Risk Management

Stopping Supply Chain Slavery

Governments are cracking down on the use of slave labor in supply chains. Companies risk their reputations if they don’t find the practice on their own and end it.
By: | October 1, 2016 • 7 min read

Modern day slavery is alive and well.

And with large food companies such as Nestle, Archer Daniels Midland Co. and Cargill under legal fire for selling products that were allegedly made in part by slave labor (often unpaid child labor), it’s critical that all companies know the score throughout their ever-expanding global supply chains.

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In the latest example of the U.S. government attempting to stop — or at least greatly reduce — modern slavery, U.S. Customs and Border Protection seized low-calorie sweetener stevia imported from China by PureCircle Ltd. The plant extract is used to sweeten Coca-Cola Life, Pepsi True and other soft drinks. The U.S. alleged that PureCircle sourced the Stevia rebaudiana plant (from which the sweetener is extracted) from a company accused of using forced labor, Reuters reported in early June.

It’s the third time the U.S. has cracked down using a new law that bans imports of products made by forced labor. The importer had three months to prove its innocence, according to Reuters.

There is growing pressure on risk managers to have a much more focused approach to supply chain management, said Andrew Boutros, a former U.S. attorney and partner in the Chicago office of Seyfarth Shaw.

“It really comes down to compliance professionals making judgment calls,” he said. “Compliance often is viewed as a cost center, so companies spend their dollars on the highest litigation risks. But as these new statutes become more enforced, there will be more attention paid to them.”

“It’s very hard to verify with confidence that [a product component] … made its way to the U.S. without slavery, corruption, bribery, falsification, etc.,”  – Andrew Boutros, partner, Seyfarth Shaw

Boutros said determining if there is a slave labor component in the supply chain is more often than not an incredibly complex endeavor.

Andrew Boutros, partner, Seyfarth Shaw

Andrew Boutros, partner, Seyfarth Shaw

“Imagine being able to know with a high degree of confidence if the beans in your coffee were collected using forced labor,” he said. “And that’s just coffee. What about parts in computers or tech gadgets? Or minerals and certain metals? Or the fishing industry?

“It’s very hard to verify with confidence that it made its way to the U.S. without slavery, corruption, bribery, falsification, etc.,” he said.

The scope of modern day slavery is devastating.

According to the Walk Free Foundation’s Global Slavery Index 2016, there are about 45.8 million people working as slaves globally, with 58 percent in India, China, Pakistan, Bangladesh and Uzbekistan. That number includes sex trafficking, which would not be part of supply chain data.

For example, as of 2014, the United Nations estimated 21 million slave labor victims worldwide. Also, a 2014 report from the UN’s International Labor Organization (ILO) estimates that $150 billion in illegal profits are made in the private economy each year through modern slavery.

Modern slavery and forced labor is not as openly or frequently mitigated as other regulatory supply chain risks — such as foreign corrupt practices or conflict minerals, according to Kris Hutton, head of product management at ACL, a Vancouver, B.C.-based global compliance and audit software firm and consultancy.

“Slavery is a much more diverse, complex issue to govern, monitor, detect and regulate.”  — Kris Hutton, head of product management, ACL

And that’s a primary reason why major Western nations like the U.S. and the United Kingdom only recently enacted anti-slavery legislation (2015 in the U.S.), unlike the Foreign Corrupt Practices Act (FCPA) enacted in 1977.

“Based on maturity of legislation alone, jurisdictional regulators, such as the Department of Justice in the U.S., are far more likely to issue punitive fines against abuses of FCPA and Dodd Frank than those of anti-slavery regulations,” Hutton said.

Kris Hutton, head of product management, ACL

Kris Hutton, head of product management, ACL

This focus will change in the future, due to pressure from external social forces — such as consumer protests.

Modern slavery is also much more difficult to detect compared to other crimes, he said.

Corruption involving an electronic trail of payment or expense, for example, can be monitored by the organization and the regulator. Modern slavery, however, has to do with the conditions surrounding the workforce, which often rely more on qualitative evidence such as interviews and observation than documentation.

“Slavery is a much more diverse, complex issue to govern, monitor, detect and regulate,” Hutton said.

Finally, modern slavery carries a more serious social stigma compared to either corruption or conflict minerals.  Many companies look the other way to avoid having to act on the knowledge.

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Hutton expects this will start to change with more social awareness and increased regulatory enforcement; one thing that will drive organizational behavior is a combination of monetary and reputational damage that influences consumers and investors.

“Companies are responsible not only for their own integrity and ethics, but also for acts of their third-party suppliers,” said Scott Lane, CEO at The Red Flag Group, an independent corporate governance and compliance firm in Tempe, Ariz.

“A company that uses suppliers engaged in actions such as forced migrant or child labor, or human trafficking, could sustain significant fines and reputational damage,” he said.

Lane cited the example of Nestlé, which revealed late last year that poor workers from developing countries such as Thailand, Myanmar and Cambodia often ended up trapped in illegal and brutal working conditions as part of the company’s supply chain.

“A company that uses suppliers engaged in actions such as forced migrant or child labor, or human trafficking, could sustain significant fines and reputational damage.”  — Scott Lane, CEO, The Red Flag Group

He added that modern laws place an obligation on companies to assess whether or not it is happening, or could happen, in their supply chain. And if the answer is yes, is it being taken care of?

Finally, they need to report how they are doing in that process.

Scott Lane, CEO, The Red Flag Group

Scott Lane, CEO, The Red Flag Group

“These laws are creating an obligation on companies to do these things,” Lane said. “It’s less about the risk of fines and litigation and more about the reputational damage to the extent you don’t do anything once you find it.”

“It’s safe to say there is not a single company in the world within the Fortune 1000 that knowingly wants to violate these laws,” says Jeff Hunter, a partner in PricewaterhouseCoopers’ U.S. risk assurance services practice.

“With the expansiveness of today’s supply chain, there are much deeper ways to monitor and surveil third-party suppliers,” he said. “In the past, there was word of mouth, trust and the transparency of how they did business before. But that is changing, and the lead companies will have to look deeper into their supply chains.”

Some proactive steps

There are three critical areas that need to be addressed within organizations looking to reduce supply chain risks connected with slave labor, ACL’s Hutton said.

First, organizational leadership and the board need to make it part of their corporate mandate and be committed to educating, training and building awareness.

“One concrete way this is done is by including anti-slavery culture into the Code of Conduct — create policy and training for procurement professionals and enforce it,” he said.

Next is including prevention and detection controls in the supply chain vetting process, not just internally using vendor pre-approval, but by extending the obligations and awareness of the anti-slavery mandate to all vendors.

“Insist on supply chain traceability,” he said. “Make the key indicators of slavery highly visible — age and mobility of the workforce, fair wages (absent of fees or indentures) and working hours, and humane treatment to name a few.”

Point-scoring systems can be created where certain criteria would raise a red flag — such as vendors located in known conflict regions.

Finally, invest in auditing, monitoring and/or investigative measures — hold procurement and risk professionals accountable internally and hold vendors equally accountable.

Provide a whistleblower hotline so grievances can be reported.

As for data, Hutton said, the best angle is to create preventive controls that use a scoring model to indicate a higher risk for slavery. For instance, when a procurement professional wants to buy from a new vendor, the vendor has to be approved.

“If it is in a region that is in an emerging market or is a conflict region, the score should reflect that higher risk,” he said.

It’s still too early to tell if the new laws will have a positive impact on reducing the world’s slave labor market, Hutton said.

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On the one hand, there is much more social awareness and pressure for ethically and socially responsible corporate behavior.

On the other, the global supply chain is complex and it’s not an easy problem to solve by just running a data analytic monitoring program.
“It’s going to take time and it’s going to take pressure from regulators with punitive enforcement around the globe,” he said. “From that perspective, it’s early in the transformation to socially responsible outsourcing and procurement.”

According to Seyfarth Shaw’s Boutros, risk managers should always look for one key indicator when it comes to supply chain purchasing.

“If the price is too good to be true, there probably is a reason for it,” he said. “It’s not necessarily always a red flag, but it certainly needs to be investigated.” &

Tom Starner is a freelance business writer and editor. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.
By: | April 26, 2017 • 3 min read

As insurers become increasingly concerned about the aggregation of cyber risk exposures in their portfolios, new tools are being developed to help them better assess and manage those exposures.

 One of those tools, a comprehensive cyber risk modeling application for the insurance and reinsurance markets, was announced on April 24 by AIR Worldwide.

Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

Last year at RIMS, AIR announced the release of the industry’s first open source deterministic cyber risk scenario, subsequently releasing a series of scenarios throughout the year, and offering the service to insurers on a consulting basis.

Its latest release, ARC– Analytics of Risk from Cyber — continues that work by offering the modeling platform for license to insurance clients for internal use rather than on a consulting basis. ARC is separate from AIR’s Touchstone platform, allowing for more flexibility in the rapidly changing cyber environment.

ARC allows insurers to get a better picture of their exposures across an entire book of business, with the help of a comprehensive industry exposure database that combines data from multiple public and commercial sources.

The recent attacks on Dyn and Amazon Web Services (AWS) provide perfect examples of how the ARC platform can be used to enhance the industry’s resilience, said Scott Stransky, assistant vice president and principal scientist for AIR Worldwide.

Stransky noted that insurers don’t necessarily have visibility into which of their insureds use Dyn, Amazon Web Services, Rackspace, or other common internet services providers.

In the Dyn and AWS events, there was little insured loss because the downtime fell largely just under policy waiting periods.

But,” said Stransky, “it got our clients thinking, well it happened for a few hours – could it happen for longer? And what does that do to us if it does? … This is really where our model can be very helpful.”

The purpose of having this model is to make the world more resilient … that’s really the goal.”Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

AIR has run the Dyn incident through its model, with the parameters of a single day of downtime impacting the Fortune 1000. Then it did the same with the AWS event.

When we run Fortune 1000 for Dyn for one day, we get a half a billion dollars of loss,” said Stransky. “Taking it one step further – we’ve run the same exercise for AWS for one day, through the Fortune 1000 only, and the losses are about $3 billion.”

So once you expand it out to millions of businesses, the losses would be much higher,” he added.

The ARC platform allows insurers to assess cyber exposures including “silent cyber,” across the spectrum of business, be it D&O, E&O, general liability or property. There are 18 scenarios that can be modeled, with the capability to adjust variables broadly for a better handle on events of varying severity and scope.

Looking ahead, AIR is taking a closer look at what Stransky calls “silent silent cyber,” the complex indirect and difficult to assess or insure potential impacts of any given cyber event.

Stransky cites the 2014 hack of the National Weather Service website as an example. For several days after the hack, no satellite weather imagery was available to be fed into weather models.

Imagine there was a hurricane happening during the time there was no weather service imagery,” he said. “[So] the models wouldn’t have been as accurate; people wouldn’t have had as much advance warning; they wouldn’t have evacuated as quickly or boarded up their homes.”

It’s possible that the losses would be significantly higher in such a scenario, but there would be no way to quantify how much of it could be attributed to the cyber attack and how much was strictly the result of the hurricane itself.

It’s very, very indirect,” said Stransky, citing the recent hack of the Dallas tornado sirens as another example. Not only did the situation jam up the 911 system, potentially exacerbating any number of crisis events, but such a false alarm could lead to increased losses in the future.

The next time if there’s a real tornado, people make think, ‘Oh, its just some hack,’ ” he said. “So if there’s a real tornado, who knows what’s going to happen.”

Modeling for “silent silent cyber” remains elusive. But platforms like ARC are a step in the right direction for ensuring the continued health and strength of the insurance industry in the face of the ever-changing specter of cyber exposure.

Because we have this model, insurers are now able to manage the risks better, to be more resilient against cyber attacks, to really understand their portfolios,” said Stransky. “So when it does happen, they’ll be able to respond, they’ll be able to pay out the claims properly, they’ll be prepared.

The purpose of having this model is to make the world more resilient … that’s really the goal.”

Additional stories from RIMS 2017:

Blockchain Pros and Cons

If barriers to implementation are brought down, blockchain offers potential for financial institutions.

Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

Feeling Unprepared to Deal With Risks

Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

RIMS Conference Held in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]