The benefits of transacting through a channel are well known. Companies that adopt the indirect channel as their go-to-market avenue can expand their presence in new territories and segments, and also gain access to skills and recognition faster — and with a lower investment. Everybody acknowledges there are trade-offs, the biggest of all being that companies relinquish control over how, where and to whom products are sold and supported. The dangers of partners not keeping with the recommended pricing or assigned territory have long been recognized. But companies seldom consider the risks of breaking trade compliance regulations beyond their first distribution tier.
A few common scenarios spring to mind:
- The company is offering market development funding to its authorized resellers, retailers, service providers, etc. These channel partners are organizations that purchase the products indirectly, perhaps from the tier 1 distributors or wholesalers. There is no direct transactional relationship between the company and the partners in tier 2 and below, but the company is providing funding. Should the company be concerned whether these other entities on their record are blacklisted organizations or individuals?
- The resellers use the marketing funding brand owners to provide run campaigns reaching out to a broad customer base. Should the brand owner be concerned whether the customers targeted by the indirect partners are on a restricted party list?
- Sales reported by the lower-tier channel partners come in and the revenue prospects are great. The partners stand to get some healthy rebates because of those sales. Should the company be concerned whether the transactions being rebated where with entities that have investments in assets that are directly or indirectly owned by one or more persons on a government-issued blacklist?
- How about the grey market? What happens when an indirect partner sources restricted products on the grey market?
Whilst, in these cases, there is no direct law-infringing sales transaction between the company and a lower-tier partner, sometimes incentives alone can constitute a violation. Similarly, when the company provides not just market development funding but also marketing campaigns support — which includes target customers lists – if any name on the list was a banned entity, the company is at fault. It is a company’s responsibility to ensure its goods or services are not sold to banned organizations or individuals.
The risks of violating trade compliance regulations should not be underestimated. Companies who do not comply can lose access to government contracts, lose their export privileges, forfeit funds or goods, face criminal prosecution, hefty fines and even prison time for the individuals in charge.
Just a few examples:
In November 2015, National Oilwell Varco / Dreco Energy Services Ltd of Canada paid $2.5 million in civil penalties to BIS and one year later National Oilwell Varco signed a Non-Prosecution Agreement forfeiting $ 22.5 million funds to the DOT Forfeiture fund for unauthorized export of oil drilling equipment to Iran and Oman.
Singapore-based, Corezing International Pte, Ltd conspired to export thousands of radio frequency modules to Iran. Some of the modules were later found in detonation systems for explosives. Between 2013 and 2017, the individuals responsible were convicted and sentenced to 37, 34 and 40 months in prison respectively, plus two to three years of supervised release.
There is also the risk of reputational damage. In a world where trade relationships seem to be getting more complex and security concerns are rising, companies perceived as willing to deal with banned parties should be worried about alienating their customers.
To prevent such risks, companies who trade across borders via a distribution channel need to embed compliance mechanisms, processes and software that can help screen channel partners and the goods they trade through each of the recruitment, enablement, demand creation, growth and reward stages of the partner journey.
There are two major challenges in achieving this:
- Most companies use dedicated incentives management, MDF and channel marketing automation software packages to manage their partner incentives, distribute market development funds and support partners’ marketing efforts. They use channel data management, inventory reconciliation and serialization software to track the movement of goods through the channel. But none of these applications are equipped to deal with cross-border trade compliance.
- The lists of restricted parties and controlled export goods, as well as the regulations, are continuously evolving. The general response is for companies to adjust their business processes and employ software packages that provide a range of key capabilities:
- An always up-to-date repository of knowledge containing screening rules and lists of prohibited entities
- Automated screening processes with high accuracy identification
- Workflows to manage the resolution
- Strong integration capabilities
However, the applications that help companies identify and block prohibited transactions don’t handle the typical channel processes.
Ideally, a single platform will support both channel management and restricted party screening capabilities to ensure each transaction is scrutinized and compliance risk is resolved. The only company able to offer this today is E2open.
E2open’s Channel Shaping suite provides a complete range of partner incentive and management capabilities on a unified data platform, creating the unique opportunity to gain a holistic view of all channel activities. E2open Export Management Intelligent application, part of the Global Trade and Logistics suite, automates export compliance, including country controls, denied party screening, license determination and tracking, and document generation for efficient processing. Both Channel Shaping and Global Trade & Logistics are powerful application suites in their own right. Together they are terrific. The combined capabilities on a single platform enable companies to conduct their normal channel programs, screening all their transactions against the world’s largest and most up-to-date repository of trade content – all without disruption to their operations.