Supply chain disruption: what are the pitfalls?

Border closures, reduced capacity, and container congestion from the aftermath of the pandemic have led to longer delivery times by up to 20%. This, coupled with the rising cost of transportation, has resulted in a serious supply chain issue. Additionally, the delays caused by Brexit and extreme weather occurrences have further complicated the situation. Experts predict that the supply chain “hangover” is likely to continue for the foreseeable future. Let’s take a look at how these issues impact fraud and explore what you need to know to avoid the pitfalls.

Is there an increased risk of fraud?

Supply chain difficulties may increase the risk of fraud. If companies are having difficulties with their usual supply chains, they are likely to seek alternative suppliers at short notice. This can lead to a situation where you are doing business with someone you don’t know, and you don’t have time to complete your usual due diligence. This is dangerous and can lead to problems.

For example, imagine a supplier to Tesco is unable to source its usual olive oil made with Italian grown olives, so it seeks alternatives. The alternative supplier promises it can supply high-end olive oil, but unknown to Tesco’s supplier the olive oil is actually watered down with inferior quality vegetable oils. Due to the delay with supply, our supplier fails to run its normal quality checks and sells the inferior olive oil onto Tesco at the same price and under the same labelling as the high-end product. This is adulteration and the fraud is perpetuated by the failure to run quality checks and then eventually through the sale to consumers.

Supply chain difficulties may also lead to companies seeking to circumvent legal supply routes, thereby avoiding taxes and import/export duties. Often, those offering such routes will be those suppliers with little respect for the rule of law, and therefore they are more likely to be involved in fraudulent trades. Furthermore, those desperate to secure supplies may be more likely to resort to bribery and collusion, exposing not only themselves to prosecution under the Bribery Act 2010, but potentially the company which employs them as a result of s.7 of the Bribery Act 2010 (under this section it is an offence if the company did not have adequate procedures in place to prevent bribery).

How can I avoid the pitfalls?

1. Due diligence

Due diligence is key. If buffer stocks are not an option due to perishable items, then perhaps the answer is seeking alternative or additional suppliers in good time, to allow robust due diligence checks to take place. Taking the time to get to know your suppliers is essential.

2. Buy local

Can you source your component products or ingredients more locally? Not only is this better for the environment, but it may mean less disruption to your supply chain and reduce the risk of fraud.

3. Self-insure

Self-insure against the risk of disrupted supply chains by seeking wider panels of alternative or additional suppliers or agreements with competitors to help each other on short supply issues.

4. Watch out for pre-contract assurances

If you are supplier, then be careful what pre-contract assurances you give regarding the ability to supply and timing of supply. If you are seeking supply, then ensure these assurances are written into the contract then at least you may have some financial remedy in the event of a failure to supply.

5. Check policies

Check the company’s policies and procedures around bribery and other fraud. Ensure staff are aware of those policies and staff training is up to date. Consider having a whistleblowing policy if you do not already have one.

In supply chain fraud disputes, often a lot of direct and circumstantial evidence is needed to demonstrate dishonesty.  However, your organisation can alternatively bolster their contractual terms to anticipate dishonest conduct.  Breaching these terms can bring easier claims to terminate a supplier relationship and claim damages.

To learn more about how Tenet can support your business prevent and detect fraud please get in touch at hello@tenetlaw.co.uk

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The Secret Ingredient is our dedicated food and drink quarterly newsletter. Each publication supports in-house counsel and those from a science background assessing food safety to keep up to date with current and emerging fraud-related risks. Catch up on previous issues below and subscribe here to receive quarterly updates direct to your inbox.