A Common Approach to Mitigate Corruption, Environmental and Labor Risks in Global Supply Chains

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The challenge of improving ethical standards in global supply chains begins with the complexity of today’s commodity networks. Richard Locke, responsible for supply chain management in such leading firms as Nike, Cola-Cola and HP, indicates current challenges come from two major shifts from supply chains in the past: changes in the geography of global manufacturing – from advanced industrial states to developing countries, and in the organization of production – which includes thousands of independent suppliers typically located in emerging markets.

This shift has important implications for achieving international ethical standards. There is a lack of visibility of second- and third-tier suppliers and gaps in accessing real-time information on supply chain activities, disparate local regulations that may not integrate well with industry requirements, and the inherent unforeseen risks of being a small business. Simultaneously, legal and regulatory developments as well as consumer pressure across the global North are pushing multi-national corporations (MNCs) and their third-party providers to have measures in place that comply with global anti-corruption norms, and environmental and labor standards.

Committing to accountable governance structures and ethical business practices is a key priority for both MNCs seeking to lower their risk profile and for local small and medium-sized enterprises (SMEs) attempting to join global supply chains. Adopting a coordinated approach to managing these risks will both strengthen internal compliance efforts and avoid the adoption of duplicative due diligence measures – making the company’s supply chains more efficient and competitive. Coordinated efforts between MNCs and SMEs can also help companies to effectively recognize and respond to very specific labor and environmental concerns at the local level.

At present, these standards are rarely applied in unison or with an emphasis on adjusting firms’ corporate governance structures to lessen the risk of corruption and environmental and labor malfeasance. This is partially due to the friction and perceived clashing of interests between large MNCs and local or global environmental and labor communities. Additionally, integrated standards only gained real traction at MNCs quite recently, largely due to international pressure rather than internal.

For example, in regards to environmental compliance, a US $13 million settlement between the U.S. Government and Lumber Liquidators in 2015, marked the largest enforcement action of the U.S. Lacey Act – a law banning the sale of wood products illegally purchased overseas. A 2016 amendment to the U.S. Tariff Act closed a loophole that had allowed for the importation of goods produced with slave labor. The amendment has already resulted in U.S. importers taking steps to reduce the risk of their value chains’ exposure. In addition, noncompliance with international environmental and labor standards, increases the risk of potential FCPA and Bribery Act liabilities as any interaction with foreign officials, subsidiaries, franchisees, joint venture entities or suppliers, create potential for exposure under both anti-corruption laws.

When preparing to join global supply chains, SMEs should be ready to strengthen aspects of their compliance programs and ensure they are integrated and demonstrable. CIPE’s previous anti-corruption work with local SMEs in Pakistan, Ukraine and Indonesia, amongst other countries, show the need for awareness and training in labor and environmental standards. This not only boosts competitiveness, it clearly helps identify any gaps in local regulations and enforcement. As integrated compliance becomes the norm, compliance officers at MNCs should study up on the local context and be prepared to work closely with their global counterparts.

Elisabeth de Vega Alavedra is an Anti-Corruption/Conflict Fellow at CIPE.