Corruption impacts every level of the supply chain. Visibility over third parties is a critical piece to protecting supply chains.

The Impact Of Corruption Can Be Felt At Every Level Of The Supply Chain Image 1, Industry Today
The impact of corruption can be felt at every level of the supply chain.

The last two years have seen historic contortions in the global supply chain, from raw material and personal protective equipment (PPE) shortages at the beginning of the pandemic to more routine strains related to delivery delays from the temporary closure of the Suez Canal and weather shocks in Texas.

Kroll’s Global Fraud and Risk Report found rising corruption concerns globally, with 46% of those surveyed particularly concerned about the reduction in visibility over third parties. The rise in corruption over the last year is no shock: with much of the world, and the world’s enforcers, locked down, corruption has been harder to detect. Organizations have moved to working from home, meaning that normal worker monitoring may not be possible. The temporary economic depression has impacted the lives of hundreds of millions. When oversight drops, economic strains increase and change is turbulent, corruption goes up.

Corruption impacts supply chain in every possible way. Supplier intermediaries are better positioned to demand kickbacks in a tight market, things like order prioritization becomes a bargaining chip, and the sheer urgency to move goods quickly creates opportunities for graft at every stop along the way – from supplier to customs inspectors to transportation companies. In a scarce market, counterfeiting increases and becomes more profitable. With increasing trade tensions between major economies, country risk must be managed and refreshed at a tempo much higher than before.

We focus here on the less thought of risks of corruption: business loss and competitive disadvantage – something often overlooked in light of the criminal risks of dealing with corrupt intermediaries. We also suggest that a fulsome compliance program should be regarded by leaders not only as being the right thing to do and the best way to avoid allegations of criminal activities, but as a core business function upon which the success or failure of an operation can turn. Re-framing anti-corruption efforts as business, rather than legal and moral imperatives, may highlight their importance and help arm operations and compliance teams with additional political capital when they seek resources and buy-in from their leaders.

The following four steps can help make this transition.

1. Act in a risk-informed way and revisit those risks often

The American bank robber, William Sutton was once asked why he robbed bank. His reply, “That’s where the money is.”  This is mostly true of corruption – it is most likely to arise at the intersection of counterparties, especially when one counterparty is a government or government agent. Organizations with an immature compliance program should focus their efforts on diligence, training, and analytics first and then on the geographies most known for corrupt customs (and adjacent countries). Mature organizations – and those paying attention to, for example, DOJ expectations, should be regularly scrutinizing every source of data – and especially enterprise resource planning (ERP) systems – for indicia of anomalous activities. These anomalies, combined with a regular review of any operational issues, should be used to re-target corruption investigations and anti-corruption efforts.

2. As goods become scarce, corruption risk increases – act accordingly

Particularly in the raw materials, precious gem and energy marketplaces, the risk of products from illegal origins is always high – and made higher by global shortages. Compliance professionals have known this for years, and executives know that dealing with a sanctioned entity is often a death blow, even for large organizations. Now there are more scarce resources – and treating previously commoditized items that are now rare in the same way as rare earth materials is wise. How do you mitigate this risk? Know your suppliers and engage in regular due diligence investigations of them. Know your intermediaries and business developers, especially those operating in geographies that are in close proximity to sanctioned countries. Have a documented, regular education program that stresses the risk to individual liberty of doing business with sanctioned individuals and entities. Finally, from a competitive element: do not allow your organization to be the victim of unfair competition, and remember that reporting wrongdoing by others offers both a moral and business benefit: by depriving your competitors access to corruptly obtained profits, you are both making the world a better place and also improving your firm’s fortunes.

3. Resilience, resilience, resilience

Regional risks are real, and diligence should be conducted not just on critical suppliers but also the countries they operate in. Trade tensions will likely increase in the coming years, and global market froth – particularly in the private equity space – means that suppliers will likely change owners more often than before. Cultivating diverse geographies and types of supply networks and ensuring that there is not over-dependence on any one vendor are key. This may sometimes mean cultivating an up-and-coming supplier by giving them more generous terms. Longer-term, many companies are beginning to re-visit the benefits of offshore operations and manufacturing and have found themselves concluding that the commercial and political benefits of building at home outweigh short-term cost savings. Senior executives should engage regularly with the operations team to plan for the future.

4. Encourage cultural skepticism

We advise clients to foster a sense of cultural skepticism – especially in procurement functions. What is a skeptical culture? It is one where employees are rewarded for careful introspection and held accountable for problems. When presented with a deal that seems too good to be true, procurement professionals should ask why – and consider whether a deeper level of vendor diligence is required. And from a corporate risk management level, doubling down on ethics commitments from suppliers and counterparties is a must. 

Kroll’s Global Fraud and Risk Report examines the increasing risks associated with fraud and corruption, which directly impacts all levels of the supply chain. Supply chain management has always been existential, but the seams in supply chains have stayed largely hidden from consumers and, in some cases, executives. Given the speed with which businesses and consumers demand goods, the increasing interdependencies across industries, and an exceptionally competitive marketplace, organizations must continue to adapt and monitor supply chains to protect against fraud and corruption.

Jordan Strauss Kroll, Industry Today
Jordan Strauss

Jordan Strauss is a managing director with the Forensic Investigations and Intelligence practice of Kroll, where he investigates and advises organizations on sensitive issues that threaten their competitiveness, security and prosperity. He is also a Fellow of the Kroll Institute, a thought leadership group that advocates fairness, integrity and transparency in the public and private sectors. Previously, Jordan has served as Director at the White House National Security Council specializing in incident management and has held various roles with the U.S. Department of Justice.

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