SaaS Companies: Here Is Why Sanctions Screening Is Non-Negotiable
In the SaaS world, the following is an elephant in the room: Not all businesses sanctions screen their new and current customers. And in the era of increased sanctions, especially against Russia, this can be considered high-risk. This sanctions.io article examines the issue and reveals why performing sanctions checks is non-negotiable.
But before diving into why your SaaS business should have a sanctions screening program, let's briefly examine why it matters.
Why Sanctions Compliance Matters to SaaS Companies
A remarkable advantage to being a company offering a Software-as-a-Service (SaaS) product is that you can win customers from almost anywhere in the world.
And it's this simple: Whether it's a bakery chain in Spain or an event management company in Australia, if you can offer a software solution to solve a problem, all it takes for a financial transaction to take place is for them to whip out a bank card that says Visa or Mastercard on it.
There's no better feeling than those monthly recurring revenue (MRR) metrics going through the roof.
But here is another elephant in the room. The smaller barriers to global customers mean an elevated sanctions violation risk. And as soon as that financial transaction occurs, a legal obligation kicks in - one that some SaaS companies might overlook or underestimate (especially ones that aren't regulated).
Of course, this obligation revolves around sanctions compliance.
To kick off the reasons why sanctions screening for SaaS companies is non-negotiable, let's look at the legal side.
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Avoid Legal Quagmires and Massive Financial Penalties
For the majority of SaaS companies, the most significant reason for performing sanction checks is to mitigate the risk of breaking laws that may lead to serious legal consequences and astronomical financial penalties.
We'll get to the specifics in a moment. But here is an example from the software world: In 2023, the US Treasury announced that Microsoft will pay a combined penalty of $3.3 million to resolve alleged and apparent violations of US export controls and sanctions against Russia (related to the 2014 Russian invasion of Crimea).
You can learn about the case in this sanctions.io blog post dedicated to the penalty.
In this article, we cannot go into all the legal reasons why your SaaS company should sanctions screen new and existing customers - there are numerous that could make a lengthy PDF document. Also, the jurisdictions where your business is registered and if it operates financial products affect legal responsibilities.
But we will now explain why almost all SaaS companies are strongly advised to sanctions screen their customers.
Legal Incorporation in the US Means Enhanced Sanctions Responsibilities
Here is a reality: In the SaaS world especially, founders choose to incorporate their business in different countries from where they are physically located. The US is one of the most popular locations for reasons such as enhanced investment opportunities.
And it means that a chunky percentage of SaaS companies with founders working from Budapest to Bali - and everywhere in between - take on more stringent US sanctions-related responsibilities and legal obligations.
It's also important to remember that it doesn't matter if your business is a regulated financial service or if it isn't - it still must comply with, for example, sanctions imposed by the US Office of Foreign Assets Control (OFAC).
If your SaaS company is legally registered in the US and isn't performing sanctions checks on new and current customers, the risk of legal difficulties, financial penalties, and reputational damage cannot be avoided.
You can find further information about why OFAC sanctions compliance is essential in this sanctions.io article.
SaaS Companies: Watch Out for Secondary Sanctions
We'll get to secondary sanctions risk in a moment. But first, a reminder. In the previous section, we looked at how SaaS companies incorporated in the US are subject to more stringent sanctions laws.
But it's also important to remember that other jurisdictions, such as the United Kingdom (UK) and the European Union (EU), have their own sanctions laws that can impact SaaS businesses.
For example, given that the pound is a Big Eight currency, the UK's Office of Financial Sanctions Implementation (OFSI) consolidated list of sanctions is influential worldwide.
But now back to the importance of secondary sanctions.
You can learn more about them in this article, but we'll now explain what they are in layperson's terms and why almost all SaaS companies must watch out for them, no matter where they are legally incorporated. Secondary sanctions are often overcomplicated, so let's make a tangible example that's easy to understand.
Secondary Sanctions Example
For reasons already alluded to, many US-registered SaaS businesses (in the US or physically located in countries worldwide) must legally comply with OFAC sanctions.
But what about SaaS businesses with no legal registration in the US?
Because of secondary sanctions implemented by OFAC, US sanctions still apply. It's often considered controversial (especially in Europe), where terms such as the weaponized dollar are ubiquitous. However, jurisdictions worldwide have a choice: Trade with the US or the sanctioned target - but not both.
And what does that mean? Unless you're a SaaS company targeting customers in locations such as Russia, Iran, or North Korea, almost everyone reading this is likely from a SaaS company subject to US secondary sanctions - with your jurisdiction upholding OFAC sanctions laws on behalf of the US.
To conclude this section on secondary sanctions, it's vital to understand that how sanctions penalties are enforced isn't straightforward. After all, it isn't like running a red light and a camera snaps your number plate.
But, although it could appear that not complying with OFAC sanctions laws may never result in a firm governmental knock on the door (and the damaging legal, financial, and reputational events that will follow), the risk exists.
And is that a risk worth taking for a respectable business seeking growth, investment, and long-term success? Most would agree it isn't.
Other Important Reasons Why SaaS Companies Should Perform Sanctions Checks
This article has revealed legal reasons why complying with sanctions laws is crucial for almost all SaaS businesses.
Another significant legal reason is this: Software companies, including Software-as-a-Service models, are subject to export laws. For example, the US's Export Administration Regulations (EAR) may also prohibit SaaS services sold to sanctioned entities. The 2023 multi-million dollar fine involving Microsoft involved US sanctions and export violations.
However, beyond mitigating the risk of breaking legal obligations, a sanctions screening program also has the following benefits:
- Reduces money-laundering risks
- Maintains reputation and trust
- Helps meet compliance obligations in global expansion
- Contributes to ESG goals
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How SaaS Companies Can Easily Perform Sanctions Checks
If your SaaS company is concerned about sanctions compliance, sanctions.io's cost-effective and best-in-class solutions are already helping software companies worldwide with their screening needs.
To learn more about how our sanctions, PEP, and criminal watchlist screening service can support your organization's compliance program:
We also offer a free 7-day trial (no credit card is required) and will be delighted to walk you through our service. sanctions.io is a highly reliable and cost-effective solution for sanction checking. AI-powered and with an enterprise-grade API with 99.99% uptime are reasons why customers globally trust us with their sanctions screening needs.
