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SAPsecurity
Establishing fruitful relationships is a cornerstone of successful enterprises. And if you think about it, business partner screening in some form has existed for thousands of years. For example, the Chinese even have a word for the broader concept: Guanxi.
This article embraces the traditions of guanxi with the realities of the fast-paced modern world, where connections - and transactions - are made at the press of a button.
In 2024, smart companies screen the following potential partners before entering a relationship with them:
But what exactly is business partner screening? Why is the real-time automation of this process increasing the norm? And why, in many cases, is it also a legal requirement?
With no further ado, let's dive into it.
In layperson's terms, business partner screening is one of the crucial steps in the more comprehensive due diligence process. Companies decide to what level they want to investigate a future partner based on the type of relationship and its purpose.
But in recent years, what does it mean to screen? Due to the incredible advancements in regulatory technology, it's now possible to connect your ERP systems (for example, within SAP) to APIs that in real-time screen persons and legal entities against:
It's important to remember that each organization is unique, with different appetites to risk and compliance obligations to fulfill.
For example, it's not illegal to hire and do business with people who have criminal records. Also, most jurisdictions only require financial institutions to PEP checks, which are subject to strict anti-money laundering (AML) regulations.
But what about screening business partners against sanctions lists? Let's look into this crucial area in more detail.
Here is a legal fact: Whether you are a small retail business, a global multinational, or even an individual going about your daily business, it's illegal to perform financial transactions with any person or legal entity appearing on the sanctions lists from jurisdictions such as the following:
It's more complicated than that, of course, but for the sake of brevity, all you need to know for now is that sanctions laws apply to everyone. And what happens if you break them? As companies increasingly are discovering, multimillion-dollar penalties and tremendous reputational damage may come their way.
The question now is, who do you need to screen? And what's the most efficient way to do it? We'll answer these questions in the following section.
All stakeholders bring an element of risk that must be carefully assessed through screening. To mitigate the risk of breaking sanctions and to avoid other problems, here's why companies need to screen the following business partners:
The customer segment is often the most common category where business partner screening occurs. Why? Because they represent a large percentage of a company's financial transactions. And the risks are significant:
Performing screening processes can greatly mitigate the chance of, for example, a convicted fraudster becoming your latest customer. It could also red flag a sanctioned individual using your company's services.
Screening customers for sanctions, especially since the Russian invasion of Ukraine, has become non-negotiable in recent years, with jurisdictions such as the EU, the US, and the UK all passing new laws that punish violations tougher than ever.
For example, in 2023, the UK sanctions enforcer, the Office of Financial Sanctions Implementation (OFSI), began using its new 'naming and shaming' powers.
Even for less severe sanctions breaches, where no financial penalty is issued, OFSI can now publicly name the firm that committed the violation and the individuals involved (something they have already done).
Just as screening customers is crucial for businesses, performing checks on vendors and partners is equally necessary. Much of the reasoning outlined in the customers section applies here as well.
But in 2024, there is another reason why performing sanctions checks on this group is crucial for mitigating the high risk of financial penalties and reputational damage.
So, what is it?
Sanctions evasion is now an issue that even regular people walking down the street know about. For example, sanctioned Russian oligarchs moving around super-yachts, like pieces on a chess board to avoid seizure, have made national news.
The issue is this: To evade sanctions, state-owned companies from heavily sanctioned countries, such as Russia and Iran, create front companies in jurisdictions like the EU, the US, and the UK.
And regulators expect screening processes to be in place to help mitigate the risk and make it as hard as possible for the perpetrators. Remember, enforcement agencies often punish companies for not having responsible and effective screening processes, regardless of whether violations occurred.
Employees are another type of business partner requiring varying screening levels, depending on the role and operational jurisdiction. After all, they are a category that contribute significantly to a company's financial transactions.
Conducting criminal background checks and screening against watchlists, such as Interpol's, has been standard procedure for organizations for many years. After all, in certain positions, companies like to know they are dealing with individuals who pose no legal or security risk.
With the advancements in regulation technology, this is now an automated process - which we'll briefly discuss next.
In this report, we've identified issues that different business partner categories pose - and the real risk of legal quagmires, financial penalties, and tremendous reputational damage.
But here is the good news: Within your SAP ERP system, it's now easy to set up an automated, real-time business partner screening process that mitigates these risks effectively.
To learn more, we encourage you to read the following article: How to Set Up Business Partner Screening In SAP.
Does your business use SAP ERP or S/4HANA? Embrace business partner screening automation within the SAP environment with remQ.
remQ Sanctions Compliance helps reduce counter-party and legal risks by screening business partners against global sanctions lists. Use our solutions to save costs! We would be delighted to answer any questions you have - contact us.
Watch our remQ introductory video here.
Paul ist Autor und Stratege für RegTech-Inhalte und verfügt über umfangreiche Erfahrungen im digitalen Marketing und Journalismus. Seine Arbeiten sind in der Zeitung „Guardian“ erschienen. Er hat einen Abschluss in „International Relations“, wo er die Einhaltung globaler Sanktionen und grenzüberschreitende Finanzen studierte.
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