The pandemic has turned supply chains into fragile constructs. Manufacturing companies are feeling the shakiness among some of their suppliers and are concerned that they may become unstable and unreliable. Regular screenings of business partners are now more important than ever.
Typical headaches for purchasing departments and supply chain managers:
- How stable is the supplier financially? Are payment delays becoming more frequent?
- Who controls the company, have its beneficial owners changed?
- Have compliance issues such as fraud, corruption, unethical behavior, or organized crime affected my supplier since the last time we screened them?
- Has any sanctions regime or other blacklisting been added recently?
- Has the supplier become a target of civil (or criminal) 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 their suppliers. But complex international corporate structures, anonymous offshore companies, and hidden business relationships may 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 and timely data worldwide and the experience how to interpret that information.
As part of an enhanced supplier screening, various sources of information are needed for informed decision-making.
The screening should comprise at least these six elements:
- Credit rating databases, ideally from the country where the supplier resides to get the best and most timely data. If the supplier’s current financial situation is not reflected in the databases yet, that is where HUMINT — human-source intelligence — comes in: Specialists make inquiries among well-informed sources in the country to make sure their grasp of the financial situation is accurate. This approach takes some time and effort, but is well worth it when looking at key suppliers.
- 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 Lists 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 effects of adverse coverage in local and regional news media in the 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 press, not even locally. But knowing, for example, that a supplier is being investigated by local prosecutors for a corruption scandal, tax evasion or environmental violations is key to adjusting the supply chain in time. If possible, a fallback supplier should 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 follow-up is often sluggish. Seasoned analysts who know how the world of global business works and present the facts with a dose of realism are key here.
Sebastian Okada heads Corporate Trust’s department for Investigations & Prevention of White-Collar Crime.
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