The novel coronavirus outbreak continues to have a substantial impact across the globe. As of the writing of this post, more than 87,000 cases of the coronavirus disease (COVID-19) have been identified in 60 countries and territories around the world, claiming the lives of 2,977 people. Travel restrictions are becoming increasingly tighter at airports, with countries either imposing mandatory health screenings on travellers arriving from certain countries, or denying entry to passengers who have recently visited China, Italy, and other regions with reported cases of the coronavirus.
The outbreak has also created uncertainty and fear about the health of the world economy. Just last week, the U.S. stock market experienced its worst week since the financial crisis, with each of its major indexes (The Dow, SP 500, and Nasdaq) plunging between 10 and 12 percent. Other major indexes around the world also experienced significant declines. With many factories in China closed since the Lunar New Year, it is expected that global stock markets will continue to fall.
As the world considers how to best respond to these adverse health and economic events, global companies may want to consider the potential compliance risks the coronavirus poses in their supply chains.
Shifts in Supply Chains Exacerbate Compliance Risks
Many multinational companies depend on Chinese manufacturing and exports, so with factories throughout China remaining closed in an attempt to stem the spread of the novel coronavirus, companies around the world grew concerned about shortages of labor, goods, and raw materials. This concern has encouraged some companies to shift their manufacturing out of China to other countries and regions, or seek alternative suppliers outside of China. These shifts in the supply chain create new challenges and exacerbate risks, such as sourcing from regions where labor or other human rights abuses are common, and sourcing from new suppliers who have not been fully vetted and screened. This not only increases the risk of dealing with unreputable or even restricted parties, but also exposes companies to liability under sanctions regimes, the Foreign Corrupt Practices Act (FCPA), and corporate liability for supplier abuses, including forced labor and human rights violations. Diligence and screening is typically the primary way companies mitigate these legal risks in supply chains; however, the speed of changes wrought by the novel coronavirus and the substantial potential impact on sales, revenue, and profit can demand prompt shifts in suppliers and result in transactions commencing with partners prior to the completion of formal vetting.
Global emergencies like the novel coronavirus outbreak frequently cannot be predicted, but companies can take proactive steps to help them adequately respond to such events when they arise. In a case like this, where companies experiencing supply shortages must look outside of their usual place of manufacturing or sourcing, companies may consider the following:
- Use Other Existing Partners in Your Supply Chain – Consider if there are other manufacturers in your supply chain that can temporarily satisfy production or sourcing needs. By sticking with manufacturers and suppliers you are already familiar with, you are able to work with partners who have been previously vetted and who understand your business and ethics, which thereby reduces the risk of compliance breaches.
- Properly Vet New Suppliers – Alternatively, if you must look to new suppliers for production, appropriate, risk-based due diligence checks should be conducted. In light of the urgencies, a risk-based approach to vetting is more important than ever – that is, dedicating resources to vetting suppliers based on locale, the type of services provided or product supplied, and other appropriate risk factors is paramount. This risk-based approach should consider, for example, the level of corruption in the country the supplier is located; whether the supplier has any personal relationships or business dealings with government entities or public officials; and whether the supplier has been the subject of any complaints or investigations related to labor abuses and other misconduct.
- Conduct Restricted Party Screening – Screen new parties against applicable restricted parties lists, and incorporate them into your restricted party screening processes to minimize the risk of engaging in transactions that may be prohibited or restricted under export controls or trade sanctions laws. Keep in mind that anytime you engage a new supplier, they may bring other new parties into the equation, such as banks, freight forwarders, and other intermediaries, which can further increase the risk of dealing with restricted parties.
Supply Shortages Create Customs Risks at Borders
Multinational companies typically rely on customs agents and brokers to help them clear their merchandise across borders. While customs agents are able to assist companies in navigating the often complex local laws related to the customs clearance process, using such agents expose companies to certain compliance risks and liabilities, particularly under the FCPA. A significant number of FCPA enforcement actions brought by the U.S. Department of Justice and the Securities and Exchange Commission have focused on improper payments made by third-party customs agents to secure customs clearance. With exports and imports in a lull due to the panic and uncertainty surrounding the coronavirus, the risk of customs-related violations may be high, as companies face pressure to quickly clear goods and mitigate the economic consequences posed by the outbreak.
To control for such risks, companies may consider reminding their third party customs agents (as well as their own employees who liaise with these agents) about their zero-tolerance stance against customs violations, and require these agents to acknowledge their compliance with company policy and local laws and regulations. Companies may also consider reviewing their internal controls to help ensure the timely detection and response to customs violations.
Urgent circumstances such as these call for decisive company communication to relevant employees and third parties alike, underscoring the company’s commitment to following the law and appropriate procedures. By employing an appropriate risk-based approach to diligence and screening, companies can help ensure that the impact of the novel coronavirus is not exacerbated by additional legal and PR trials resulting from transactions with unreputable or restricted parties.
