Legal Risk in Supply Chain and Third Parties Operations
Legal risk is a growing concern for organizations, as non-compliance with anti-bribery and corruption (ABC) regulations in the global supply chain can lead to serious financial and reputational repercussions. Without clear visibility into third parties and a legal risk management strategy, it can be incredibly difficult to monitor legal risk in business operations. To protect against financial and legal penalties, organizations must manage and mitigate legal risk across the supply chain, staying in compliance with various ABC laws and regulations.
Types of Legal Risk
In order to prevent supply chain and business disruptions, you must monitor and manage the many types of legal risk. All types of legal risk can have adverse effects on a business, and can result in reputational, financial and strategic damage.
- Compliance Risk: To avoid financial and legal penalties, you and your supply chains must comply with the country’s laws and regulations in which you operate. One type of compliance risk that many organization face is modern slavery, especially in developing countries, where laborers may be forced to work in unethical and illegal conditions.
- Contract Risk: When a third-party business partner or supplier fails to hold up the terms outlined in a contract, your organization could face financial and/or reputational damage. The same goes when you fail to meet the terms of a contract. You could face legal or financial penalties.
- Trademark/Patent Infringement: These are both examples of non-contractual legal risk. Infringing on a third party’s patent is considered a misuse of intellectual property, and unauthorized use of a trademark can be damaging to your organization legally and financially.
- Bribery and Corruption: One type of legal risk in supply chains is failure to comply with ABC laws like the Foreign Corrupt Practice Act (FCPA). Without a legal risk management strategy, you could be exposed to risk due to corrupt actions undertaken by suppliers or other third parties acting on your company’s behalf.
Recent Examples of Legal Risk in Business
While all companies must consider legal risk in business, some industries are more vulnerable to the risk than most. The extractives industry, for example, faces elevated risk because operations like drilling for oil often take place in countries where paying bribes are a common practice for facilitating business.
In 2016, Huffington Post and Australia’s Fairfax Media reported on alleged bribery and corruption taking place at Unaoil. The reports claimed Unaoil bribed public officials in the Middle East in order to gain contracts for companies in the foreign oil and industrial industries—including Honeywell, Samsung and Rolls-Royce. These claims were reported based on thousands of internal emails that were leaked. The reports damaged Unaoil’s reputation, and tainted the entire oil industry as a whole. The only company to claim wrongdoing was Rolls-Royce, leading to both reputational damage and $800 million in penalties.
The pharmaceuticals industry also faces elevated legal risk as it expands sales operations into other countries. Under the FCPA, companies are restricted from making payments to government personnel in furtherance of their business. In countries where hospitals are state-owned entities, such as China, it means that doctors are categorized as government officials. In 2016, several FCPA settlements were related to pay-to-prescribe or unlawful incentives—bribes—to increase drug sales in China, including:
- GlaxoSmithKline paid a $20 million penalty
- AstraZeneca PLC paid a $5 million penalty
- Novartis AG paid a $25 million penalty and also agreed to provide compliance updates to the SEC for two years
Capping off a year of record FCPA fines for the pharmaceutical industry was the December 2016 settlement with Teva Pharmaceutical Industries Ltd. The company agreed to pay $519 million in a deferred prosecution agreement (DPA) and civil settlement over bribery of government officials in Russia, Ukraine and Mexico to facilitate drug approvals and sales.
Legal Risk Management
Without a legal risk management strategy, your organization could face reputation, financial and strategic damage. In order to prevent supply chain and business disruptions, it’s important to identify and manage all types of legal risk.
Nexis Entity Insight is a fast, efficient and cost-effective solution for proactively monitoring local and global suppliers and third-party business partners. The solution leverages a wide range of market intelligence unavailable on the open Web and applies the industry-standard PESTLE analysis framework (Political, Economic, Socio-cultural, Technological, Legal and Environmental).
Nexis Entity Insight sets a new industry standard by helping you manage legal risk in your supplier and third-party portfolio. The tool captures an in-depth view of reputational, financial, strategic and legal risks and helps ensure monitoring and alerts retrieve important risk-related articles that are unavailable via the public internet.