliance solution:
Unilateral sanctions from the United States will often come as a surprise, and that’s by design. By catching sanctioned entities off guard, they often have few to no options for mitigating the financial impacts of their sanctions. This also means that an organization without centralized risk management will have little recourse should a sanctioned entity make up one or more links in their supply chain.
Organizations that engage with a sanctioned entity, even accidentally, can be subject to enforcement action, including payment restrictions. Banks can tie up payments and other capital assets at best, and agencies can seize them at worst.
Even those organizations that have worked with sanctioned entities unintentionally put themselves at risk of having their professional reputation damaged as a result. Centralized risk management from third-party procurement systems helps alleviate much of that risk.
Sanctions compliance gets progressively more complicated with every added client terms, templates, and processes. Usually, procurement management cobble together bits and pieces of various apps and complex spreadsheets to help coordinate the process. This comes at the cost of both resilience and efficiency.
Current SCM is a powerful procurement app built for supply chain teams by procurement professionals. It increases resilience and efficiency while facilitating the entire process and centralizing all activities in one app to provide a single source of truth for your project team.
If you need to modernize your procurement systems for a digital age, then contact us today at our Website to get started.