When thinking about supply chains, most people consider goods moving from point A to point B.
They see the visible aspect of it, such as trucks on the highway and cargo ships on the water.
However, there’s another dimension to global logistics that takes place in the background that people don’t see – the legal side of it, also known as supply chain compliance, plus transparency.
Even though this side is not as visible, when the legal foundation is not in place, cross-border trade flows can come to a dead stop. Because business is more globalized than it has ever been – and with that comes increasing risk – there is increasing demand for supply chain compliance and transparency. But what is that exactly? Why is it getting more important? How can technology help? How can an organization prepare?
These were the questions Adrian Gonzalez, host of Talking Logistics, and I explored during our discussion. Read to learn more about how companies can leverage supply chain compliance software to navigate the complexities of global trade. Or you can watch the video interview.
Key Takeaways
- The Dual Importance of Compliance and Transparency: Supply chain compliance ensures legal adherence, preventing transactions with denied or sanctioned parties. While transparency mitigates reputational risks by aligning with ethical standards.
- Evolving Regulatory Landscape: Complex and emerging regulations, such as the OFAC 50 Rule and ESG-related requirements, demand detailed due diligence and adaptability to rapidly changing global conditions.
- Higher Due Diligence Burden: Companies must go beyond basic checks to investigate ownership structures and third-party relationships.
- The Role of Technology in Compliance: Advanced supply chain compliance software like those offered by Descartes streamline tasks such as denied party screening and export control processes, while also providing actionable insights for risk management.
What is supply chain compliance?
Supply chain compliance refers to the process of ensuring that an organization adheres to all relevant laws, regulations, and ethical standards throughout its supply chain operations. This includes the sourcing, production, transportation, and distribution of goods and services. The process ensures that the laws and regulatory requirements for countries that they work with and in are followed. With strong due diligence policies and supply chain compliance software in place, an organization can take steps to avoid doing business with denied parties or countries subject to trade restrictions and embargoes.
What is supply chain transparency?
Supply chain transparency takes compliance a step further. While compliance ensures that an organization CAN do business with countries or entities, transparency provides visibility in the supply chain that ensures that an organization SHOULD do business with countries or entities. It ensures that the organization is not exposing itself to risk that could degrade its image, reputation, or resiliency. With transparency, organizations self-sanction by being cautious or stopping their operations altogether in dubious regions. They are doing this not because it is illegal, but because their customers or stakeholders are not willing to tolerate the risk related to being seen doing business in a sensitive geopolitical region. Effective supply chain compliance keeps shipments moving smoothly to satisfied customers, and this enables business growth.
Why is supply chain compliance and transparency so important?
There was a time when compliance professionals were viewed as mere paper pushers. Now, organizations are realizing the level of risk and complexity involved with supply chain compliance and transparency issues. They are also realizing the value that a strong compliance operation can bring to the organization.
One of the reasons for the risk and complexity in supply chain compliance and transparency is volatility. For example, the Pandemic and the Russia/Ukraine conflict brought into sharp focus how quickly the world can change. Being prepared for the rate and scope of change can greatly bolster the resiliency of an organization.
Another reason for the complexity in compliance and transparency is legislation and regulations. Here are some examples:
- The Bureau of Industry and Security (BIS) recently introduced a significant update to the Entity List by including address-only information. The final rule released on the 12th of June 2024 authorizes BIS to publish addresses without listing a corresponding name.
- The Uyghur Forced Labor Prevention Act (UFLPA) which went into effect in the U.S. on June 21, 2022, with the aim of stepping up efforts to eradicate forced labor from supply chains. Under the UFLPA, importing goods produced wholly or partly in the Xinjiang Uyghur Autonomous Region of China is prohibited.
- A U.S.-centric piece of legislation, the OFAC 50 Percent Rule, states that companies cannot do business with an organization that has a majority ownership position by an individual who may be sanctioned, debarred, or restricted. (OFAC is the Office of Foreign Asset Controls, which is part of the Treasury department.)
- The Securities and Exchange Commission is signaling that organizations should adhere to ESG (Environmental, Social, and Government) regulations more closely. In basic terms, ESG is about providing supply chain transparency. Companies must actively contribute to combating climate change and improving social conditions, such as by not supporting slave labor.
- Legislation in the early stages of passing in New York state requires any type of organization above a certain size involved in the fashion industry to make mandatory disclosures about the nature of their third-party relationships.
With new and evolving legislation and regulations like the aforementioned, trade compliance has gone beyond cross-checking denied party screening lists. Now, with sanctioned ownership restrictions, such as the OFAC 50 Percent Rule, there is no exhaustive list that tells a compliance officer the companies in a country who are majority or partly owned by sanctioned individuals. Similarly, with address-only listings, a specific entity is not targeted, rather any individual or company using the listed addresses is labeled high-risk and treated as a possible restricted party.
Compliance operations must go beyond a linear approach (cross-referencing products with companies/countries, looking at trade agreements to leverage, reviewing the filing process with the customs authority) into more abstract and complex due diligence exercises to be able to disentangle the ownership structures of international organizations. Organizations now need to be fully transparent on how they make decisions regarding stakeholders across all dimensions.
The burden of due diligence on organizations is huge. The accountability for supply chain compliance and transparency falls to the enterprise themselves. However, this can be streamlined and better managed by leveraging supply chain compliance software.
How can Supply Chain Compliance Software Help?
Compliance teams possess valuable skills and experience but often face challenges managing the operational aspects of compliance, such as denied party screening, OFAC 50 compliance, and export control processes. Leveraging supply chain compliance software can streamline these tasks while providing access to information needed for effective due diligence. Solutions like those offered by Descartes also deliver specialized trade compliance content to help organizations understand risks and make informed decisions, supporting comprehensive and efficient supply chain compliance management.
How Tech Enhances Key Components of Supply Chain Compliance and Transparency
- Automation of Sanction and Denied Party Screening: Supply chain compliance software automate tasks such as screening denied party lists and verifying ownership structures, ensuring organizations avoid restricted parties or entities under trade embargoes.
- Improved Documentation and Recordkeeping: Trade compliance technology integrate with centralized data management platforms for maintaining all necessary documents, such export licenses, transaction records, and audit trails. This enables alignment with regulations like OFAC’s 10-year record retention requirement, reducing the risk of penalties.
- Facilitate Regulatory Adherence: Adapting to diverse legal and regulatory frameworks, leading supply chain compliance software support multiple regions and regulations. Simplifies global markets expansion while maintaining compliance with various trade laws, export controls, sanctions, and customs regulations.
- Enhanced Supply Chain Visibility: Supply chain compliance solutions provide tracking tools to map and monitor activities across the supply chain. These tools enable full transparency, helping businesses identify risks such as forced labor and prevent potential UFLPA violations.
- Support for Ethical and ESG Compliance: Technology makes it easier to track and address issues like labor rights, environmental impact, and responsible sourcing to meet ESG goals. This helps organizations ensure their practices match stakeholder expectations and prevent reputational damage.
- Real-Time Risk Monitoring and Alerts: Supply compliance software solutions provide real-time tracking of transactions and shipments, flagging risks related to new sanctions, geopolitical changes, or regulatory updates.
- Faster Decision-Making: Supply chain compliance software powered by AI and machine learning streamline data analysis and due diligence checks, helping teams quickly identify risks or opportunities. This reduces delays in trade operations and allows trade compliance teams to focus on high-priority tasks.
How can an organization prepare for supply chain compliance and transparency?
Plan ahead. Don’t wait for a major event like a geopolitical conflict or trade war to force your organization into action. Avoid waiting for a catastrophic moment to take necessary steps. Begin now by positioning your organization for long-term success. With the right supply chain compliance software integrated with accurate trade content, businesses can ensure robust compliance and risk management.
While profitability and shareholder value remain priorities, companies also strive to be recognized as contributors to a sustainable future. Strong global supply chain compliance and transparency are key to achieving this goal. By integrating supply chain compliance solutions, organizations can transform compliance and transparency from a reactive process to a proactive strategy. Ensuring stronger management of their global trade responsibilities.
Build Resilience with Descartes Supply Chain Compliance Software Solutions
Descartes provides a range of supply chain compliance software solutions with capabilities like denied party screening and Third-party risk management. These solutions also offer comprehensive trade content for leading business systems such as SAP, Oracle, Salesforce and NetSuite, among others.
Descartes solutions are flexible and modular, organizations can select the functionality they need now and scale up later, if necessary. By utilizing these solutions, organizations can strengthen their compliance processes, enhance their competitive edge, and increase sales velocity.
To learn how Descartes can keep you ahead of the latest sanctions, please drop a note or request a demo.
This article is based on a Talking Logistic interview on the Growing Demand for Supply Chain Compliance and Transparency. Tune in to learn more.
