Risk Management

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As the Old Testament prophet Isaiah knew perfectly well when he wrote the above verse some 3, years ago, diluting the quality of commodity goods is a time-honored way of reaping an illicit profit—and the situation has only grown worse ever since. In the business world of today—with its global supply chains, complex products with hundreds of components, impenetrable thickets of regulation, and activists ready to lay siege via lawsuit or social media at the slightest infraction—commodity risks in the supply chain have exploded, in ways Isaiah could never have imagined.

As ey commodity trading and risk management concept, the problem is easy to grasp. Suppliers mix two piles of commodity goods together. One group might have some restriction ey commodity trading and risk management as high import taxes, or economic sanctions, or quality defects; the other does not. Define it more narrowly, and the numbers are still enormous. In East Africa, rice farmers are under pressure from commodity dealers who mix imported rice from Pakistan which carries a low import duty with rice from Kenya which carries a higher dutyand then sell the blended package as low-cost Pakistani product to evade tariffs.

Off the coast of Thailand, slave labor is used to pull shrimp out of the water that eventually finds its way into food products sold in North America and Europe.

This is the next generation of commodity risk. Historically, large purchasers of raw materials worried foremost about price volatility and diversity of suppliers, either to meet financial projections or to avoid business interruptions. Today corporations must also worry much more about compliance risk if they are unwitting participants in violating economic sanctions or tax fraud, for example as well as reputation risk if their goods are identified as coming from undesirable suppliers.

The frauds they might encounter, then, are more about unreliable promises than contaminated goods. Intrading firms were shaken by news that a metals broker in the Chinese port of Qingdao was selling rights to the same pile of metals to multiple buyerswho were using those receipts as collateral for bank loans.

Trading firms are better positioned to put those controls in place, both because they face heavy oversight from U. Corporations that consume raw materials are in a more difficult spot. For example, price risk is something a business understands: Likewise, procurement departments can take the lead on reducing business interruption risk by seeking reliable suppliers.

Compliance and reputation risks in the supply chain are different. Instead of a company looking horizontally to find more suppliers of materials, the company must look vertically down to its suppliers, and then their suppliers, and their suppliers, and so forth—all to be sure that no unwanted goods have infiltrated the supply chain at any point.

That requires new mechanisms to confirm the source of commodity goods; and new collaboration among treasury, risk, procurement, and compliance departments to do the task well. The consequences can be significant. Take the example of slave labor used in the fisheries business in Thailand. Nestle, Costco, and Whole Foods have all been sued in the state of California, by activists who accused the companies of not doing enough to eradicate those shrimp supplies from their products sold in Western supermarkets.

The plaintiffs have exploited the California Transparency in Supply Chains Act, which requires businesses to disclose what efforts they take to remove human trafficking from their supply chains.

Nestle, meanwhile, took the extraordinary step in November of admitting forced labor is part of its supply chain. It also announced numerous steps to address the problem, from anonymous reporting hotlines, to more training, to external audits of its anti-trafficking efforts. The underlying dynamic there—a sharp increase in compliance and reputation risks for goods that previously only carried financial risk—upends the usual company oversight.

Once upon a time, the corporate treasurer or risk officer would be in charge of finding the right hedging strategy to ey commodity trading and risk management enough materials at acceptable prices. Today a company cannot manage physical purchasing and financial risks in isolation; it must address compliance and reputational risks as well. That is something treasury and risk officers have rarely done.

Likewise, the company functions most likely to oversee compliance and reputational risks the compliance and legal departments have less experience with the supply chain. Most large companies already appreciate the risks posed by ey commodity trading and risk management immediate suppliers, distributors, and other third parties; some have even launched vigorous programs to herd those third parties toward some desired standard of conduct. But that only brings visibility to the next link on your supply chain.

That means businesses must somehow push their own due diligence efforts further down the supply chain if they wish to combat that risk of unscrupulous commodities trading. The certificate of origin is one useful first step, but it is only that: An end-to-end program to fight commodities corruption involves much more, and needs the following characteristics:. Commodities dealers already use certificates of origin throughout the import-export world to show where their goods purport to come from.

All ey commodity trading and risk management efforts should documented, and the documentation placed in some central repository so it can be found whenever necessary, by anyone who needs to peer down the supply chain. All companies ultimately are responsible for vetting their own supply chain, but in the ey commodity trading and risk management world where most corporations have thousands if not more of third parties—other links in your supply chain can make themselves more appealing by adhering to standards set by trustworthy trade groups.

A right-to-audit clause should be standard in any supplier agreement, even ey commodity trading and risk management your business has limited ability to conduct an actual audit.

Trusting your suppliers to obey some code of conduct is no longer enough, in the eyes of regulators, investors, and the public. Even if you have a superb code of supplier conduct, and thorough documentation requirements, and right-to-audit clauses you exercise regularly—all that means you will face considerable labor yourself to ensure you have an ethically rigorous supply chain.

The ideal is to construct a system where every part of the supply chain has commercial incentive to ey commodity trading and risk management ethical. It reduces your effort, builds trust, and even further ostracizes the few unscrupulous commodity traders who remain. Another challenge is to ensure that everyone within your company who somehow plays a role in the supply chain which can be a lot of people shares all the risks they see with everyone else, so senior management can run a coordinated effort that reduces everything from wasted money to bad headlines.

Those communication channels are crucial. In one survey of more than supply chain professionals Thomson Reuters conducted at the end ofnearly two-thirds of respondents said procurement and compliance departments both oversee two critical tasks: What can happen if that communication falters? Compliance or risk committees have existed in many large organizations for years, to ensure everyone is aware of various risks the business faces and the practical challenges of getting business done.

Supply chain risks are no ey commodity trading and risk management any different—especially as regulators, investors, and the public push more of their concerns about global business standards onto corporations everywhere. Like all good jolts, those pressures roll right down the chain. Thomson Reuters World-Check helps you screen and monitor third parties against millions of profiles to raise red flags about potential risks, such as sanctioned entities, politically ey commodity trading and risk management persons PEPsbribery and corruption, negative media, environmental crime, slavery and human rights abuse.

Thomson Reuters Enhanced Due Diligence gives you advanced background checks on any heightened risk entity or individual, no matter where they are located in the world, through in-depth, tailored reports.

Thomson Reuters Practical Law takes regulatory intelligence a step further by providing legal know-how for counsel on the implications of new and ongoing regulations, empowering ey commodity trading and risk management to better help ensure compliance and manage regulatory risk. Training employees on regulatory obligations is a critical component of demonstrating compliance. Thomson Reuters Compliance Learning offers customizable training programs to mitigate the risk of compliance breaches.

Seeing down the chain Most large companies already appreciate the risks posed by their immediate suppliers, distributors, and other third parties; some ey commodity trading and risk management even launched vigorous programs to herd those third parties ey commodity trading and risk management some desired standard of conduct.

An end-to-end program to fight commodities corruption involves much more, and needs the following characteristics: The efforts can be documented. The efforts follow standards. The efforts can be audited. The efforts should be incentive-based. The second battle front: Anti-corruption Commodities Emerging markets Enterprise risk management International business management Modern slavery Oil and gas Third party risk.

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