Supply Chain Due Diligence: An expanding duty

There is an increasing number of ethical consumers that take notice of the origin and background of the products and services they purchase. Their heightened focus is not only based on their personal choices but on corporate matters too, making knowledge about third parties more important than ever.

Companies need to be aware of third parties’ inherent risks. The main concern used to be corruption, as international anti-corruption and bribery regulations gained traction and resulted in billions in fines. But now, environmental, social and governance (ESG) criteria need to be added to the list of considerations about all external business partners, especially in the supply chain. Being compliant with the law and its regulators to avoid penalties or even prison now also includes satisfying end-users, prospects, investors, competitors, other suppliers and the media. The court of public opinion moves much faster – and often more sternly than the law courts.

Minimising legal and reputational risks

Supply chain due diligence helps companies to minimise the risk of being exposed to legal and reputational risks, by investigating business partners that align with their own high standards. This information allows your company to access relevant information about your external partners. External partners refer to both market-side players, that is all parties involved on the supply side, including vendors, logistics and suppliers, as well as the sale side that includes wholesalers and distributors. Quality information also gives companies the opportunity to make an informed decision regarding an external partner, whether to engage or continue in business or end the relationship, in order to mitigate any partner-related risks.

With so many partners involved, how deep should your company search? Where should your supply chain due diligence process start? The clearest answer may be to start with your closest partners and build your third-party knowledge from there. A gradual approach may enable you to better understand the information gathered as you search for insights from your partner’s supply chain. A company’s size and location may also determine your obligations. For instance, according to The National Law Review, in March 2021, the European Parliament decided in favour of adopting an EU Directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence. The European Commission drafted the directive as a legislative proposal to be presented to the European Parliament in the summer of 2021 – and it is expected to come into force in early 2023. The directive will be enforced on businesses operating in the European Union (no matter their place of registration) with more than 250 employees, €50 million annual turnover (or a balance sheet of over €43 million); publicly listed or ‘high-risk’, small- and medium-sized entities. Also, companies that provide financial services and products will have to prevent and take measures towards the adverse impact on human rights, the environment and ensure good governance, establish the required processes for this purpose and communicate to the public their due diligence approach as well as the relevant strategy document to comply with the directive.

Identifying industry-specific risks

For some industries, such as mining, the Organisation for Economic Co-operation and Development (OECD) has published the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. This guidance refers to where risks are identified, risk mitigation actions are suggested and even improvement measurement indicators are summarised. In all other industries, this level of detail is still a work in progress.

A shipping industry example highlights the need for supply chain due diligence. During the UN Global Sustainable Transport Conference, held in Beijing between 14-16 October 2021, UN Secretary General Antonio Guterres called for International Maritime Organization (IMO) members to prioritise full decarbonisation by 2030 in order to achieve zero emissions in the shipping sector by 2050. He also called for measures to improve the working conditions in shipping, which he described as “unsafe and inhumane” treatment during the Covid-19 pandemic. Now that the IMO has set these targets, member countries will have to include them within their own legal framework.

Looking at shipping from another angle imagine your business is an international relocation company that relies on several third-party providers and sea freight is one of the most relevant. How can you know and assure your investors, clients and the media that your shipping partners are compliant with these at first reduced then eliminated emissions, labour, safety and all other applicable rules? How can you also know that your shipping partners are not involved in corruption or bribery cases, are not exploiting their workers, hiring child or forced labour or paying unfair wages? Moreover, that their carbon footprint is within your accepted range and that they comply with the human rights of their seafarers? You can find the answers by applying supply chain due diligence.

How supply chain due diligence works

Supply chain due diligence is a constant process that starts before engaging in business with a third party and continues via continuous monitoring even after a contract is signed. The process usually begins with an onboarding questionnaire, custom-made for your company. Based on a prospect partner’s responses, you will decide whether or not to engage in business with them, depending on the risks they may expose your company to. Also, once accepted as a partner, according to the level of risk they bear, the frequency of ongoing monitoring will be defined as well as the monitoring parameters.

The duty to know and understand your third party’s business as well as the people behind it is an ongoing responsibility that companies need to add to their list. The good news is that implementing due diligence monitoring systems is a viable way to achieve it.

There are several ways that companies can choose to conduct due diligence on their third parties. Some of the information that is not publicly available, which can be significant depending on a third party’s location, can actually be requested from the third party. The information that a third party provides should be verified via official documentation, government data bases, business information aggregators, the media and speciality due diligence providers. These providers typically have subject matter experts based across the world with linguistic, industry and country-specific expertise to give context to the findings.

Regardless of the methods used to identify, analyse and remediate risks, companies need to address supplier compliance risks as it is a growing area of concern for governments around the world as well as the public, media, consumers and investors.

Author Biographies

Christopher Sindik, Head of research consultancy at Refinitiv Due Diligence, an LSEG business.

Christopher is an expert on creating and evaluating written policies, including codes of conduct, programme evaluation and quantitative analysis. He also conducts extensive reviews of ethics and compliance programmes, hotline and whistle-blower programmes, and third-party due diligence programmes. Christopher is one of the world’s leading authorities on codes of conduct, having reviewed over 10,000 codes in the past six years. Programme evaluation is another area of broad experience. Christopher has benchmarked ethics and compliance programs for international companies in dozens of industries, with his advice leading to practical improvements in the structure, standards and processes of those companies’ ethics and compliance functions. He has evaluated training, governance and communications programmes, along with written standards and workflows.

He has constructed, built and administered online surveys to measure employees’ awareness and knowledge of ethical issues. Christopher has extensive experience in statistically analysing data sets to provide feedback on both qualitative and quantitative levels, along with written standards and workflows. He has constructed, built and administered online surveys to measure employees’ awareness and knowledge of ethical issues. He is a certified fraud examiner with detailed experience in financial crimes investigation, detection, and remediation.

Christopher holds a B.A. and M.A. from Arizona State University.

• P:  +1 (989) 600-4795
• E: [email protected]
• W: https://www.refinitiv.com

Aymard H. Jimenez is a research and due diligence specialist at Refinitiv, an LSEG business.

After twenty years working as a corporate and maritime lawyer, Aymard is contributing with his due diligence knowledge, from the user perspective, in the preparation of corporate compliance programmes.

Aymard has managerial experience in the BVI, Hong Kong and Panama and has also held two diplomatic posts in Europe. Aymard’s practical approach and professionalism contribute to an efficient teamwork.

Aymard holds an LLM in Commercial Law, with emphasis in anti-money laundering and corporate governance, from Cardiff University in the U.K. as well as a Kellogg School of Management MBA, from Northwestern University.

In his free time, Aymard likes to travel with his wife and three kids and is an avid football fan.

• P: (+507) 63054361
• A: Panama City, Panama
• E: [email protected]
• W: https://www.refinitiv.com

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