By Laura Putnam, Content Manager, Descartes Systems Group
Prior to the kickoff of this year’s ICPA Annual Conference, I met a small group of Trade Compliance professionals for a dinner organized by Elisabeth Sherrell, ICPA’s Director of Member Engagement.
During the dinner, it was discussed how it took container ships piling up at the local ports during the pandemic for family members and friends to have an inkling of what kind of work it is that they do in Trade Compliance.
The same held true for getting visibility in the corporate boardroom for Trade Compliance and its role in supply chain management.
But the struggle that seems to be at the forefront of issues that has intensified is the fear that AI will eventually replace all the humans in the Trade Compliance department. This is something that was a topic of discussion at the ICPA Annual conference.
Key Takeaways
- Human Touch in Trade Compliance: Despite advancements in technology, human interaction remains indispensable in Trade Compliance. Relationships with suppliers, cultural understanding, and nuanced decision-making are areas where human involvement is crucial and cannot be entirely replaced by AI or automated solutions.
- Integration into Business Decision-Making: Trade Compliance shouldn’t be treated as a mere checkbox exercise. Instead, it should be seamlessly integrated into business decision-making processes to ensure that compliance considerations are given due importance.
- Proactive Risk Management: Utilize available tools and technology to manage third-party risk effectively. However, it’s essential not to solely rely on technology and to remain vigilant for common warning signs, providing training where necessary.
- Customized Approach to Suppliers: Recognize that not all suppliers are the same. Developing meaningful relationships with suppliers allows for a deeper understanding of their operations, thereby facilitating better risk management.
- Compliance Beyond Regulations: Trade Compliance extends beyond legal requirements. It encompasses considerations such as commercial risk, reputational risk, and adherence to ESG standards. Companies need to ensure that their compliance programs address these broader aspects adequately.
The Influence of AI in Trade Compliance
As expected at the ICPA conference, there was a bigger spotlight on AI as an automated solution under the Innovative Solutions track. The unexpected gem that emerged was how the regulations are now structured in such a way that AI or other types of automated solutions cannot possibly do it all. Trade Compliance does not merely consist of a questionnaire programmed to be electronically submitted to a new supplier, or a compilation of country/entity lists that must be screened by a software tool. It requires human interaction to develop meaningful relationships with suppliers and to build a culture of compliance within an organization.
The key takeaways for the human part of the Trade Compliance function in supply chain risk management are summarized in the table below.
| Trade Compliance Dos | Trade Compliance Don’ts |
|---|---|
| Use available tools and technology to manage third party risk | Don’t expect technology to catch everything. |
| Integrate Trade Compliance into business decision-making. | Don’t allow Trade Compliance to be just another box to be checked off. |
| Look out for common warnings and use them to reach out and provide training. | Don’t gather information and not use it. |
| Develop meaningful relationships with your suppliers. | Don’t treat everyone the same. |
| Leverage cone of privilege if legal issues emerge during an internal investigation. | Don’t wait for government to find legal issues and disclose them. |
Beyond the Scope of Trade Compliance
There are other types of risks involved with working with third parties that also warrant screening and monitoring. This is in addition to the legal risks that fall under the Trade Compliance umbrella such as corruption, export controls, forced labor in the supply chain, and sanctions. Commercial risk should be a top consideration when vetting suppliers. A supplier must be qualified to do the work required and be able to prove longevity to ensure that the work will get done. Reputational risk also needs to be factored in, since the hiring of a third party can potentially impact brand and company values. The emergence of ESG (Environment, Social, and Governance) has given this heightened priority as third-party suppliers that do not meet ESG standards as reflected in a company’s values and in the viability of marketing claims may result in a decline in business and/or market share.
Considering the headline-grabbing whistleblower payout in 2023 of almost $279 million dollars under the FCPA (Foreign Corrupt Practices Act), corruption is a third-party risk to address that companies can’t afford to neglect in their compliance programs. Foreign governments expect you to do your due diligence before the hiring of a third party. Companies have to evaluate their suppliers based on the applicable regulatory requirements such as anti-corruption laws that cover the payment of bribes (either directly or indirectly) to public officials. The more touch points with government agencies, the higher the risk when a third-party contacts with the government on your behalf. Additionally, there are cases where third parties are used to conceal misconduct. For example, a supplier may give a steeper discount on the sale of the product if they know that part of the savings from the discount will be used for a bribe payment.
New Regulations = New Compliance Methods
Screening stops short after asset-freezes / dealings prohibitions and travel bans. Financial services bans are outside of screening lists or geographic-based restrictions. Routine screening using restricted party screening software may not consider red flags or other factors such as a change in business name, location, and/or ownership and control.
Here are some pro tips (raised at ICPA) to consider when developing an effective third-party evaluation process:
- Follow Know Your Customer (KYC) / Know Your Supplier (KYS) guidance.
- Check ownership and control under the OFAC 50% rule and similar regulations from other jurisdictions.
- Consider subscribing to a comprehensive third-party risk management software screening platform.
- Consider alternate spellings, possibility of typos, and foreign characters.
- Include international lists when searching for restricted parties.
- Develop a protocol for when to request beneficial ownership information and include a question to probe who controls any third-parties involved.
Descartes Visual Compliance Enables Comprehensive Third-Party Risk Management
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Our platform leverages our business intelligence capabilities to rapidly screen new and existing partners, clients, or customers against known denied parties. New sanctions are constantly emerging — accordingly, our compliance data sets are updated in near real time to help businesses maintain continuous compliance and avoid costly consequences.
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