When thinking about supply chains, most people consider products moving from point A to point B. They see the visible aspect of it, such as trucks on the highway and cargo ships on the water. However, there’s another dimension to global logistics that takes place in the background that people don’t see – the legal side of it, also known as supply chain compliance, plus transparency.
Even though this side is not as visible, when the legal foundation is not in place, cross-border trade flows can come to a dead stop. Because business is more globalized than it has ever been – and with that comes increasing risk – there is increasing demand for supply chain compliance and transparency. But what is that exactly? Why is it getting more important? How can technology help? How can an organization prepare?
These was the topic discussed by Adrian Gonzalez, host of Talking Logistics, and Jackson Wood, Director Industry Strategy, Global Trade Intelligence, Descartes Systems Group. Read on to get more granular details about supply chain compliance issues and how companies can navigate the complexities of international trade rules and regulation to ensure compliance. Or you can watch the video interview.
What is supply chain compliance?
Supply chain compliance ensures that an organization is following the laws and regulatory requirements for countries that they work with and in. With strong compliance measures in place, an organization can be sure that it is not doing business with denied parties or countries under trade restrictions or embargoes.
What is supply chain transparency?
Supply chain transparency takes compliance a step further. While compliance ensures that an organization CAN do business with countries or entities, transparency provides visibility in the supply chain that ensures that an organization SHOULD do business with countries or entities. It ensures that the organization is not exposing itself to risk that could degrade its image, reputation, or resiliency. With transparency, organizations self-sanction by being cautious or stopping their operations altogether in dubious countries. They are doing this not because it is illegal, but because their customers or stakeholders are not willing to tolerate the risk related to being seen doing business in a sensitive geopolitical region. Effective compliance keeps shipments moving smoothly to satisfied customers, and this enables business growth.
Why is supply chain compliance and transparency so important?
There was a time when compliance professionals were viewed as mere paper pushers. Now, organizations are realizing the level of risk and complexity involved with supply chain compliance and transparency issues, and they are realizing the value that a strong compliance operation can bring to the organization.
One of the reasons for the risk and complexity in supply chain compliance and transparency is volatility. For example, the Pandemic and the Russia/Ukraine conflict has brought into sharp focus how quickly the world can change. Being prepared for the rate and scope of change can greatly bolster the resiliency of an organization.
Another reason for the complexity in compliance and transparency is new legislation and regulations. Here are some examples:
- A U.S.-centric piece of legislation, the OFAC 50 Percent Rule, states that companies cannot do business with an organization that has a majority ownership position by an individual who may be sanctioned, debarred, or restricted. (OFAC is the Office of Foreign Asset Controls, which is part of the Treasury department.)
- The SEC (Securities and Exchange Commission) is signaling that organizations are going to need to adhere to ESG (Environmental, Social, and Government) regulations more closely. In basic terms, ESG is about providing supply chain transparency. Companies are required to contribute efforts to combat climate change and to improve social conditions, for example, not supporting slave labor or sub-optimal labor conditions.
- Legislation in the early stages of passing in New York state requires any type of organization above a certain size involved in the fashion industry to make mandatory disclosures about the nature of their third-party relationships.
With new legislation and regulations like this, compliance has gone beyond cross-checking denied party screening lists. Now, with sanctioned ownership restrictions, such as the OFAC 50 Percent Rule, there is no exhaustive list that tells a compliance officer the companies in a country who are majority or partly owned by sanctioned individuals. Compliance operations must go beyond a linear approach (cross-referencing products with companies/countries, looking at trade agreements to leverage, reviewing the filing process with the customs authority) into more abstract and complex due diligence exercises to be able to disentangle the ownership structures of international organizations. Organizations now need to be fully aware of being transparent on how they make decisions about how they work with stakeholders across all dimensions.
The burden of due diligence on organizations is huge as the accountability for supply chain compliance and transparency falls to the enterprise themselves.
How can technology help compliance teams?
More and more, we talk about the capabilities and experience that compliance teams have. But they need help. They can work with an organization like Descartes to automate or streamline some of the more operational components of compliance, such as the denied party screening, OFAC 50 compliance and associated export control processes. Working with an organization like Descartes can also help ensure that the business gets access to the right type of information to ensure due diligence. Descartes is determined to deliver not only the right types of supply chain compliance software to their customers, but also with providing them with sophisticated and specialized content that helps them understand the implications of risk to help make the best possible compliance decisions for their business.
How can an organization prepare for supply chain compliance and transparency?
Be proactive. Don’t wait for some big event like geopolitical conflict or a trade war. Don’t wait for the catastrophic event that will finally compel your organization to take action. Start thinking now about how to position your organization for success. Partner with a company like Descartes to be sure you have the right compliance technology with the right content soundly in place.
Yes, companies want to be profitable. Yes, companies want to return value to shareholders. But they also want to be seen as a company that’s doing its part for a sustainable future for everyone on the planet. Exceptional global supply chain compliance and transparency can help organizations reach this goal.
How Descartes can Help
To help manage compliance risks more effectively, Descartes provides a range of robust denied party screening and 3rd party risk management solutions as well as comprehensive and trusted trade content for leading business systems such as SAP, Oracle, Salesforce and NetSuite to name a few, which altogether can help significantly enhance supply chain compliance.
Descartes compliance solutions are flexible and modular, allowing organizations to select the specific and exact functionality and content they need now and scale up later as and when necessary. By utilizing these solutions, organizations can strengthen their compliance processes, enhance their competitive edge and increase sales velocity.
This article is based on a Talking Logistic interview on the subject of Growing Demand for Supply Chain Compliance and Transparency. Tune in to learn more.