There are numerous risks that any company faces. One not often considered is the reputational risk a company is exposed to through its supply chain. Many U.S. clothing manufacturers stumbled upon this fact a few years ago with the collapse of buildings in Bangladesh, which housed contractors and sub-contracts sewing clothes. It appeared that many U.S. companies were not even aware their brands were being manufactured in such conditions.
This reality was driven home again this week when Target cut its ties with a supplier of Egyptian cotton products because the products were not made from Egyptian cotton. The Wall Street Journal said Target announced “it was severing ties with one of India’s largest textile suppliers, Welspun India, after concluding the company sold it phony Egyptian-cotton sheets.” This contract termination led directly to a 20 percent drop in share price for Welspun. However, the bad news for the product supplier did not end there, as Walmart followed up with an announcement that it was also reviewing its relationship with the company based on the facts presented in the WSJ article.
The risks for Target and Walmart are obvious. They both faced claims of misleading advertising and the damage to their reputations. Yet for The Man from FCPA, this news points to several issues for the anti-corruption compliance professional as well.
Target allegedly picked up the misrepresentations through an audit of its supplier. This fact points out why auditing of third parties is so critical to any third-party risk management program; whether on the sales side of the business or the supply chain. Additionally, you cannot audit a third party if you do not have that right stated in your contract so audits rights have long been suggested by the Justice Department and the Securities and Exchange Commission as a key component of any best practices compliance program.
Stepping back to a more strategic level, this matter also demonstrates that a company must manage its third-party relationships. Simply signing a contract every two or three years is not sufficient, even if you perform due diligence. A company must continually administer the relationship going forward. If you do not, you may well never know your supplier is making misrepresentations to you.
Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more