June 29, 2017
Supply Chain Corruption: The Elephant In The Room
The majority of companies invest heavily in robust product integrity, social compliance and merchandising systems. However, a single act of corruption can override the most stringent of these controls. In Omega’s experience, corruption within supply chain operations is usually so endemic that the question companies should be asking is not ‘Is there a problem?’ but, ‘Where are the problems and how significant are they?’ Companies should treat employee integrity like any other quality control procedure. Nobody would suggest that product quality does not need continuous monitoring. Ethical conduct is the same.
Which Corruption Risks Am I Exposed To?
Incidents of bribery and kickbacks remain the most common form of corruption Omega encounters. 75% – 85% of all issues fall into this category. These include an auditor being offered a bribe from a factory, an inspector requesting a red packet to pass a shipment or a merchandiser requiring a commission from suppliers in order to do business. Incidents can be overt, such as a red packet being pressed into an associate’s hand, or subtly, such as reimbursement for transportation and meals. More sophisticated systems also exist such as those where suppliers are required to patronize a restaurant, with a minimum spend, which an associate has a financial stake in.
Extortion is another example where a supplier threatens to report an associate for corruption unless he passes an inspection. Associates requesting loans from suppliers in India, China and Bangladesh is a growing issue Omega is aware of. Not only is a loan a conflict of interest but, should the loan go unrepaid, it becomes an illicit payment. While comparatively less frequent, the issue is becoming more prevalent in Asia as a growing consumer class, coupled with weak financial institutions, creates a demand for gray market loans.
Conflicts of Interest are an ongoing challenge with a multitude of scenarios where it occurs. As an example, a senior merchandiser, in a Shanghai buying office, far from corporate oversight and with weak, local leadership, has a financial stake in an apparel accessories company. She requires all the apparel suppliers she sources from to work with this accessories supplier. To avoid detection, the accessories supplier has been established under her child’s name, possible in China, using her husband’s surname rather than her own. These scenarios may appear preposterous to anyone without business experience in Asia, but they truly are an everyday challenge.
What Should Companies Do?
It is important to recognize that it is impossible to eliminate corruption. However, companies must implement the requisite controls to minimize its impact. The key is to be proactive and address problems before they escalate. If there is an incident it is usually because the problem has become so significant it has risen to the surface. This may be in the form of a supplier reporting an associate because he can no longer pay escalating bribes. Silence is usually a red flag.
It is essential that companies develop a culture of transparency. Including integrity on agenda points in staff meetings sends a clear message. Not only should there be support from the top, but support from the middle also. This is crucial since supervisors and middle managers interact with the supplier-facing staff most closely. Importantly, associates must feel confident that they have the full support of the company when they report suspected corruption as the outcome may be lost business, through the cancellation of a PO, a blacklisted supplier or termination of a colleague. Ultimately, the culture of ethics flows from the company code of ethics which should be developed with your legal counsel and cascaded throughout your organization. This document, however, is just that: a piece of paper. The understanding and implementation of the code is vital.
Asking an associate, located in part of the world where corruption is embedded in business culture, to apply ‘common sense’ is unhelpful. In Omega’s experience, asking an associate if they understand the code of ethics usually elicits an affirmative response. However, if you present that same associate with a real world ethical challenge to navigate there is often uncertainty. Expert training and guidance are key. Omega recommends that these training sessions be scenario-based and relevant to the associates’ exposure. Training could be classroom based initially with refresher training performed via e-learning. In these sessions, associates should be encouraged to file a report in the event they suspect corruption is occurring. Fear of speaking out is indicative of a poor culture of ethics. Investing in training also sends a strong message that ethical behavior is fundamental to the company.
Associates must be comfortable with reporting to their direct manager. If, for any reason, they are uncomfortable in doing so there should be alternate reporting channels available such as a corporate option or via a third party hotline, such as Ethics Point which Omega contracts.
Allegations of corrupt practices are difficult to prove. Interviews are time consuming and, since those involved in any incident may have committed an offence, associates and suppliers are usually reluctant to speak openly. Investigations may be resource intense since cross functional input is required from HR, legal and often external investigative resources. Despite these challenges, it is crucial that all allegations are followed-up on thoroughly and immediately. Not only should any associate or supplier, implicated in corrupt behavior, be managed appropriately, but investigations send a strong message, reinforce company culture and demonstrate that leadership is consistent when implementing its code of ethics. It is important to recognize that motivations are complex so impartially is required throughout.
Managing an anti-corruption program over hundreds, or even thousands, of suppliers across multiple countries can be daunting. Omega has vast experience dealing with supply chain integrity risks. For more information on how Omega can support your business, please contact us.
Should you wish to view the full webinar, it is available from the AAFA webpage.