Introduction

The supply chain has never been under the level of scrutiny that it is today. The risk of engaging integrity-challenged third parties is more public than ever before. Yet while many companies regularly examine the traditional and obvious set of risks when conducting due diligence on their third parties, they fail to consider integrity challenges that can have a significant business impact. Quite often this standard set of risks – which mainly focus on corruption, logistics, health and safety standards and financial stability – does not include inherent supplier integrity and compliance risks. While the standard risks are certainly important, government regulators, the media, non-governmental organisations and the public are increasingly exerting pressure on companies to closely monitor their suppliers’ integrity and regulatory compliance.

We will explore the top five integrity risks that are likely hiding in your supply chain right now and provide practical tips for establishing an integrity risk assessment programme that enables transparency into unexamined compliance and integrity risks.

Identifying and prioritising risks that exist in your suppliers can be challenging, especially if you lack the know-how, capabilities or correct tools. As well as exploring the five integrity risks that reside in your supply chain, we will explore the identification and prioritisation of such risks to help you make better decisions regarding your key stakeholders.

Consumer purchase patterns are becoming more and more influenced by the perceived ethical standing of not only the service provider, but also the organisations they choose to do business with. Therefore, unethical conduct committed by suppliers can not only harm your company’s brand and reputation, but can lead to loss of trust and confidence from customers. Questionable or unethical conduct could be committed by a supplier in a remote country in Southeast Asia, Latin America, the Middle East or Africa, but it is your brand that would be named and shamed through the courts of public opinion and the media.

Similarly, potential business partners may reconsider or change the terms of deals with you if they learn that the integrity and operational stability of your supply chain has been compromised. A compliance challenged supply chain would represent a potential third-party or even fourth-party integrity risk that a business partner could be held responsible for, increasing the overall risk of the deal. Even though the deal may close, your company may not receive favourable terms given the extra risk your supply chain introduces.

Supply chains have become larger and increasingly complex, making end-to-end transparency a hard thing to achieve, and thus creating an opportunity for wrongdoers to take advantage without detection. Failure to detect and mitigate unethical conduct in your suppliers is almost as bad as not knowing your own business practices and conduct, as demonstrated by the numerous well-known multinational corporations that have been fined, taken to court or had their reputation ruined for misconduct committed by their third parties. It is therefore very important to fully assess and understand where integrity and compliance risks reside in your suppliers.

Risk detection is no longer a check-the-box process; it involves a combination of techniques and technologies to match. The initial starting point to knowing your suppliers is understanding

how they operate, the work they do for you, the common risks that they have, and how such risks may affect you. Understanding your suppliers inside-out can give you a reasonable insight into their risk areas. Simply put, the conduct of your supplier is your responsibility. As such, you need to understand them just as you do your own business. Additionally, understanding your suppliers will help you to ascertain your risk exposure, identify potential risks and impact, and prioritise risks based on your tolerance.

The Red Flag Group® has identified and categorised 23 compliance and integrity risk areas to consider when developing a compliance programme. Based on over a decade of compliance experience working with global organisations, numerous surveys and business intelligence research, we present five of the top risks that are likely hiding in your supply chain right now.

When developing this list of supplier compliance and integrity risks, we considered both the likelihood and the severity of impact in a typical supply chain. (This is not to say that the other risk areas cannot damage your reputation, brand or business. We recommend that all compliance and integrity risks be considered in the context of your business challenges when assessing your supply chain.  Read more