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Beyond the pandemic: rethinking the supply chain

Regulatory compliance

Despite the challenges posed by COVID-19, checking regulatory compliance across a supply chain, particularly when onboarding new suppliers, will help businesses prepare for any increased scrutiny that follows the crisis.

Compliance violations can lead to regulatory investigations that can cause huge reputational damage. Any human rights or environmental violations also raise the risk of stakeholders – including investors, consumers and business partners – launching their own proceedings.

A supply-chain due diligence law for Europe?

In March 2021, the European Parliament adopted a resolution with recommendations to the European Commission for a directive on mandatory value chain due diligence. 

Although far from final, the directive's draft text provides a strong steer on the direction of travel. 

According to the resolution, the directive would apply to all large undertakings (ie those exceeding at least two of the three criteria: €20m balance sheet total; €40m net turnover; at least 250 employees on average during the relevant financial year) and to publicly listed SMEs or 'high-risk' SMEs.

Under the directive, member states would need to implement measures to ensure that companies conduct adequate due diligence in relation to human rights, environmental and governance risks. This should cover the whole value chain (upstream and downstream) and direct or indirect business relationships.

Read more about this development in our blog post.

When planning to reconfigure their supply chains, manufacturers should look at not only the operational issues (such as inventory levels or workforce availability) but also:

  • the environmental, social and governance (ESG) risks that may arise within the supply chain, such as:
    • human rights issues, both within the workforce (eg the use of forced/child labour and discrimination) and broader impacts on local communities (eg forced relocation of indigenous populations);
    • health and safety issues (eg forced overtime or the lack of personal protective equipment); and
    • the violation of environmental standards relating to, for example, water usage, habitat preservation and pollution.
  • risks relating to bribery, corruption, money-laundering and terrorist financing, which may rise among suppliers in financial distress.

Depending on the assessment’s outcome, the supplier code of conduct should reflect the standards expected and the right to audit compliance.

Where a manufacturer is having to engage a substitute/backup supplier quickly, due diligence may have to be performed in a curtailed or expedited fashion, with certain aspects of the investigation replaced by early monitoring rights and more frequent reporting. However, suppliers operating in high-risk jurisdictions, environments and/or industries should be prioritised.

Human rights and labour standards

In a joint brief published on 12 June 2020, UNICEF and the International Labour Organization warned that the pandemic may push millions young people into child labour.

Certain sectors are more exposed to having child workers in their supply chain. But every manufacturer should carry out regular risk assessments to understand the potential human rights impacts of its supply chain (including forced labour and other labour risks). Based on that risk assessment, it should carry out appropriate human rights due diligence (HRDD), a key tool for identifying, preventing and mitigating violations relating to workplace standards for the entire workforce.

According to the UNGPs it is not sufficient to identify, assess and mitigate human rights violations only when entering into a business relationship. Rather, assessment of human rights impacts must be undertaken ‘at regular intervals’.

Read our blogs on human rights issues for companies.

Anti-money laundering and terrorist financing

In May 2020, the Financial Action Task Force (FATF) published a report (PDF) on COVID-19-related money-laundering and terrorist-financing risks, and the possible policy responses.

The report suggests that the pandemic is impacting the ability of government authorities and the private sector to effectively fulfil their anti-money laundering obligations.

With regard to the customer due diligence processes required by anti-money laundering laws, the FATF recommended using digital ID tools as much as possible during the crisis while referring to its pre-crisis March 2020 guidance on digital identity (PDF), which highlights that onboarding and transacting with other entities using trustworthy digital ID can be lower risk than face-to-face processes.

Maintaining good practice internally

While the crisis remains fluid, companies should:

  • stay up to date with the latest money-laundering methods;
  • continue to communicate their compliance commitment to, and consider specific compliance training for, staff; and
  • consider reviewing their whistleblowing systems to make sure that the policies and procedures cover misconduct by external parties.

Our experience

The strategy involves ensuring compliance with International Labour Organisation standards and global best practice through contractual and regulatory methods, including drafting and lobbying for the adoption of new child protection legislation and engaging in wholesale reform of market structures. The project has included global strategy development, and jurisdiction-by-jurisdiction implementation, initially focussing on South America and sub-Saharan Africa.

Freshfields was an adviser to John Ruggie in the drafting of the guidelines.