Karen Gray, Senior Due Diligence and Monitoring Specialist, LexisNexisPrint This Page
Inside Sourcing newsletters / Anti-bribery and Corruption - How Sourcing Professionals Should Be Doing Their Due Diligence and Partnering With Their Compliance Teams to Help Reduce Corruption Risk within Their Supply Chains
Recent disclosures regarding the Panama Papers and numerous headlines related to corruption continue to shine a light on the need for advanced due diligence to protect companies from the financial and reputational damage when bad actions come to light. Thus far, the Panama Papers have led to fallout globally - Argentina, Australia, Azerbaijan, China, Iceland, Iran, Pakistan, Panama, Russia, the UK and Zimbabwe - while corruption scandals plague an ever-widening range of companies across numerous industries.
The intense spotlight on corruption only emphasizes the importance of uncovering potential compliance violations wherever they may occur, including in your supply chain. Today's modern supply chain executives face enormous pressures. Not only do you need to minimize the potential for supply chain disruption influenced by third-party suppliers - whether due to supplier solvency, material shortages, logistics or other factors - but increasingly, you have to manage government mandates related to anti-bribery and corruption compliance, forced labor, environmental sustainability and more. And, these days, doing so demands greater collaboration than ever with your compliance team.
Are Shell Companies Inherently Bad?
As the Panama Papers scandal shows, shell companies can hide myriad compliance problems, but an offshore account or shell company does not, in and of itself, signal corruption. The Economist offers a list of uses ranging from "Perfectly Legitimate" to "Deeply Dodgy." On the legitimate end of the scale, shell companies can allow businesses to:
Pool investor funds from different countries
Protect trade secrets
Diversify a business without impacting the brand
Ensure security for employees in high-risk hotspots
However, use of shells or offshore accounts moves into the grey area - and beyond - when used to:
Hide assets from bankruptcy courts
Evade taxes and sanctions
Facilitate bribery and corruption
Support arms dealers, drug cartels and terrorist organizations
So, not all bad, yet if a shell company is being used to disguise financial instability of a key supplier, your supply chain could certainly face serious consequences.
Three Steps for Creating Supply Chain Transparency
Working in concert with compliance executives, procurement professionals should focus on three steps for proactive supply chain risk management.
Conduct risk assessments to prioritize risks. While this may seem obvious, by teaming with compliance, you improve awareness into risks that might otherwise not be on your radar. Likewise, compliance gains insight into critical non-compliance factors that go into successful supply chain management. As each team learns more about the priorities and needs of the other, you become better at truly mitigating risk across all factors.
Use visualizations to map your supply chain. This is especially helpful when dealing with complex supply chains that rely on multiple tiers of third parties. A paper supplier connects back to a pulp mill, to a saw mill, to a lumber supplier to a forest. Do you know whether the wood is sustainably harvested? A cell-phone battery supplier sources out work to smaller suppliers who, in turn, purchase materials from other suppliers. Are you confident that those distant third parties aren't using forced child labor to mine cobalt? By thoroughly mapping the supply chain and sharing it with the compliance team, you can work together to increase awareness into potential risk factors and close any information gaps in the process.
Continue monitoring your supply chain to manage risk over time. Due diligence and ongoing monitoring represent two important steps in managing supply chain and compliance risk. In fact, when it comes to compliance, in particular, enforcement officials have indicated that having a robust, well-documented process in place is crucial to reducing the potential penalties if corrupt practices are later uncovered.
Break Down the Barriers between Supply Chain and Compliance Teams
Unfortunately, in many organizations supply chain management and compliance teams work in silos, separated from each other. In fact, PwC's "2015 State of Compliance Survey" reported that only 52 percent of compliance teams have primary ownership over third-party/vendor compliance. More worrying, even supply chain management teams admit to struggling to achieve real visibility into the third parties on which they rely beyond the first tier. The good news is that collaboration is gaining traction. From 2014 to 2015, for example, a slight increase in the number of supply chain and procurement professionals included on corporate compliance committees. By working in concert with each other, supply chain/procurement executives and compliance executives can realize distinct advantages. How?
Supply chain risks have escalated with globalization. Supply chains can now cross many borders and with them, a changing array of legal jurisdictions, business practices and cultural norms. This is especially true as the number of emerging-market suppliers grows. In many emerging-market economies, bribery and corruption run rampant. By partnering with your compliance team, you improve visibility into potential risks - and your ability to manage those risks proactively in order to not only protect your supply chain from the direct costs of corruption, but also from indirect costs such as:
Poor time and resource management in identifying issues
Legal liability including criminal and civil fines
Reputational damage that negatively impacts the value of your company's brand, business partner relationships and share price
When you build compliance review into your supply chain/procurement management workflow, you improve supply chain transparency and ensure improved focus for due diligence and ongoing monitoring to mitigate risk across a wider range of factors. Have you already started to build a more collaborative framework for risk management in your company? If not, what are you waiting for?