Knowing your business partner Knowing your business partner

Businesses are turning to new suppliers to meet their needs as longstanding suppliers fail to deliver on critical supplies due to a number of factors including workforce disruption, restrictions in global travel and supply and financial hardship & bankruptcy.

Many new, unknown business players have emerged to capitalize on the gaps in the commercial landscape, with many set up, with COVID-19 domain names, to take advantage of the limited supply and increased demand to scam and defraud companies. Companies of all sizes have subsequently fallen prey to fraudulent entities selling faulty and counterfeit goods, jeopardizing business integrity & consumer trust and sustaining loss.

In spite of this new precarious climate, businesses may neglect appropriate due diligence because of the pressure to secure contracts and maintain revenue. Chief Compliance Officers operating with reduced budgets have had to improvise and take over parallel duties in operational crisis management.

The crisis has added a new layer of complexity to business operations, heightening exposure to fraud alongside other supply chain risks.

Devising effective risk control measures is key to countering opportunistic exploitation and ensuring business continuity. Knowing one's business partner is the first step.

Here are five guidelines to mitigate fraud risk exposure, no matter the crisis or evolving circumstances:
 

1. Don’t cut corners on due diligence of new business partners, despite the time pressure.
2. Make use of due diligence questionnaires so that your business partner can be an active part of the onboarding process.
3. Set up monitoring of your current business partners to keep abreast of new adverse issues or challenges that may impact your business or relationship.
4. Implement fraud mitigation programs to protect your company against unethical business partners.
5. Track developments in your industry to stay well-informed about emerging fraud risks, the character of fraud perpetrators and the opportunities they exploit.

In times of disruption, supply chain businesses are inclined to use their friends and commercial relations more than ever. Businesses face severe legal and reputational ramifications where an employee or entity selects a vendor for their own personal gain over their obligations to their organization. Undisclosed conflicts of interest, when identified, can result in the public, media or stakeholders raising questions regarding the independence or objectivity of a company's actions and decision-making (in particular for public interest entities and companies subject to public procurement regulations).

Companies nonetheless find it difficult to manage potential conflict of interest situations. This was the case before the emergence of the COVID-19 pandemic, and is particularly true for businesses since the outbreak. The systems in place to control and manage conflicts of interest are often paper-based, incomplete and rarely subject to third party verification and validation. The failure to safeguard independence heightens the risk of undisclosed relations for a business and the market.

By effectively managing potential conflicts of interest, companies bolster their ability to identify independence related risks before these reach counterparties or the media. Managing conflicts of interest also increases awareness and transparency among employees and managers, preventing potential project delays resulting from the failure to account for undisclosed market relations on time. As always, the best way to mitigate conflicts of interest is to avoid them in the first place.

We recommend the following five guidelines to avoid undisclosed conflicts of interest:
 

1. Ensure open lines of communication to encourage ongoing, proactive disclosure of conflicts of interests. 
   
2. Revitalize processes and policies which define the relationships that represent conflicts, how to disclose conflicts of interest and how to address and handle conflicts of interest when they do occur.
3. Continue training employees and managers to ensure awareness and familiarity with conflicts of interest policies.
4. Adopt the necessary technologies to monitor and anticipate potential conflicts of interest. For instance, using data from corporate registers with periodic updates. 
5. Perform risk-based testing and/or internal audits focusing on common supplier and employee details.