Many companies worldwide are hurting these days. Have you asked yourself how your suppliers are holding up in these uncertain times? Supply chains have become fragile constructs. Regularly screening business partners has become more important than ever.
Typical headaches for purchasing departments and supply chain managers:
- How stable is the supplier financially? Has this changed since the spring of 2020?
- Who controls the company, have its beneficial owners changed?
- Has any sanctions regime or other blacklisting been added recently that we are not aware of?
- Have compliance issues such as fraud, corruption, unethical behavior, or organized crime affected my supplier since the last time we screened them?
- Has the supplier become a target of criminal investigations or civil litigation, either in their home country or internationally?
To secure their supply chain, it is crucial for companies to be familiar with the background of all parties that are involved in the production and movement of the company’s goods. But complex international corporate structures, anonymous offshore companies, and hidden business relationships complicate the screening process.
That is why a comprehensive supplier due diligence is a task for seasoned analysts who have access to all the relevant databases worldwide and experience how to interpret their information.
As part of an enhanced supplier screening, various sources of information are necessary to make an informed decision.
The screening should comprise at least these six elements:
- Credit rating databases, ideally from the country where the supplier resides to get the best possible data quality. But the challenge is the shortness of time between the beginning of the crisis in March and now. The supplier’s actual financial situation may not be reflected in the databases yet! (A wide-spread problem since the beginning of Corona.) That’s where HUMINT — human-source intelligence — comes in: Specialists have to make inquiries among well-informed sources to make sure their grasp of the financial situation is accurate.
- Official company registries, shareholder and beneficial ownership information: In times of economic stress, shareholders can quickly change without anyone noticing. Who controls a company, however, is essential to the stability of the relationship. The last thing a purchasing manager wants is to overlook that the supplier’s previous owner sold his factory to a local organized crime figure because he couldn’t make his loan payments anymore.
- International sanctions and compliance databases: Sanctions regimes are ever-evolving and – usually – expanding. Much of it is US-driven, but often enough, Europe follows suit. Staying on top of developments by using commercial compliance databases in combination with primary sanctions sources such as OFAC and EU Consolidated is crucial in order not to miss new listings of companies and individuals. This is especially relevant in the Middle East and the former Soviet Union countries, which are most affected by international sanctions.
- Worldwide press archives and social media platforms: Companies should not underestimate the influence of local and regional news media in far-away countries where the suppliers are based. It takes years to build a reputation and only minutes to ruin it.
- National and international court databases: Often, court cases do not make it into the media, not even locally. But knowing, for example, that a supplier is being investigated by local prosecutors for a massive corruption scandal or tax evasion is key to adjusting the supply chain in time. A fallback supplier must be found, and quickly, before the old one starts having delivery problems.
- And finally, keeping everything in proper perspective: It’s no use if the screening provides a heap of overrated „adverse information“ without a proper qualification of what really matters and what can be ignored. Things are never as bad as they seem; especially in countries, where sabor-rattling by government officials, for example, is part of the game but their follow-up is often sluggish. Seasoned analysts who know how the world of global business really works and present the facts with a dose of realism are key here.
Katharina Stocker screens suppliers and other business partners worldwide. She holds a Masters in International Affairs from George Washington University in Washington D.C.
Sebastian Okada heads Corporate Trust’s department for Investigations & Prevention of White-Collar Crime.
Contact us at:
+49 89 599 88 75 80