Large importers are essential to the progress of nations. They are important for enabling the creation of an SMB sector which is the bedrock of any country’s economy. They also build knowledge networks of suppliers that prove critical to international trade and the growth of nations. It may seem contrary when you hear the word import but in fact, efficient import networks and improved export performance of value-added goods have an intimate proven relationship. You cannot move up the export value chain without smart sourcing of inputs globally. 

Large importers are thus a foundational building block for economic activity generation and diverse healthy economies. Therefore, there is a national risk to large importers that should matter to their management, financial institutions dealing with them and policymakers at large. While import regulations and a culture of internal safeguards ensure the lessening of risk and liability, they focus overwhelmingly on product quality and payments. In a global world where justice is dispensed in sanctions and compliance fines, the biggest risk for large importers may very well be a third-party risk.  

Understanding third-party risk

The governments in the GCC are spending to diversify their economy. Buoyed by a period of high energy prices, such spending is expected to have a long tail. Large importers are responding with agility to this opportunity. They need to be careful as we now exist in a world where all regulators understand that import risk is the importer’s liability. This means that onboarding just one wrong party could result in crippling business damage.

A wrong party is any external party like a supplier, vendor, partner, contractor, or service provider who can cause reputational, and operational disruption, data breach and other damages. Most critical of these and often hardest to identify is a third party not complying with international regulations and has the potential to be blacklisted by governments as part of international trade bodies and protocols like FATF, and regulators of countries where international trade transactions take place. While all risks carry a business exposure, compliance-related reputational hit can be the most damaging.

While proponents of managing the business in volatility have been enunciating strategies since the Cold War, this new era of uncertainty is different. Trade is carried out in USD. This means trade is under the regulatory purview of US regulators who have never been more active. Additionally, geo-political events like the invasion of Ukraine have added a new list of filters to be looked at while studying third parties. Financial services partners now expect large importers whose businesses they support to invest in deeply understanding and mitigating this risk. If anything goes wrong, authorities in relevant countries come after banks involved in any trade with a suspicious third party. Not only do companies get hurt and fined by regulators, but they also find their banking terms changed making it more expensive to do business.

Proactive mitigation of third-party risk

Large importers need to proactively put in place a third-party risk strategy as part of their broader approach to risk & compliance. Some key actions we recommend are as follows:

  1. Do the basics well: Put in a system for third-party compliance that is data-driven and analytics-based. In a complex and ambiguous world where you are managing dozens, hundreds, or thousands of suppliers, a digital risk management solution with access to government, as well as business data, is critical. Comprehensive due diligence and risk management to ensure sustainable, ethical, and responsible relationships cannot be done without digital support.
  2. Key supplier financial health checks: A supplier’s financial health is a primary risk factor. Too many companies rely on financial instruments to secure supplier risk with a narrow focus on mitigating payment risk. Key supplier bankruptcy is the ultimate supply chain risk with the ability to set back growth & revenue plans by years. Often these bankruptcies happen without warning and result in the cessation of business. Identifying key suppliers and assessing their financial health regularly is a key part of governance and needs to be baked into the everyday business DNA for large importers. Rely on alternate sources of data for suppliers who are reluctant to share financial information.
  3. Keep an extra focus on front companies: Front companies have moved from being legal vehicles for international trade operations to the focus of regulatory investigations. Recently reports by a GCC government implementing fines for importers not doing due diligence on front companies are part of a broader re-orientation of the compliance world on front companies.
  4. Do a deep dive into people & company relationships: Information about a supplier and legal information about a company is no longer enough. Third-party risk is best mitigated when onboarding of suppliers includes deeper due diligence that digs into people and company relationships. Businesses have family trees, just like you and I have personal family trees. In a corporate family tree linkages depict relationships of business locations and reveal how organizations engage with each based on shared equity and shareholding. This is also true for individuals on boards. Which other boards are they on? What are their business positions and in which companies? Remember both companies and people can be on black and undesirable lists of governments. This level of due diligence is now critical.
  5. Build a self-starter culture: Make sure that through regular collaboration and training everyone in your organization, even your suppliers and other partners are aware of your commitment to proactive compliance and know which point person to escalate any issues to. For partners, make sure they realize that this commitment extends to their suppliers as well. Your own compliance organization needs to have a healthy paranoia. The Russian invasion of Ukraine is an example where proactive compliance departments would have reviewed all their relationships post-sanctions to ensure there is no possible fallout.

Large importers are becoming more important than ever as GCC states embark on ambitious economic diversification programs. Complexities of world trade and multi-layered global supply chains are realities they must contend with. When efficient import procedures and compliance led importers who focus on third-party risk combine, countries build healthier economies. However large importers need to own their risks themselves, including less understood but critical third-party risks.

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