Hong Kong - Covid-19 Enforcement Update: Managing Supply Chain Risk May 2020.
Legal News & Analysis - Asia Pacific - Hong Kong - Regulatory & Compliance
18 May 2020
On the Herbert Smith Freehills COVID-19 hub, experts from our global network have been sharing a range of insights into the challenges posed by the COVID-19 pandemic to global supply chains. In the following bulletin, we take a closer look at some of the key areas of regulatory and corporate criminal risk that supply chain participants (whether suppliers, customers or intermediaries) need to be focused on.
Severe disruption to supply chains is leading many companies to seek new supply or distribution relationships. Businesses are unlikely to have the time or capacity to carry out the level of due diligence that would normally be undertaken in relation to new suppliers. Such businesses may find themselves exposed to increased risks – from bribery and corruption and AML to health and safety, and human rights breaches.
Companies should be particularly wary of suppliers or service providers claiming they can continue operations in circumstances where their competitors are unable to do so. Such claims may be a red flag that the supplier in question is engaging in misconduct to ensure operational continuity (e.g. breaching restrictions put in place to limit the spread of COVID-19 or bribing public officials to “look the other way”), or that they are making false claims about their ability to deliver services to win contracts.
Legal and compliance teams may come under pressure to minimise due diligence requirements for on-boarding suppliers. While circumstances may certainly justify a degree of commercial pragmatism (in waiving requirements for on-site inspections, for example), it is imperative to conduct due diligence as fully as possible on suppliers in high risk areas or markets. As an absolute minimum, supplier due diligence should include relevant checks to understand the precise nature of the supplier’s business and the scope of the service(s) to be provided; understand their own supply chain as it relates to your business; and ensure that appropriate quality and safety controls are in place.
Cross-border supply chains are inherently susceptible to fraud due to the complexity of supply and distribution networks and the difficulty in implementing controls in high-risk overseas jurisdictions. Major operational disruption to supply chains and significant financial pressure faced by supply chain participants create a heightened risk environment. Meanwhile, remote working may impair effective monitoring of supply chains, for example by impeding an organisation’s ability to verify physical receipt of goods. Companies should look carefully at how remote working impacts their controls and identify vulnerabilities proactively.
An increase in demand for certain products, where there is a lack of supply through regular sources, may create more opportunity for unscrupulous vendors to supply counterfeits or replacement products (e.g. mis-supply or passing off), or distributors assigned to other jurisdictions may start supplying into markets outside their territory (known as “parallel imports” or “grey goods”).
Where supply chains are disrupted, purchasers may consider reverse engineering products or components themselves or supply by providers who have themselves reverse engineered replacement products. Where the products or components are covered by intellectual property rights these may be able to be enforced to stop such practices.
Government aid directed at keeping supply chains moving, particularly in areas critical to fighting the pandemic or aiding business recovery, creates another potential area of risk. Companies seeking to benefit from government support should ensure that they comply fully with the relevant application processes and maintain a record of all communications with government authorities.
While many competition authorities are taking pragmatic steps to seek to assist businesses and preserve supply chains, authorities will come down hard on any businesses that try to exploit the pandemic as a “cover” for non-essential collusion.
In China, for example, the State Administration for Market Regulation (SAMR) has stated that it will grant exemptions in relation to certain types of cooperation agreements in light of the COVID-19 outbreak, recognising that certain forms of cooperation agreements may be required to address gaps between supply and demand At the same time, however, SAMR has insisted that fair competition is essential to maintain stable prices and an adequate supply of materials in the current environment and has shown its readiness to impose heavy punishments on conduct which hinders the prevention and control of the epidemic, the resumption of work and industrial production and that harms the interests of consumers.
Regulators across the region will be particularly focused on anticompetitive behavior such as price gouging, production restrictions, market segmentation, coordinated boycotting, refusals to deal, tying and the imposition of unreasonable trading conditions.
To discuss any of the issues above, please contact a member of our Asia Corporate Crime & Investigations team.
For further information, please contact:
Jeremy Birch, Herbert Smith Freehills