What is supply chain compliance?
Supply chain compliance refers to the process of thoroughly assessing and evaluating various aspects of a company's supply chain to identify potential risks, ensure compliance with regulations, and promote responsible business practices. This activity is typically conducted before entering into or during ongoing relationships with suppliers and partners, and protects businesses from any potential corruption risk that may lead to reputational and financial damage.
Why is supply chain due diligence important?
Supply chain due diligence is crucial for many reasons:
- Compliance and Legal Obligations: Supply chain due diligence ensures that companies comply with relevant laws, regulations, and industry standards. This is essential for avoiding legal penalties, regulatory fines, lawsuits, and reputational damage resulting from non-compliance.
On 13 February 2024, the UK government increased the penalties for those employing illegal workers:
- For first-time offenders - the penalty increased from £15,000 to £45,000 per worker
- For repeat offenders - the maximum fine increased from £20,000 to £60,000 per illegal worker
- Modern Slavery: Supply chain compliance is essential to protect your workforce and prevent serious exploitation such as Modern Slavery. Read more around the Modern Slavery Act
- Enhanced relationships with stakeholders: Managing supply chain risks and ensuring supply chain compliance can enhance trust and strengthen relationships with customers who are increasingly looking to work with companies that offer transparency and accountability.
Supply chain due diligence process
Ensuring due diligence is vital to shield your business from exploitation, fraud and tax evasion, all of which may lurk beneath the surface of a supply chain.
When assessing due diligence in the supply chain, you should follow HMRC's principles of Check, Act and Review to assure credibility, legitimacy, legal and tax compliance of your suppliers.
Check
Your risk by performing risk assessments - Identify what the risks are and how to mitigate them
Your compliance - With legal, financial and social obligations to safeguard against risks
Your suppliers' tax and legal compliance - For example, submitting their tax returns and payments on time, complying with legal and social responsibilities, and having procedures in place to prevent the facilitation of tax evasion
Modern slavery and exploitation risk - Check for published slavery and human trafficking statements and for indicators of modern slavery and exploitation
Act
Act on your risk assessment - Set up systems and processes for supply chain due diligence
Know your suppliers - Be vigilant for previous business failures or criminal intent. Check the credibility of directors and verify signatories of contract negotations
Know your suppliers workforce - Understand the relationship between the workers and the provider of the labour
Know the length of your supply chain - Margins become tighter with every layer of subcontracting and opportunities increase for fraudulent infiltration so be vigilant and check that supplier exists. For example, look for commercial features.
Know their suppliers - Due diligence applies throughout supply chains
Review
Due diligence procedures - These should be risk-based, relevant, reasonable, proportionate and ongoing
Live risk management - This can stop or prevent harm before it occurs, for example it will provide added protection against denial of input tax
Are mini umbrella's placing you at risk of criminal tax evasion?
Involving a Mini Umbrella company in your supply chain could be considered as criminal tax evasion under the General Anti-Abuse Rule.
Read more around how to spot Mini Umbrella Companies and the consequences that including such businesses in your supply chain may have.