Mitigating Compliance Pitfalls in Manufacturing

The manufacturing sector comprises so many moving parts that high compliance risk comes with the territory.

Mnet 109474 Supply Chain Large
Valerie CharlesValerie Charles

The U.S. Department of Justice and the Securities and Exchange Commission have stepped up efforts recently to enforce the Foreign Corrupt Practices Act (FCPA). For manufacturers, this involves regulations surrounding exports and international conduct, including those related to U.S. economic sanctions and export control laws.

Vigilance is required to stay ahead of the many potential risk scenarios. Manufacturers can better manage their risk and mitigate costs by approaching compliance in a way that takes into account their individual risk profile, countries of operation, method of operations and what type of products they make.

But wait—there’s more. When dealing with global supply chains, international trade and downstream manufacturing by worldwide affiliates, manufacturers take on elevated risk. Conducting business in nations with a reputation for corruption or theft of trade secrets is fraught with potential legal peril. Depending on the country, keeping track of whether sanctions have been eased, increased or removed can be a time-consuming but necessary activity.

A Brief Overview of Industry Realities

The manufacturing sector comprises so many moving parts that high compliance risk comes with the territory. Consider these factors:

  • Manufacturers usually employ a large number of employees, their facilities are often distributed across multiple locations—including other countries—and their operations involve many processes and people.
  • Their supply chains are often complex. Each link in the chain usually means another business partner, and each partner can pose corruption risk to the whole.
  • In foreign markets, there can be exacting local legal and operational requirements. For example, large Western companies might be required to partner with a local business in the emerging market. Those needs create an opportunity for local officials to extract bribes, rig contracts or engage in other forms of corruption.
  • An activist consumer culture requires manufacturers to be more diligent than ever about maintaining strong corporate and individual ethics. One slip-up can be broadcast across social media and turn the tide of public opinion, potentially leading to loss of trust and revenue, as well as possible legal trouble.
  • Car manufacturers and automotive supply chain companies have received particular scrutiny in the last several years, especially in terms of FCPA investigations. Late last year, in fact, three auto parts companies disclosed open and ongoing FCPA investigations.

These factors within the manufacturing industry combine to create a landscape full of corruption risk. No wonder, then, that healthcare, defense contracting and aviation are other sectors brimming with corruption risk. They all have these or similar risk factors, too. Any compliance officer who wants a rough sense of his organization’s corruption risk can simply ask: How often does my sector encounter these forces?

Creating a Plan to Mitigate Risk

These realities must be taken into account when assessing your organization’s corruption risk. What simple rules of thumb do they imply for building anti-corruption programs? Focus on the three elements below.

Managing Contracts

There are untold ways that those intent on bribery or other corrupt practices have created to disguise their dealings. Improper payments can be masked as training visits that bring foreign officials to the West (with a layover in Hawaii, for example), donations to local charities in the emerging market, price rebates or other sleights of corporate hand. Precise contracts, with a management system that lets compliance officers see those contracts, are crucial to reducing that risk.

Due Diligence for Third Parties

If local regulations or foreign government officials require your company to work with business partners in emerging markets, you must know who those third parties truly are. Any number of bid-rigging or improper payment schemes can filter through those potential partners.

Payment Processes

Even with all these careful compliance measures in place, there will always be a few bad apples—employees and third parties who will flout the law and try to make improper payments anyway—and some will be quite good at it. So, corporations also need strong accounting controls and payment processes that let you identify suspicious transactions and, ideally, intercept them. (Remember, the Securities and Exchange Commission may enforce books-and-records violations stemming from weak accounting controls, even if the Justice Department doesn’t prosecute any criminal violations from paying a bribe.)

Meet Risk Head-On

Compliance is a vast and complex field. The manufacturing sector faces particular risks that must be addressed, but a refresher on the basics provides an opportunity to make sure that all the needed resources are in place, from people to policies to technology. Paying special attention to the three elements noted above will help your organization mitigate risk and avoid the fines and reputation damage that come with non-compliance.

Valerie is chief strategy officer at GAN Integrity.

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