This article was republished with permission from Tom Fox’s FCPA Compliance and Ethics Blog.
I recently read a book review in the Times Literary Supplement (TLS) by Archie Brown, entitled “One into fifteen,” in which he reviewed the book “The Last Empire” by author Serhii Plokhy. Plokhy’s book is about the dissolution and final days of the Soviet Union. One of the more interesting precepts from the book is end of the Soviet Union as announced on Christmas Day, 1991, by then Communist Party Secretary Mikhail Gorbachev. Brown wrote, “All too often the dissolution of the Soviet Union is conflated with the end of Communism and with the end of the Cold War. But the book points out that the Politiburo had ceased to be the ruling body of the USSR in March of 1990 and thus it was ‘entirely fallacious to speak of either Communism or the Cold War as having ended in December 1991. The transformation of the system was a precondition for the demise of the state, with the latter being an unintended consequence of the former. But these were distinctive, albeit interconnected processes.’”
I considered “interconnected processes” when I saw the Compliance Insider Illustrative Case Study Series entitled “Supplier Risk Management,” in which The Red Flag Group laid out in a visual format how a company can effectively identify and manage risks in its supply chain. The process is dubbed “Report, Review and Improve” and consists of six steps:
Step 1 – Collect information on the suppliers. This step begins with a review and assessment of your own vendor master files to make an initial determination regarding whether a new or alternative supplier is needed. If there is a business justification for bringing the supplier into a commercial relationship with your company, then you should gather performance data on the proposed vendor. The article suggests that a technological solution can help to provide risk-rated questionnaires to facilitate the process by building workflows and approvals directly into your questionnaires.
Step 2 – Validate the collected information. This is the investigative step. You should take the information provided to you by the proposed supplier and test it. You can check on references. You should also engage the supplier directly by interviewing the internal staff of the proposed supplier and review documents and records as appropriate. When necessary, you may also wish to consider the use of outside experts or internal consultants for recommendations or validations. This step should end with the creation of a risk score of the data you have gathered. Here, a technological solution can assist by automating your analysis of the completed questionnaire with a risk-based scoring of the answers to facilitate the validation process.
Step 3 – Rate the risk of the supplier. This is the analysis step where you should “compare the risks against your complete knowledge of the proposed supplier.” You should also compare your assessed risks against industry data and then risk-rank the proposed supplier or suppliers. A technological solution can also help to crunch large amounts of numbers or other data to give a first pass on your risk-ranking, which can be further refined if required.
Step 4 – Implement risk management controls. The article posits that this step should include the conducting of background due diligence and integrity analysis by screening against known watch lists, sanctions lists and those of politically exposed persons (PEPs). A technological solution can help this step by managing the request and delivery of due diligence reports and it can also aid in the review, approval and tracking of completed reports and ensure ongoing compliance with automated daily reviews of such lists. Another suggested component of this step is to meet with your internal and external stakeholders to convey expectations. From this point, you should be ready to enter the contracting phase with appropriate compliance terms and conditions. To the extent required, you should also create and manage your compliance policy for the supplier at this stage as well.
Step 5 – Assess and monitor the supplier. In any relationship with a third party in the compliance world, this step is where the rubber meets the road and you have to manage the relationship. The article discusses custom eLearning that can allow you to quickly and efficiently create training programs for your suppliers based upon your compliance regime and not hypothetical training based on legal standards. A technological solution can also assist you in obtaining online certifications to certify that your supplier is in compliance with your company’s business requirements and internal controls. Finally, such a solution can help to automate the process going forward to ensure that certification updates are provided, executed and tracked. But more than the ongoing certifications and training, you will need to monitor the transactions you engage in with a supplier. This may entail reviewing a large amount of data through transaction monitoring but it may also entail going to visit a supplier and going through the deep dive of an audit.
Step 6 – Continuous reporting, review and monitoring. All of this information you obtained must be fully documented. Of course, it must be documented to produce to a regulator if the government comes calling. However, this information can also be used to improve the supplier relationship and perhaps even your vendor system. One of the most interesting suggestions was to create a “Virtual Data Room” dedicated to your suppliers. Not only would the creation of such a stored environment enable you to call up information requested by a regulator on short notice, but you would also have it in an accessible format for supply chain process improvements. The article suggests trying such techniques as implementing performance incentive programs, which can push compliance culture and behavior changes based upon the data you collect. Interestingly, the clothing company Levi Strauss instituted just such a policy for suppliers in the area of corporate social responsibility, making the announcement earlier this week.
If you do not subscribe to The Red Flag Group’s Compliance Insider publication, I suggest that you do so. It is one of the very best periodicals around on the building blocks of compliance. The six steps it has laid out for process of identifying and managing your supplier compliance risks under the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act demonstrates the thesis of Plokhy’s book reviewed in the TLS; that it is interconnected processes which usually mark change and management. In the case of the former Soviet Union, it may be drawn by more human factors, but there are now a variety of technological tools available to assist your facilitation of this process under any anti-bribery or anti-corruption compliance regime.
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