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How Corporations Can Protect Themselves by Conducting Supply Chain Due Diligence
In today’s complex global market, companies face significant risks when it comes to managing their supply chains. The recent criminal complaints against major tech firms like Apple, Dell, and Microsoft for allegedly using conflict minerals highlight the urgent need for thorough supply chain due diligence. By proactively addressing these issues, companies can not only avoid legal and reputational troubles but also ensure ethical and sustainable business practices. This article will guide you through the essential steps to protect your company from potential pitfalls and enhance your supply chain accountability.
Recent Legal Challenges Highlighting Supply Chain Risks
The recent filing of criminal complaints against Apple subsidiaries in France and Belgium by the Democratic Republic of Congo (“DRC”) accusing the “tech firm of using conflict minerals in its supply chain” is a warning sign for corporations of the importance of conducting supply chain due diligence, especially in industries that touch dangerous issues of tracking in conflict minerals and human rights violations. The complaints, which allege that “blood minerals” are “taken from conflict areas and then ‘laundered through international supply chains,’” is just one of the most recent examples of challenging a company to show that their due diligence programs are effective and that they are complying with relevant laws as Apple contends they do. They follow several other recent, notable cases filed against U.S. tech companies and other multi-national entities including Dell, Tesla, Alphabet, and Microsoft who have been accused of “profiting off forced child labor in the DRC” in efforts to collect and extract rare and valuable materials used in everyday life such as cobalt.
The Complexities and Risks in Supply Chain Management
The complexity of the supply chain, especially for rare and valuable materials, poses significant risks for companies operating in these business environments. Starting at the moment of extraction to the point where the goods are sold in stores, numerous actors and middlemen, many operating in unregulated or corrupt environments often ravaged by war or other internal conflicts, touch these products all with the goal of generating revenue. These realities often limit access to or mask the reality of where and how these items are extracted and obtained. In a 2017 study published in the Harvard Business Review, six years after the Dodd-Frank rule was enacted, some “80 percent of companies reporting to the SEC were still ‘unable to determine their raw materials’ country of origin.’” As noted in the article “Do Car Companies Know Where Their Critical Minerals Come From? “The reason this is so difficult is that supply chains are long and geographically dispersed” and “raw materials often come from developing countries, where capacity for supervision, recordkeeping, and enforcement may be limited” which allows for or leads to “corruption.”
In response to these challenges, over the past decade-plus, governments and international bodies have enacted “significant international legislation” designed to combat and regulate conflict minerals in the supply chain. In the Unites States, these efforts include Section 1502 of the Consumer Protection Act of 2010 also known as the Dodd-Frank rule, and rules enacted by the Securities and Exchange Commission. In 2021, the European Union enacted the E.U. Conflict Minerals Regulation which is designed “to stop conflict minerals and metals from being exported to the EU, global and EU smelters and refiners from using conflict minerals, and mine workers from being abuse.” These efforts track with the broader awareness developing around conflict minerals, forced labor, and other abuses in the supply chains. They also coincide with efforts by both governments and private parties to be more aggressive through legal actions in holding corporations accountable for either their direct actions, or the actions of their subsidiaries and suppliers. Importantly, these legal actions are a clear sign of the need for corporations to dedicate critical, professional resources to monitor their supply chains as the ramifications of missing or ignoring issues becomes more severe.
What Can Companies Do
Many of the arguments in favor of extensive, in-depth supply chain due diligence focus on the critical issues of environmental protection and human rights. But from a corporate perspective, supply chain due diligence is good for business. As efforts increase to hold companies accountable, both civilly and criminally for supply chain malfeasance, it is possible that we will see a movement by governments to extend both civil and criminal liability to directors, managers, and other c-suite level figures responsible for corporations’ actions, just as we have seen in other areas like corporate fraud and financial crime. This will increase the ramifications facing companies beyond the legal, reputational, and financial implications, as it is possible individuals will now be held accountable for their roles in corporate actions.
Confronting these potential ramifications will pose new and complex obstacles for companies and the law firms representing them. In addition to developing, maintaining, and consistently updating comprehensive policies and procedures for managing their supply chains, companies will have to implement and enforce them. It is this space where many companies face their biggest risk and liability. If a company cannot track where their products are coming from, who is handling them, where they are going, and ultimately how they get into their factories and products, then they cannot be sure that their products are clean and that their business practices are legal and ethical.
Challenges in Implementing Effective Supply Chain Policies
However, many companies struggle with this due to lack of manpower, resources, or expertise to develop, carry out, and maintain compliance and due diligence programs. This is where a global investigations and compliance firm, like Guidepost Solutions, can help support company efforts. Beyond developing, or assisting in developing policies and procedures, we have successfully provided resources and expertise to assess, develop, enhance, and staff compliance programs. Clients have found our global reach and highly trained former law enforcement agents beneficial for conducting international investigations and due diligence work. While the foundation for this work is often sound and accurate open-source, public records, and media and Internet research, which Guidepost routinely does on companies and individuals around the world, due diligence work often requires the human intelligence and investigative aspect. Putting boots on the ground to regularly monitor company’s supply chains, maintain visual contact with the sources of their materials, and speak with the people gathering and handling their products, all in attempt to ensure that what the companies have authorized to occur is actually happening, is critical to ensuring compliance with all necessary rules and regulations. By being aggressive in their due diligence, companies would take the required steps to protect themselves against the growing risk of litigation, as well as reputational and financial damage.
Ian Pillinger
Director
Ian Pillinger is a Director in the New York office of Guidepost Solutions. A former state prosecutor and federal government official, Mr. Pillinger focuses his work at Guidepost on complex and multi-jurisdictional investigations, compliance, and security matters for organizations and individuals.
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