Global Trends Driving a Paradigm Shift in Trade Compliance
Over the past year, global trade has faced seismic disruptions, from escalating geopolitical conflicts and persistent inflation to supply chain breakdowns and expanding regulations. With fines for non-compliance reaching into the millions and CBP enforcements increasing in severity, organizations can no longer afford—from a financial, reputation and sustainability perspective—to view compliance as anything less than a strategic priority.
Take, for instance, CBP’s enforcement of the Uyghur Forced Labor Prevention Act (UFLPA), established to root out forced labor from the supply chain. CBP requires importers to prove that their goods are free from forced labor before releasing them. For companies lacking full visibility across their supply chain—including sourcing information from Tier 1 and Tier 2 suppliers and their suppliers—this CBP enforcement tactic can be extremely costly. And without key stakeholders within the organization working together to build a holistic compliance strategy, importers are facing an uphill battle.
Navigating murky waters
As enforcement becomes harsher and penalties more severe, ensuring compliance with trade regulations is also becoming trickier for importers. Government stakeholders and policymakers today are significantly less prescriptive in how they identify third parties that are illegal or ill-advised to do business with—and this creates a serious visibility problem for companies.
The U.S. government, for example, publishes a list of Chinese entities involved with forced labor in the Uyghur region but admits the list is not exhaustive. As a result, organizations must conduct their own due diligence to prove to CBP that their goods comply with UFLPA regulations. The bottom line is that simply screening third parties against published government lists is no longer adequate.
A collaborative model
As policymakers become markedly less prescriptive, organizations are shackled with the internal operational burden of managing increasingly complex due diligence requirements. Indeed, the rising pressure to mitigate “three-dimensional” risk—regulatory, reputational, and resiliency (e.g., is this supplier facing political instability or climate change challenges that might impact their ability to be a long-term partner?)—is driving a new paradigm of trade compliance that promotes collaboration and the dismantling of departmental silos to build a cohesive risk mitigation strategy.
Due diligence is no longer solely the domain of the compliance group within an organization. Moving forward, companies will need to think collectively and holistically about compliance, working collaboratively across multiple operational areas—legal, procurement, trade compliance, finance, information technology, logistics and supply chain, etc.—to address three-dimensional risk.
Building the collaborative framework
How does an organization facilitate internal collaboration to build a compliance program that mitigates regulatory, reputational, and resiliency risk? The first step is to identify the individuals and stakeholder groups within the organization that have the capacity, capabilities, and necessary perspectives to make a meaningful contribution to the compliance discussion.
Executive sponsorship is vital for establishing a common language, lens, and framework to help break down discipline silos and facilitate productive collaboration. By appointing an executive leader, such as the Chief Ethics Officer or Chief Compliance Officer, to chair the internal governance conversations and take ownership of cross-functional collaboration efforts, organizations can build a holistic compliance program capable of meeting complex regulatory demands and reducing compliance risk.
In addition to aligned internal governance, exploring relationships with established third party partners (e.g., freight forwarders, customs brokers, any intermediaries that help enable the supply chain) and technology providers (e.g., contract management, enterprise resource planning, compliance management providers) can yield unexplored collaborative opportunities to address compliance challenges.
Compliance in the spotlight
Adopting a collaborative approach to trade compliance helps organizations stay ahead of the game, gaining a competitive advantage as the trend towards supply chain transparency intensifies and environment, social, and corporate governance (ESG) becomes a valuable competitive differentiator.
Notably, the U.S. Securities and Exchange Commission (SEC) has made significant motions towards codifying sustainability directives, with its Climate and ESG Task Force already levying numerous enforcement actions for ESG-related misconduct. In parallel, the European Commission issued the Corporate Sustainability Reporting Directive (CSRD) and recently adopted the European Sustainability Reporting Standards (ESRS), impacting many U.S.-based companies.
ESRS puts companies under the regulatory microscope, requiring annual disclosure of the impact of companies’ activities on people and the environment, including details of what the organization is doing to address issues like human trafficking, forced labor, and sustainability. For the first wave of organizations affected, sustainability reports will be required as soon as fiscal year 2024.
Taking the proactive path
With the blurring of regulatory and reputational risk, forward-thinking companies are getting out in front of the transparency and sustainability movement—before disclosure becomes a legal requirement. Organizations are driving a stake in the ground, both internally and externally, with statements from executive and governance leaders that clearly demonstrate a commitment to rooting out any forced labor risk and establishing a transparent and sustainable supply chain.
Whether this commitment takes the form of featuring compliance outcomes in the annual report or making compliance a reported business metric, for example, companies are being proactive in pledging to set specific goals and to be transparent with consumers and internal staff about the work they’re doing and the resources they’re allocating to effect change.
A collaborative compliance framework enables an organization to provide supply chain information that investors, the public, and regulatory bodies demand. For instance, did the strategic sourcing group change its standard operating procedures to bring a heightened level of due diligence into sourcing activities? What changes did the logistics and supply chain group implement with respect to how the organization thinks about moving goods from point A to point B? Did the legal and regulatory affairs group change the way it works with stakeholders internally to start bringing more transparency and accountability to the global supply chain?
It is in every organization’s best interest to embrace this paradigm shift in trade compliance and start building the cultural change towards transparency within the organization. By adopting a collaborative approach to trade compliance now, companies will be prepared when the law compels them to disclose their compliance policies and actions.
Creating value moving forward
With a sustainable commitment at the governance level to transparency and internal cooperation, plus the appropriate level of executive sponsorship, organizations can foster productive collaboration between stakeholders and hold people accountable to executing the agreed upon course of action. This framework is the key to pivoting trade compliance from what has been historically viewed as a cost center to a strategic value creator within the organization. As trade compliance is redefined across the globe, savvy organizations can reap the rewards of enhanced internal and external visibility, while mitigating regulatory, reputational, and resiliency risk moving forward.