When assessing your third-party risks, it is important to start with one important division — a company’s supply chain and on the flip side, a company’s distribution chain.  Sourcing materials and supply chain links present a set of risks.  Conversely, a company’s distribution chain, sales channel, presents another set of challenges.  In each case, legal and compliance have to understand the legal risks presented by these relationships — they are far from equal and implicate different concerns.

Supply chain risks are rapidly increasing, especially in this volatile world of tariffs, trade wars, embargoes and shifting alliances.  As tariffs are adopted, or even threatened, companies have to integrate a dynamic mechanism for ensuring cost-effective operations.  An effective tariff increase can result in shifting supply needs to alternative sources. 

Aside from these significant business or economic set of concerns, legal and regulatory risks have to be included.  If, for example, you need to switch from one supplier to another, an updated assessment for the new supplier may indicate real risks, such as human trafficking or forced labor.  The cost savings resulting from a switch of a supplier may be offset by increased regulatory risks from higher human rights risks.  It is a delicate balance and one that has to be weighed carefully given the quickly evolving set of risks.

At the same time, the Trump Administration is elevating its focus and concern over cartel and TCO tentacles into the legitimate economy.  The focus on corrupt actors or Russian-oligarchs is gone — instead, companies must redirect their due diligence and third-party risk framework to increase due diligence efforts to uncover and prevent indirect benefits to cartels and TCOs.

Whether intentional or unintentional, third-party relationships present risks that can quickly create legal prosecution risks and severe reputational damage.  in defining your high-risk candidates with this new attitude, cartel and TCO risks have to be identified and factored into the analysis.  Corruption should not be ignored because cartel and TCOs often develop hand-in-hand with corruption governments.  But, a targeted focus on cartels and TCOs means that enhanced due diligence inquiries into distribution and supply chain relationships are essential.

To this end, stringent AML and CTF analysis is more important than ever. Aiding of cartels or even operating in areas known to be controlled by cartels and TCOs are indicative of tangible indirect risks — whether on sales or supply chain/sourcing activities.  The Trump Administration will not tolerate denial based on head-in-the-sand or “we did not know claims” of lack of knowledge that cartels and TCOs were benefiting in some way from the company’s operations.  Beneficial ownership and transaction geography and pathways are critical. 

Basic screening operations will be important.  For example, companies that conduct background checks on customers, partners and suppliers should ensure that such searches are updated regularly.  If potential associations are uncovered, any explanation should be certified or incorporated into a contract.

Besides these basic steps, companies have to supplement existing training to include warnings signs for human trafficking, slavery, cartel and TCO activity.  A geographic analysis is a great starting point but there has to be additional, region-specific analysis of risks for a country or region.

A valuable source of information in specific counties and regions is law enforcement, which can help you isolate various factors.  The federal government maintains important information about such operations and can provide valuable insights into AML and other commercial activity.

In this new environment, Latin America and other known hot spots will be the focus of commercial activity.  The DOJ is pointing at three significant criminal gangs — “Tren de Aragua (TdA), La Mara Salvatrucha (MS-13), the Sinaloa Cartel, and the Jalisco New Generation Cartel.”

For many of these illegal organizations, companies have to examine financial currency transactions and AML risks, lodging, personnel and transportation services. We are awaiting DOJ guidance on how FCPA enforcement will supplement prosecution efforts. Companies that operate in cartel and TCO areas will have to up their game to identify potential risks. 

High-risk activities will fall generally into remote or high-conflict regions where oil and extractive, agricultural and telecommunications activities occur.  Cartels and TCOs may have infiltrated these industries in high-conflict regions.  Companies may experience a risk in extortion demands against employees or third parties.  In various local jurisdictions, companies may face demands for bribes from local law enforcement, municipal officials, or other corrupt officials. 

Cartel risks are present in the logistics industry — transportation, air travel and logistics, may involve transport of illegal cargoes (e.g. guns), drugs, currency, personnel and other items.  Material support is a very broad concept and risks to organizations are severe.  On the supply side, product manufacturers could be create goods that can be used in the manufacturing of narcotics, weapons through front companies making it difficult to identify indirect cartel relationships and interdependencies.