Almost all surveyed respondents (88 percent) are aware of the strict penalties for non-compliance with legal regulations related to breaking economic sanctions. Despite this, many Polish companies fail to exercise due diligence when checking the credibility of their counterparts. This conclusion can be drawn from a survey conducted by EY called “Risk related to economic sanctions”.
According to the study, 74 percent of surveyed companies claim to have taken additional actions in the context of managing sanction risks. However, a third of them (31 percent) were exposed to the risk of unintentional sanctions violations, and one in six (16 percent) admitted to having violated the sanctions.
Failure to impose sanctions effectively can lead to severe penalties and can affect a company’s operations and reputation, says Tomasz Dyrda, Partner in the Risk Management Department of EY Poland, commenting on the conclusions drawn from the report.
Correct verification of counterparties is key to reducing risk
Companies participating in the survey declare that they do verify their counterparts, but the scope of the analysis performed varies. The vast majority of companies state that they analyze partners only in terms of their ability to fulfill contracts or their business partner’s solvency(73 and 70 percent respectively). Only just over half of the companies (56 percent) follow appropriate risk-based procedures.
Effective counterparty verification, in terms of sanction risks, should cover establishing ownership structure and the real beneficiaries of the counterparties. For their correct identification, access to appropriate data and knowledge of local languages is necessary. Therefore, it is not surprising that a large percentage (69 percent) of responses confirmed the use of external advisory services in this area, said Wojciech Niezgodzinski, Partner in the Risk Management Department of EY Poland and co-author of the study.
Key challenges for enterprises
The outbreak of war and imposition of sanctions have significantly impacted the operations of enterprises operating in international markets. Most surveyed companies (67 percent) dropped imports or exports of goods or services to or from Eastern markets. More than half (54 percent) ended collaboration with some partners. Changes related to the sanctions regime have also been reflected in the contracts signed with business partners. More than two-thirds of surveyed businesses (69 percent) have decided to modify the provisions of contracts concluded with their business partners.
Our study confirms that sanctions have a significant impact on business operations. In making sound business decisions, it helps to conduct and continuously update a risk assessment – not only of direct sanctions breaches, but also of their unintentional violation or circumvention, for example through cooperation with intermediaries trading with entities under sanctions, says Tomasz Dyrda.
How often should you verify your partners?
The lack of regular and cyclical monitoring of changes in ownership structures presents a serious sanctions risk. More than half of the companies (52 percent) perform such verification at least once a year. Every fourth company (24 percent) carries out such an analysis in the event of an indication of heightened risk of cooperation. Every ninth company (13 percent) does not carry out periodic verification of its partners, but only when cooperation is initiated.
Considering the frequency of changes in the area of sanctions, verifying partners only when starting cooperation or once every two years is insufficient. Guidelines from the European Commission indicate that the verification of partners for sanctions should be conducted based on a risk analysis, notes Tomasz Dyrda.
Education of entrepreneurs and raising awareness
Over the last two years, we have witnessed the European Union adopt thirteen sets of sanctions, with another soon to be developed. Experience also shows that the ownership structures of companies are dynamically changing. Thus it seems prudent to continuously update knowledge in this area. Half of the respondents (50 percent) appear to operate on similar assumptions as they have held sanctions training for all employees in the last twelve months.
Due to the complexity of sanction issues, it is necessary to conduct training. Ideally, the training should be introductory (aimed at explaining the essence of sanctions) and regular, providing reminders and updates on changes, emphasizes Tomasz Dyrda.
About the study
The “Risk related to Economic Sanctions” survey was commissioned by EY and carried out by CubeResearch among 204 companies using a combined method – CATI (telephone interviews) and CAWI (online interviews). The main goal of the study was to check how companies operating in Poland manage the risk associated with sanctions and what challenges they encounter in this area. The survey is available on the EY website.
