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Gary Cohn, president and COO of Goldman Sachs, knows a thing or two about regulatory risk. After all, the financial services industry faces constant scrutiny—and headline-generating enforcement actions—for violations of anti-money laundering, anti-bribery and corruption and a host of other regulations. But you might also find it interesting that Mr. Cohn has said, “If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business.” We touched on the subject in last week’s blog post about how globalization has led to elevated compliance risk. Today we’re taking a look at three industries that aren’t generally considered ‘high risk,’ but have encountered problems just the same.
When reports surfaced that modern slavery was rampant within the Thai fishing industry, immediately, calls went out to boycott grocery stores and restaurants that may have sourced products acquired using forced labor. And it wasn’t just activists leading the charge. New Jersey Republican Congressman Chris Smith, a member of the House Foreign Relations Committee, said, “All of us may find ourselves eating a slave-made product without knowing it, but once we know it, we all have a moral obligation, I believe, to make a personal decision to boycott it.” Not surprisingly, consumers raised their voices in protest too.
After all, consumers are paying more attention to where their food comes from these days. Organic food has moved from fad-status to a widely-embraced preference. Consumers have raised expectations on companies to meet ethical and environmental standards, demonstrating a clear preference for ethically-sourced products, according to a Nielsen survey. As a result, if consumers learn that the shrimp, chocolate, coffee or tea they’re enjoying comes from slave labor, they tend to blame the brand they know best, not some nameless third-party far along the supply chain.
Last month, models strutted down runways in New York City and Paris and celebrities mingled with designers in a grand celebration of fashion. But style comes at a cost, and we’re not just talking about high fashion price tags. The fashion supply chain travels a long, often convoluted, path—and government bodies, non-governmental organizations (NGOs) and consumers are looking more closely at what takes place in the journey from concept to closet.
CNBC reported in August that “Ten of the world’s 12 biggest garment-exporting countries hold a high or extreme risk of slaves working in their supply chains.” The risk starts early—in the growing and harvesting of cotton, for example. Check out this Anti-Slavery International video produced for its “Cotton Crimes” campaign. From there, forced labor takes place in yarn and spinning mills, then garment factories—all in an effort to produce fast, inexpensive fashions for consumers in the U.S., Europe and elsewhere. Modern slavery laws—like the UK Modern Slavery Act passed last year or the 2010 California Transparency in Supply Chains Act will likely be joined by additional laws as nations around the world try to bring an end to practices that disproportionately impact the most vulnerable people: women, children and people displaced by war or poverty.
Not surprisingly, forced labor is also viewed as a potential indicator of other corrupt practices, such as bribery of government officials like health and safety inspectors, immigration authorities and others. This opens the door to potential Foreign Corrupt Practice Act (FCPA) investigations. But that’s not the only bribery and corruption risk. When it comes to gift-giving and hospitality in luxury fashion industry, even giving away free samples can be construed as a bribe. The financial fallout from such breaches are significant. Just two years ago, Avon entered a deferred prosecution agreement over FCPA violations by Avon China, paying a total of $135,013,013.00 in criminal and regulatory penalties. And the damage to reputations cannot be ignored either; in the age of social media, revelations about forced labor have prompted consumer protests and sweeping changes in how companies like Nike and H&M conduct third-party screenings to mitigate risk.
The tech industry hasn’t escaped third-party risk either. Components in smartphones, tablets and TVs, use materials that come from a well-documented, high-risk industry: mining. As a result, the potential for forced labor in the distant reaches of the tech supply chain is high. And the picture that is painted when bad actions come to light isn’t pretty. Amnesty International business & human rights researcher Mark Dummett says, “The glamourous shop displays and marketing of state of the art technologies are a stark contrast to the children carrying bags of rocks, and miners in narrow manmade tunnels risking permanent lung damage.” A comprehensive third-party compliance and risk management can make a huge difference, but it must be an ongoing effort.
Recently, Bloomberg reported, “Apple Inc. has reached what it’s calling a milestone in supply-chain transparency, saying it’s now auditing 100 percent of its suppliers for the use of conflict minerals linked to violent militia groups in the Democratic Republic of the Congo.” The process took five years—and a great deal of determination—to achieve results, which may be why “Only a handful, such as chipmaker Intel Corp. and tantalum capacitor maker Kemet Corp., have been able to say they sell conflict-free products,” said Bloomberg. Plus, as pointed out earlier, the presence of forced labor indicates a bribery and corruption risk as well. What’s the answer? It may not be simple, but companies must implement robust compliance programs—and use their economic muscle to enforce them—while also mitigating risk with deeper due diligence and ongoing monitoring to help ensure that bad actions aren’t taking place further along the supply chain.