May 2007 | Commentary | IT Matters

Restricted Party Screening: Who Are You Doing Business With?

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Exporters and financial institutions historically used Restricted Party Screening (RPS) solutions to determine whether the names and addresses of their consignees appeared on any "denied parties" lists.

Today, companies recognize that they may not deal in any way with certain blacklisted parties.

Since Sept. 11, 2001, regulatory agencies have made clear their expectations that companies screen domestic trading partners in addition to international partners.

As they aim to better comply with international trade laws, the Patriot Act, and other relevant regulations, companies have started to name-screen vendors, suppliers, and distributors, as well as customers.

Many companies are turning to third-party services to help:

  • Resolve false positives that flow from even the best name-screening algorithms.
  • Make qualified judgments and build compliance records and rationale for dealing with hits from automation tools.
  • Follow a defined standard for making compliant judgments where names on a denied parties list may be similar and the agencies are reluctant to provide complete identity information.
  • Help decide which international blacklists to screen; many blacklists are published by countries other than the United States.

Innovative Applications

In today's world of tight international security, Restricted Party Screening solutions increasingly are finding new applications both within and outside the manufacturing and financial industries.

As organizations start to look beyond their customer base, and in many cases within the walls of their own company, innovative RPS applications are emerging.

Here are five unique ways some companies are using Restricted Party Screening solutions:

1. Human resources. HR departments and HR-related service companies use Restricted Party Screening for background checks and pre-employment screening. Employers need to make sure that they are not hiring people who appear on the 50 ever-changing lists of denied parties.

HireRight, an independent employment background screening provider, supplements its own offerings with RPS. The company uses RPS to screen employees, contractors, and partners for compliance purposes and to provide broader search coverage to help mitigate customers' risk.

"Employers depend on us for comprehensive employment screening solutions that help protect their global interests," says David Nachman, HireRight vice president of product management.

"With RPS, HireRight is able to offer an additional search option for expanding the reach of a background check in both regulated and non-regulated environments."

2. On-site security. Companies use RPS to screen visitors to their offices and production facilities. Corporate espionage may conjure images associated with modern-day spy thrillers, but the fact is many companies have trade secrets they must protect in order to stay competitive.

In addition, companies with export controlled technology must keep their trade secrets and processes safe for purposes of national security, foreign policy, and counter-terrorism under the export control rules of the State, Commerce, and Treasury Departments.

3. Acquisition due diligence. What is the compliance history of the company you are about to acquire? Are you buying violations? Are you pricing the acquisition of a future earnings stream that will be prohibited under embargo rules or because exports will not be allowed?

All enforcement agencies impose successor liability even if you structure the contract to acquire assets rather than shares of stock.

For this reason, it is a best practice to screen the names and addresses of target business customers and partners. Business development and M&A professionals use RPS solutions to support this one element of a more comprehensive due diligence.

4. Corporate philanthropy. Does your company have a community relations or philanthropy department engaged in corporate gift-giving? A number of companies employ RPS solutions to make sure their financial grants are not being distributed to the wrong parties.

RPS also can be used to screen the names of board members and senior executives who manage the charitable organizations to which your company donates.

5. Non-profits/charitable organizations. Just as businesses need to make sure they are not distributing funds to the wrong charities, nonprofits need to make sure they are not making grants to blacklisted parties. The prohibitions against dealing with blacklisted parties apply to all firms—both for-profit and nonprofit.

One well-known nonprofit organization uses RPS to comply with a multitude of regulatory requirements, to avoid non-compliance penalties, and to maintain an audit trail. The automated screening process saves staff from having to manually check names against the thousands of entities on international denied parties lists.

In addition to these five applications, Restricted Party Screening solutions also continue to find new applicability in a variety of vertical markets as the government passes new trade regulations.

A new law that went into effect Jan. 1, 2006, for example, requires that dealers in precious metals, stones, or jewels take elevated steps to comply with the U.S. Treasury's Financial Crimes Enforcement Network's new anti-money laundering requirements. These regulations apply to jewelry "dealers" who have purchased and sold at least $50,000 worth of "covered goods" during the preceding year.

Required Actions

Many other industries are captured within the broad definition of a financial institution, and the Patriot Act requires them all to name compliance officials, develop and follow compliance processes and procedures, provide training, and audit their systems.

Name screening is part of this overall compliance program requirement, which extends to broker dealers, insurance companies, casinos, car dealers, and many others.

Whether you use RPS solutions to screen business partners or to support other areas of your business, the consequences remain the same.

If your company conducts business with a blacklisted party, or is found to be associated with a denied party as a result of improper employment screening, poor internal security, or the acceptance or distribution of "tarnished" donations, you may incur the wrath of the government and the public.

In addition to fall-out from a public relations disaster, conducting business with a blacklisted party may result in fines, revoked trade privileges, or even imprisonment.

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