Avoiding the 88 Million Dollar Fine

In our last post, we pointed out how the likelihood of a multi-million dollar fine, which could range from the $3.1 Million recently paid by Maersk to the $88.3 Million recently paid by JP Morgan, is increasing almost daily for an average mid-size multi-national that is importing and exporting regularly as more sanctions, specially designated nationals (SDN), and denied parties are being added to the OFAC (Office of Foreign Asset Control) and BIS (Bureau of Industry and Security) lists.

The problem is that with dozens of major country sanctions in the Federal Register; hundreds of individual sanctions against countries for specified commodities, services, or financial transactions; and thousands of names on the SDN, denied persons, and denied entities list, it is impossible to keep on track of the situation manually — even if you have a team of clerks and lawyers reading around the clock. You need an automated solution. But not any solution will do.

Why? You can’t just do a(n) exact name match. First of all, the individual doing data entry could make a typo — and all of a sudden instead of AIR CESS HOLDINGS LTD, it’s AIR CHESS HOLDINGS LTD, and you’re shipping to a denied national in the UAE. Oops! Secondly, the individual placing the order could slightly alter his or her (company) name so that the local delivery person still knows the shipment is for him or her (since no illiterate American is going to spell Abdelwadoud Abou Mossaab correctly and Abdelwadod Abou Mosab is the best you can hope for) but so that it doesn’t match on a name search. You also have to check for close (mis)spellings.

But this isn’t enough. If the spelling is off enough, it will still be missed. You also have to check by address. If the address is an exact match and the name could be a match, then it’s probably a denied party. But even address isn’t enough. A smart denied party that is a corporate entity will just open a new PO Box and abbreviate their name enough so that a simple match algorithm will fail. However, you could argue that you can combat this with a greater than 80% success rate with some good AI and AR (automated reasoning) and then argue that if you do screw up once, you could have the fine minimized by working with the OFAC and/or BIS and demonstrating due diligence, but even this is not enough.

First of all, if the company knows it is on a denied party list and wants to get product from the US bad enough, and it is a “holding company”, or has a parent “holding company”, the first thing it’s going to do if it’s smart is open a new subsidiary or sister company at a new address with a new Director and then approach a new mid-sized supplier who will be thrilled at the opportunity to get new business and who will likely cease checking once there are no partial matches on the sanctions or denied parties lists. And then the minute the Federal Government marks the company as associated with denied (terrorist) entity, you pop up as supplying contraband and, to be blunt, you’re in boiling water.

Secondly, it might not be you that violates the sanction, but one of your first tier suppliers who violates it on your behalf, which, depending on what sanction is violated, could be just as bad. For example, your logistics carrier could decide to load perfectly fine Cargo destined to sanction-free Egypt (at least where your cargo is concerned), which is ok, but then stop at a Canadian port to pick up cargo for Saudi Arabia, and then, before it drops your cargo off in Egypt, stops at a Saudi port where your cargo is contraband under export requirements. Then, because of bad record keeping, it can’t prove that none of your cargo was off-loaded in Saudi Arabia, and that all of the cargo made it to Egypt, and, again, you are in hot water.

In other words, a first generation Trade Data Management Solution that automatically scans the sanctions and denied party lists is not enough. It also has to keep track of corporate relationships and verify that the company isn’t a shell or entity acting on behalf of a denied company or entity, and that it’s suppliers and services providers are not violating import and export restrictions on its behalf.

I’ve seen solutions that do a great job of applying AI and advanced analysis to detect denied parties on the lists that would not be spotted manually, and I’ve seen solutions that do a great job of providing visibility into first, and even second tier, supply chain in terms of what product is where, when, and where it’s going to go — but I haven’t seen a solution that does both superbly. To be honest, it’s been over a year since I have seen the best companies like Integration Point, TradeCard, CDC Tradebeam, QuestaWeb, and EcoVadis have to offer with respect to denied party / sanction screening, so I am issuing a challenge to all Global Trade Management (GTM) and SCV (Supply Chain Visibility) Providers. Show me a solution that can prevent OFAC and BIS violations and fines 100% when used properly, and I’ll give you a 3-part series.

Will Your Supply Chain Avoid the 88 Million Dollar Fine?

Last year, JP Morgan had to pay $88.3 Million in fines for breaking U.S. embargo laws and trade sanctions, including Global Terrorism Sanctions Regulations and Weapons of Mass Destruction Proliferators Sanctions, in three incidents between 2005 and 2011 that involved Cuba, Iran and Sudan, as reported on AllGov. That’s a huge penalty that resulted from simply making loans and wire transfers. And in 2010, Maersk had to pay a $3.1 Million fine for using ships registered in the U.S. to carry commercial cargo to Sudan and Iran between January 2003 and October 2007. Another huge penalty for carrying goods that had never touched the US.

The issue at hand is trade sanctions and all of the pitfalls associated with them if you are US based, importing into, or exporting out of the US. As pointed out in this recent World Trade article on “avoiding the pitfalls of trade sanctions”, a company has to deal with:

  • (broad) country sanctions,
  • import or export specific country sanctions, and
  • Specially Designated National (SDN) sanctions against
    front companies, non-state entities, or individuals

maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury and:

  • denied persons list and
  • entity list

maintained by the Bureau of Industry and Security of the U.S. Department of Commerce.

There are dozens of country sanctions, hundreds of import/export (commodity) specific sanctions (and more could be on the way, including, of all places, a new sanction against the UK which could appear as early as 2013 as a result of allegations that they gave Airbus illegal subsidies (as per this recent Daily Mail article). And then there are thousands of denied persons and entities and this list also changes regularly.

So, what can you do? You can start by monitoring the sanction programs on the Treasury web site, country information, and the SDN list.

Then you can monitor the denied persons list and the denied entities list on the Bureau of Industry and Security site, which summarizes a multitude of export administration regulations. But considering that these are only summaries, and the full details can only be found in the Federal Register on the Department of State web site, including the pages on “non-proliferation” sanctions and “chemical and biological weapons” sanction laws as well as the pages of the counter narcotics group, you would also need to monitor the pages of the “office of terrorism finance and economic sanctions policy”, and the “energy, sanctions, and commodities” group of the bureau of economic and business affairs.

But that’s a lot of work … and it may not be enough! So what’s next?

Can You Endure the Exacerbated Euro?

Greece may be almost taken care of, but now Spain (and Portugal) are threatening to endanger the Euro’s future. Procurement’s problems with the Euro are far from over. But what can a Procurement Professional do?

Be cautions and ever vigilant. As explained by Julian Catchick in this recent article over on CPO Agenda on “How to Deal with the Troubled Euro”, about the only risk minimization strategies a buyer has available to her are to:

  • hedge,
  • spot buy in bulk to take advantage of a favourable exchange rate movement, and
  • fix the exchange rate with suppliers for a mutually agreed duration.

All of these strategies have their advantages and disadvantages.

  • Hedging on a different currency that tends to fluctuate in a manner opposite to the Euro (going up when the Euro goes down and vice versa) can mitigate the impact of a rapid Euro fluctuation if currency trades are made at appropriate times, but if the performance of the currency hedged in is not what is expected, losses can actually mount.
  • Spot buying can reduce acquisition costs significantly if done at the proper time, but if too much inventory is bought too early, inventory management costs will go up and eat into the savings.
  • A fixed exchange rate will mitigate currency fluctuation risk and allow for predictable purchase costs, but since the supplier will have to assume additional currency risk, a buffer will be built into their costs and the organization may end up paying more than it needs to.

Regardless, one strategy that should not be pursued is pulling out of the countries in question. Even though some banks are minimizing exposure to these countries, it is not the country that poses the risk to the buyer, but the supplier. As Julian states, it is not likely that buyers face a material risk as long as they look into the suppliers’ financials and credit ratings and also establish how balanced their portfolios are across other geographies. Plus, given that the buyer can get much credit better terms than the suppliers in these countries, the buyer has an opportunity to reduce costs further by pre-paying for goods and services (with a stable supplier) at a substantial discount. Suppliers need regular cash flow, and if their terms are 30%, and your terms are 5%, there’s no reason that your Procurement organization couldn’t extract a 20%+ discount due to their cost of capital. That’s a smart Procurement move!

And if there is concern about future risk, build additional break and termination clauses into the contract. If a major currency fluctuation (or collapse) would make the supplier potentially insolvent, give the buying organization the right to terminate the contract, just like you’d do with any insurance or hedging contract. But, as Julian advises, don’t forego long term (strategic) relationships just because there is a potential currency risk.

Relentless Innovation, A Review: Part III: All Hail the Middle Manager!

In Part I, we began our review of Jeffrey Phillips‘, VP Marketing of OVO Innovation, recently published book on Relentless Innovation — a guide for transforming your organization from one that innovates occasionally, at best, to one that innovates constantly — by reviewing some astutely pointed out innovation myths, the biggest barriers to innovation in an average organization, and the problems with the average organization today. Then, in Part II, we discussed what a relentless innovator is and some of the characteristics that define a relentless innovator — characteristics any organization that wants to be a relentless innovator is going to adopt.

Today, we are going to provide the roadmap for an organization that wants to be a relentless innovator.

Step 1: All Hail The Middle Manager

I know that it’s probably sending shivers up and down your spine, as it did mine the first time I got the message, but the reality is that while a middle manager can be the biggest barrier to innovation, she can also be the biggest instigator of innovation. A middle manager who is:

  • comfortable with change and uncertainty
  • full of foresight (with the understanding that an unmet need is an opportunity)
  • thorough and well-prepared
  • participative
  • endowed with persuasiveness, persistence, and discretion

can be the biggest asset an organization has where innovation is concerned. Such a middle manager who is driven to innovate will drive that commitment and vision through the ranks and help make innovation-as-usual part of the modus operandi of the organization.

Step 2: Balance Efficiency and Innovation

Since not all innovation efforts will pay off in the near term, and since the vast majority will not pay off in the quarter (or current fiscal year), the organization needs to balance efficiency — which defines the revenue generation activities off of the current products and services — with innovation and give each the appropriate weight and focus so that the organization thrives today and tomorrow. How does an organization achieve this balance?

Start with a focus on innovation at the top; embrace the proper tools, techniques, and methodologies — broadly; consider innovation as a (future) revenue opportunity; become more “plastic” (open, flexible, and nimble); adopt a rapid experimentation methodology; remember that patience is necessary; and have a Cortes Moment — scuttle your ships and leave your conquistadors no option but to move ahead with innovation.

According to Mr. Phillips — that’s it. And if the organization does it right, everything changes. Innovation tools and techniques are deployed across the organization and brought to bear on new challenges first, not last. Managers expect and anticipate innovation. The organization stops fighting fires and starts lighting fires under the competition with new, innovative, product and services the competition did not expect. Middle managers are the biggest assets. And the firm achieves an “innovation flow”.

Relentless Innovation, A Review: Part II: The Relentless Innovator

In Part I, we began our review of Jeffrey Phillips‘, VP Marketing of OVO Innovation, recently published book on Relentless Innovation — a guide for transforming your organization from one that innovates occasionally, at best, to one that innovates constantly — by reviewing some astutely pointed out innovation myths, the biggest barriers to innovation in an average organization, and the problems with the average organization today.

Today, we will move on to defining what a relentless innovator is and how an organization can get on the right path to becoming a relentless innovator. So what is a relentless innovator? Simply put, an organization that pursues innovation relentlessly. What defines a relentless innovator? Good question.

One of the first things that Mr. Phillips points out is that most relentless innovators share almost nothing in common other than their ability to innovate consistently over time. In fact, the only thing most relentless innovators (Apple, 3M, W.L. Gore) share in common is an operating model fine-tuned to innovation and employees that are passionate about innovation (as well as deeply experienced in one or more areas of expertise and the application of such area of expertise to innovation). The IAU, Innovation As Usual model employed by these firms is organized around a workflow that is built on a (core) innovation team where the roles and responsibilities of every member are well defined.

Furthermore, all of the following necessary components for innovation are present at these firms:

  • A competency and culture aligned to innovation goals.
    Sight of innovation is never lost.
  • A core innovation team.
    This team is the innovation Center of Excellence and maintains the core process and knowledge base that is shared throughout the organization.
  • Central innovation method or process.
    Each individual project applies, and extends as necessary, this process.
  • Innovation skills and constant innovation methodology improvement.
    The team knows how to apply the process, and improve the process when the opportunity presents itself.
  • Idea Management Software
    No good idea is ever lost!

Furthermore, the innovation model defines innovation as:

  • a broad undertaking (not just product or service centric)
  • a core persistent capability
  • a common business practice for everyone
  • a core component of strategy
  • a process to be continually refined
  • a constant search for new ideas
  • a way of life

The innovation model is a framework for the operating model of the organization. This eightfold operating model (as defined in detail in chapter 7) provides the foundation for the communication, skills development, evaluation framework, and rewards which, ultimately, determine if any innovation effort is gong to be successful or not. These factors — which define the culture, business attitudes, and focus around innovation — are completely under an organization’s control and that’s why, when it comes to innovation, an organization is ultimately the master of its own destiny — no solo visionary, rebel employee, or lucky charm required. (Relentless) Innovation is a strategic choice, not an act of faith, and one that can succeed with the right framework and support.

So now that an organization knows that (relentless) innovation is in its reach, how does it get there? That is the subject for the third, and final, part of our review.