The new U.S. administration has a very different approach to international relations than the previous one. New tech tools mean companies are expected to know much more about their suppliers.
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Every now and then the geopolitical pendulum makes a decisive swing and the effects reverberate through economies as well as manufacturers and their supply chains. This feels like one of those moments as a new U.S. administration takes office with a very different approach to international relations than the previous one.
The Biden administration has committed to taking a tougher stance on countries that violate U.S. human rights standards, threaten national security or even undermine democratic standards. That raises the prospect of the more widespread use of sanctions. In an early sign of its resolution, the White House was quick to threaten sanctions against Myanmar after the military’s February 1 coup.
This environment promises to ratchet up the consequences for manufacturers and other companies with risky third-party relationships. Specifically, it underlines the need for firms to understand their exposure to potential legal violations and to adopt compliance processes that provide protection.
In the spotlight
China and Russia are two countries recently in the spotlight – though they are hardly the only ones. In January, Washington announced a ban on all cotton and tomato imports from China’s Xinjiang region, citing their suspected connection with forced labor abuses of the Uighur ethnic minority. In December, the Department of Commerce announced the creation of a Military End-User list containing 102 entities in China and Russia, aimed at preventing U.S. exporters from supplying products that could benefit those countries’ military forces.
The legal onus is still on your firm to know the end-user or original supplier of your products and to act accordingly. A U.S. manufacturer with a subsidiary in China, whose staff uniforms are purchased from a firm that uses Xinjiang cotton, could well face DOC sanctions under the new rules, for example. The consequent damage to the company’s reputation and brand could be even more costly than the fines.
Companies that have fallen afoul of U.S. sanctions programs will be well aware of these dangers. One California firm last year agreed to pay a nearly half-million-dollar settlement to the U.S. Treasury after its acquired Finnish subsidiary continued to sell software products to Iran despite its agreement to stop doing so.
It’s not just the U.S. looking to come down harder on ethical violations. The European Commission is under pressure to propose a new law that holds companies accountable for human rights and environmental abuses that occur throughout their supply chains. France led the way in 2017 by passing a law requiring all companies with more than 10,000 employees worldwide to publish an annual “duty of care” due diligence report on its human rights impact, including its suppliers, subsidiaries and sub-contractors.
And just as the sanctions environment tightens, technology is raising the bar on what companies will be expected to know and control. A decade ago, authorities might have been more understanding if an obscure third or fourth party was found to be involved in prison labor or government corruption. But today there are a plethora of tools companies can use to understand their relationships. Ignorance is no longer an excuse.
Is your company at risk?
The first step for companies with potential exposure to new sanctions is to conduct an internal assessment to identify which products and third parties could fall afoul of new rules.
Then, they need to think more broadly. Many companies are taking the opportunity to implement comprehensive ethical compliance policies across operations. The logic is unassailable: If it’s unacceptable to have third-party or even fourth-party links to forced labor in China or Indonesian rainforest destruction, it should be unacceptable to have similar links anywhere in the world.
This systemic approach to compliance means companies can – and should – be much more proactive about risks, rather than checking off a list and scrambling to take action every time a government announces new sanctions. Firms can develop workflow processes that dig down into third and fourth parties and focus on the areas of greatest vulnerabilities before they become a problem.
Having this process in place is a powerful protection against potential enforcement action even if one rogue actor manages to slip through a company’s compliance net. Authorities don’t expect a company to be omnipotent, but they do want to see evidence that it made genuine efforts to monitor its relationships and avoid the kind of abuses that are now coming under closer scrutiny.