A Deeper Dive into Supply Chain Transparency & Accountability

The sheer proliferation of supply chain transparency and accountability regulations at international scale itself warrants a closer look at the level of scrutiny required of organizations with complex, multi-faceted, global, and increasingly interconnected, supply chains. Legislation as varied as the German Supply Chain Act, the Uyghur Forced Labor Prevention Act, and proposed legislation for a more comprehensive due diligence framework at the European Union (“EU”) level concentrated on human rights due diligence all lend themselves to a number of practical questions common to compliance practitioners across the board. 

The chief concern of compliance practitioners operating in industries that rely on the sale of tangible goods relates to the mapping or tracing of the organization’s entire supply chain—from the sourcing of raw materials to the manufacture, production and ultimately distribution of the finished goods to the consumer. Under any number of legislative schemes, such tracing is a constituent element of proving, to a particular jurisdiction’s satisfaction, that forced labor was not used at any stage in the product lifecycle. This challenge is compounded by the fact that visibility into first-tier supplier operations has historically been limited and little to no visibility has been gleaned by organizations into second or third tier business partners with whom they lack contractual privity. 

While typical commercial agreements between primary business partners rely on a host of covenants, representations, and warranties concerning compliance with forced labor standards, sustainability considerations, sanctions and export controls, bribery and corruption, and other areas of concern, the reality is that—in conventional legal and compliance practice—these terms have become so ubiquitous as to be almost meaningless. While they are often supplemented by robust inspection and audit rights, anecdotal evidence suggests that these provisions are seldom, if ever, leveraged in a compliance context to ensure that the contractual counterparty is adhering to the organization’s expectations. Obstacles to leveraging these provisions abound. Even though a business partner may be contractually obligated—upon reasonable notice—to open its books and records for the purposes of compliance audits, first tier suppliers are reluctant to share what they perceive as proprietary information with any third party, let alone their primary business partners. Second, even if audit and inspection rights are utilized, no single, coherent framework exists for the evaluation of the business partner’s adherence to the primary contracting organization’s compliance expectations, especially in the human rights and forced labor domain. 

The solution, it seems to me, is dependent upon a fundamental culture shift under which conventional commercial relationships operate to encourage—rather than discourage—critical information sharing that sheds detailed light on corporate practices involving regions and jurisdictions known to be hotspots for human exploitation. Secrecy should no longer be the domain in which compliance-conscious, contemporary organizations operate. When a request is made during initial or supplemental due diligence for detailed information on the highest supply chain risks facing a contractual counterparty by the primary contracting organization, the inclination should be to share as much information as possible and collaborate, where necessary, to obtain additional documentation and resources from second and third party suppliers. If the underpinning of any commercial relationship is mutual trust, then collaboration between the parties to combat—and eventually eradicate—the ongoing scourge of forced labor is a small price to pay for sharing what might otherwise be considered proprietary information. Indeed, government directives—including draft EU regulations—strongly encourage organizations operating in similar industries to actively share information regarding supply chain risks in relation to human rights abuses by minimizing the threat of prosecution under the guise of competition or anti-trust laws and regulations. So long as historically sensitive information regarding price and other details remain secret, organizations should liberally avail themselves of the opportunity to form voluntary associations and share supplier intelligence and best practices for combating human rights abuses in global supply chains. 

The emerging expectation that organizations have visibility into the operational activities of second and third tier suppliers also necessitates a fundamental shift in the way due diligence is performed. Perfunctory due diligence—the practice of initial screening and evaluating basic questionnaire responses that more often than not reflect positive answers and fail to shed light on human rights risk factors—is simply not sufficient to meet contemporary compliance demands. Due diligence questionnaires are in dire need of reform to elicit the kinds of information and documentation that global regulators expect. This information should include a detailed description of the contractual counterparty’s supply chain operations, with a particular emphasis on high-risk activities in jurisdictions notorious for the exploitation of workers. When finalizing any definitive agreement, organizations should utilize that information to commit the contractual counterparty to closely monitor risks identified during that process and to immediately report suspected violations to the primary organization under threat of termination for cause. Where practicable, organizations should also encourage their business partners to share the names of each and every entity that will be involved in fulfilling the business partner’s contractual obligations to the primary organization. Contractual terms can also be adjusted to require the formal approval of the primary organization for the utilization of any second or third tier supplier not initially disclosed by a counterparty. 

While every effort should be made to avoid sourcing raw materials and product inputs from questionable regions, where unavoidable or impractical, organizations should rely on statistics and reports from international organizations—including most ubiquitously the International Labour Organization—to inform risk mitigation efforts. A number of proposed legislative schemes and international human rights frameworks encourage organizations to engage relevant local stakeholders and conduct on-the-ground, labor-oriented audits in an effort to properly identify and prioritize the risk in question. Organizations should consider requiring their business partners to engage in these activities and provide relevant assessment results. If complete cessation of commercial activity with a second or third party supplier is impractical, then it is incumbent on the organization to redress the risk with investments in local mitigation efforts to improve the lives of those affected. 

Finally, education truly is the silver bullet in ameliorating the human exploitation crisis from a forced labor perspective. While government guidelines issued by numerous jurisdictions have emphasized internal training, many of the same guidelines have expanded in recent years to recommend that organizations also engage in third party education. Forced labor risks should feature prominently in any training given to a party’s direct business partners with an understanding that the direct business partner will, in turn, provide the same training and awareness to the second and third parties on which they rely to fulfill their contractual obligations. 

In the end, there is no single formula for success in identifying and remediating the risk of forced labor, but organizations—guided by the compliance professionals they employ—should engage in active dialogue with their direct and indirect business partners and foster a relationship of mutual respect and trust. 

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