The Quest for Safety in an Unsafe World: Taking a multidisciplinary tack in supply chain and other risk mitigation

Thursday, March 3, 2016 - 13:28

Ambassador Daniel F. Feldman and Lars-Erik A. Hjelm of Akin Gump have moved between government service and private practice in their careers. Their deep, broad and global experience in international trade, customs law and policy, corporate social responsibility, security and other areas inform the counsel they provide to clients on issues related to global risk and compliance. Their remarks below, which have been edited for length and style, focus on risk analysis and mitigation, particularly concerning global supply chain management in China and elsewhere around the world.


MCC: Please provide a brief overview of your backgrounds and experience in international trade, customs law and policies, CSR, and other relevant areas.


Hjelm: I’ve been at Akin Gump for over 17 years. Prior to that, I was in the federal government at what was then called the U.S. Customs Service, where I served for over nine years in the Office of Chief Counsel in Washington, D.C., and Baltimore as the legal manager for the Mid-Atlantic, including a stint at the Department of the Treasury in the General Counsel’s Office. 


Ambassador Feldman: I’ve gone back and forth between government and the private sector for the last 20 years, but there’s been a common theme of corporate responsibility throughout that. I was first exposed to supply chain issues in China when I lived in Hong Kong in the ’90s. I then worked in the Clinton White House on the National Security Council staff, where I oversaw multilateral and humanitarian affairs. It was a time of significant crises, particularly in the footwear and apparel sector – Nike, Reebok, Kathie Lee Gifford. We helped to spearhead the first multistakeholder initiative in that sector, bringing together not only government and company officials, but also NGOs and unions. 

When I went to the private sector after the Clinton administration, I helped build the first corporate social responsibility legal practice in the U.S. We advised multinationals on international human rights, labor rights, anti-corruption and environmental matters. 

I went back into government at the start of the Obama administration and was at the State Department for the last six and a half years, overseeing Afghanistan and Pakistan, most recently as the U.S. Special Representative for over a year. About five months ago, I left government, and, in thinking about where to build a CSR practice, chose Akin Gump. It was an ideal platform, given both its global footprint and the fact that there is already so much expertise here in issues like sanctions and compliance, investigations and due diligence – the expertise that CSR is also built upon.


MCC: Akin Gump has one of the leading international trade practice groups of any firm, but many readers may not be familiar with the nature of such a practice. Tell us about it. What’s the focus? What bundle of capabilities do you bring to bear? 


Hjelm: Akin Gump has a market-leading international trade practice group, comprising now five sub-practices, with Ambassador Feldman’s arrival and establishment of our CSR practice.  This practice is based in Washington, D.C., but we have partners and lawyers in London, the U.A.E., Hong Kong and Singapore as well. 

I manage our customs and import controls practice, and we advise companies doing business in the U.S. and elsewhere on managing their import supply chains in order to maximize compliance and reduce barriers to trade, for example through tariff engineering.  

Another core focus is our export controls and sanctions practice, which also comprises anti-corruption compliance and navigating clients through national security-based foreign investment restrictions, such as those enforced by the Committee on Foreign Investment in the United States.  Our capabilities in this arena are substantial, and our client base is diverse, cutting across a wide swath of industries.  

A fourth area is our international trade policy practice. Generally, this means our representations of corporations, private entities, foreign governments or other stakeholders that have international disputes or policy matters pending before various governmental bodies, like the United States Trade Representative, Congress, the World Trade Organization and international arbitration panels (e.g., investor-state disputes). This is a growing area for our overall practice, and our partners have significant government experience.  

Finally, the origin of our practice is in the trade remedy space. We have very strong anti-dumping and countervailing duty litigation experience, which has a lot of crossover with our customs and import controls practice group among others.  Some of our practitioners, like Ambassador Feldman and I, also served in the U.S. government prior to joining Akin Gump. 

Some of the capabilities that we bring to bear include the following. 

First, we help our clients assess, structure and audit their supply chains to maximize compliance and enhance cost savings in, for example, the customs, export control, sanctions and trade remedy spaces. That includes assessments of duty minimization strategies and free trade agreement claims, making sure that if you are utilizing the benefits of a free trade agreement, that you’re doing so in a compliant manner. 

Two, we make sure that clients have effective compliance programs in all of the core areas of our practice in accordance with the hallmarks of the essential elements of a compliance program, which, broadly based, include management commitment, routine monitoring, effective internal controls, and auditing transactions and supply chains. 

One of our major areas of focus for our clients is to assist them in negotiating with manufacturers or vendors like freight forwarders or logistics providers, reaching back into the supply chain to make sure that vendors are effectively following the international trade mandates. This includes reviewing the terms and conditions and supply agreements to make sure there are effective methods to enforce applicable legal and policy requirements, whether it’s on not dealing with denied parties or embargoed countries, making sure that there are controls on technology restricted under U.S. export or other control laws or enforcing anti-terrorism standards. 


MCC: Regarding supply chains, last August, explosions in Tianjin, the largest port in northern China and one of the 10 busiest in the world, killed at least 160 people, injured at least 1,000, and spawned more than $1 billion in insurance claims. It also touched off yet another wave of commentary about the risks that global supply chains pose for multinational companies. What lessons should companies draw from events such as Tianjin regarding their supply chains in China and elsewhere?


Hjelm: Generally speaking, companies, especially those that work in the international trade space, must recognize the need for due diligence controls over all of their vendors, as well as those vendors’ relationships with their vendors. In this particular instance, you’re talking about the due diligence that a buyer, let’s say in the United States, must undertake with respect to manufacturers that are exporting to the United States and who those manufacturers are working with: for example, freight forwarders, logistics providers, vessel operators, and, in this case, a port authority. 

To drill down even further, let’s take a footwear and apparel company as an example. Its vendor might hire a logistics provider to store the cargo in a facility that is in close proximity to hazardous material. The footwear company should know about that, and it should undertake a review and ask the right questions. That’s the lesson to be drawn – conducting due diligence over vendors and vendors’ vendors and understanding everything that goes into the supply chain, including the platforms for shipping goods from a particular port. 


Ambassador Feldman: From a CSR perspective, this is very much representative of the evolution of the practice as a whole. When CSR initially developed in the ’90s in the manufacturing sector, the first generation of inquiry was focused on what should be in a corporate code of conduct? What are voluntary initiatives? What are best practices? What’s the benchmarking against other companies? How do we start thinking about these commitments, which are typically not legal or regulatory in nature but voluntary standards and best practices? 

It then segued into a “second generation” of CSR focused on how to make those codes of conduct actually achieve their goals, including through effective implementation, training, education, and monitoring. 

Now much of the focus of CSR is on a new generation of questions: What is the exposure that we have from our supply chain, and how do we define that for our product? It continues to be about risk mitigation, though, which can be legal risk, reputational risk, operational risk, or political risk. But increasingly, the suppliers and the sub-suppliers are contributing to a company’s risk, and as companies recognize that, they want to take more steps to effectively mitigate it. 

As you move through a very robust due diligence process to figure out who your supply chain exactly is – the source of the products, other service providers, everything that enables a supply chain to function – it’s apparent that there’s risk to a company at all stages because supply chains are really only as strong as the weakest link. So, it’s a constant process of due diligence, assessment and mitigation.

As I noted, CSR standards were originally mostly voluntary initiatives that companies took upon themselves to demonstrate. As there’s been more and more focus and scrutiny on companies, and as there’s been more education by the whole range of stakeholders involved in these processes and throughout a supply chain, there’s also been a significant migration of many of these voluntary standards into our legal and regulatory fabric. 

So, areas of advocacy that have now made their way into law include conflict minerals, transparency in extractive industry payments, and a real focus on issues like trafficking throughout a company’s supply chains, as we’ve seen in the past few years in the California Transparency in Supply Chains Act and the UK Modern Slavery Act. While there’s been a real maturation in terms of the public scrutiny on CSR-related issues, particularly regarding the supply chain, this also is resulting in more potential legal risk than the primarily reputational risk that existed 20 years ago. 


MCC: Expand on where those risks are currently for our readers, many of whom are chief legal and compliance officers. Where are risks heading as laws and regulations evolve globally?


Hjelm: One is clearly the development in export controls and related national security-based restrictions, both in the U.S. and globally, as are international sanctions and economic embargo laws, the enforcement of which carry the risk of huge penalties and negative publicity.  

Anti-corruption compliance is another. There are a plethora of anti-corruption laws and programs in place that impact the supply chain and the relationship of chief legal officers’ companies with vendors and third-party agents. 

Trade remedy, anti-dumping and countervailing duty cases are another – there are a lot of trade litigation matters globally, with China, third parties, third countries (like Mexico), that have the force and effect of law. 

Then there are anti-terrorism and related supply chain standards. The worst-case scenario resulting from a lack of due diligence over international trade is that a company’s supply chain serves as a conduit to introduce terrorist implements into a country’s commerce. The U.S. now has standards in place, mandated by Congress and the Department of Homeland Security, to make sure that companies batten down the hatches and take steps to mitigate against those risks.


Ambassador Feldman: There’s an increasing focus on data collection and reporting of both the voluntary and regulatory standards. Making sure that your company has the best possible inputs, that it can assess those as best as possible, and that it has a central means of information collection for various business units and segments is very important and also is part and parcel of the broader compliance programs that CSR is frequently part of. 

CSR responsibilities in a corporation can sit in a variety of places, reporting up to general counsels, public affairs, sustainability officers, or compliance officers. Increasingly, there has to be very close coordination within companies among all those various units to ensure that internal and external reporting is consistent, and there’s broad recognition of what needs to be done within a company, across its various potential silos, both for internal purposes and to communicate that effectively to consumers and external stakeholders. 


MCC: There was a time when companies did not have to worry as much about being held accountable for the acts of their third-party partners. Many countries however have passed laws and adopted regulations putting multinationals on the hook for scrutinizing and policing those activities on their behalf. What rules and regulations do companies doing business specifically in China have to worry about? What countries are the most worrisome for companies running global supply chains?


Ambassador Feldman: First, of course, multinationals need to look through their supply chain for anything relating to sanctioned countries – particularly Iran, North Korea, Burma, Sudan, and Cuba – though sanctions are highly fluid given political events, as we’ve seen with several of these countries recently. So, the company constantly needs to monitor and calibrate its engagement. Your readers are obviously aware of the full range of regulations addressing corruption and transparency, like the Foreign Corrupt Practices Act (FCPA), which also have CSR implications. And then there are some of the newer regulations particularly addressing issues like trafficking and applicable to supply chains, as in California and the UK.


Hjelm: Obviously, in China, there have been a number of cases brought against U.S. companies under various legal theories. One is the unauthorized and unlicensed disclosure of protected national security information that’s regulated by U.S. export control laws, whether by the Department of Commerce or the State Department and the Defense Department. That’s a big issue in China. 

We’ve pointed out anti-corruption laws and working with third-party vendors or manufacturers – how are you ensuring that you’re not running afoul of anti-corruption laws both here and in China and maintaining the type of vendor codes of conduct to mitigate your risks?

In terms of any of these compliance areas, whether it’s CSR, whether it’s customs and import controls or export controls, it’s an essential element of U.S. regulatory agencies and other concerned stakeholders that companies have very, very robust compliance programs, including vendor codes of conduct and auditable vendor codes of conduct. It’s not enough to serve up a compliance policy to a vendor. The regulatory agencies and the stakeholders expect that a company is going to not only manage that effectively, whether under a general counsel or a vice president for compliance and ethics, but also that they are going to audit those standards against a risk-based assessment program. 


Ambassador Feldman: Obviously, you have to know your immediate suppliers and vendors as well as possible and articulate expectations with respect to the supply chain, including sub-suppliers – and that includes export controls and sanctions, anti-corruption compliance, special sourcing requirements such as those built into government contracting, as well as CSR issues. 

There’s a training and education process; developing tools to collect information; relaying it to the supply chains; requiring your suppliers to confirm that they meet the expectations or otherwise start auditing processes or monitoring; collecting and analyzing that information to figure out, through risk assessment and due diligence, a mitigation strategy or a longer-term strategy, depending what the actual issues are that they need to deal with. Then continuing the process of oversight and monitoring and aiding through educational opportunities. 

Essentially, it is working on integrating that reporting and compliance in a sector-specific manner given the various drivers in different sectors. Once these immediate risks are mapped, companies can use some of the same tools to focus on other areas that might help them maintain or improve their corporate brand, such as sustainable sourcing. They can also use the information they are gathering to help identify the broader set of stakeholders they should consider engaging with to help identify and manage risks and, potentially, create new opportunities.


MCC: Sourcing conflict minerals has been very much on lawmakers’ radar. What’s the state of play for companies that rely on conflict minerals but are concerned about the risks of doing business in difficult places, such as the Congo and China?


Hjelm: In our practice, we have worked with U.S. issuers on conducting due diligence reviews pursuant to the laws. This is enforced by the Securities and Exchange Commission under Dodd-Frank, and there are deadlines for companies to assess whether and to what extent they have a reporting obligation to describe which conflict minerals – tin, tantalum, tungsten and gold – are necessary for the production of their products, in which case they have to conduct certain measures and report.

The problem is that it’s confined under U.S. law at least to one area of Africa: the Democratic Republic of Congo (DRC) and the adjoining countries. The challenge is that companies that produce goods may be very, very, very far removed from the process of the mining and extraction of these minerals, and, so, it’s really a difficult process and a controversial one. It’s an illustration of how far down the supply chain some mandates and legal regimes now require companies to review.

As far as working with various suppliers and supply chain vendors that may be located in various countries, the smelters of the minerals might be in China. They might be selling those minerals on an exchange, and the buyer, let’s take Apple for example, may be further removed from this smelter, yet Apple has to conduct a due diligence review all the way back into the supply chain to determine what the source of the conflict minerals are. If Apple is not able to do so, then it has an additional reporting obligation. It might even be required under the law to conduct an audit of its supply chain. 

Ambassador Feldman: This is a classic CSR issue in terms of the concern about this region and its impact and what corporate responsibility should be in it. It was driven by NGOs, concerned consumers, shareholders and a range of other actors looking for ways to convert voluntary standards into legal ones. It was a very creative effort to utilize the SEC regulatory framework for these types of issues. But this also resulted in new challenges for companies concerning these minerals as they sought to implement the SEC regulations, given the supply chains are typically so long and attenuated for some of these minerals.

The GAO publishes an annual review of the effectiveness of the SEC’s Conflict Minerals Reporting Rule, among other DRC congressional mandates, on promoting peace and security in the DRC. As part of this review, the GAO has been reviewing company filings on conflict minerals. The most recent report in August of last year says that, of all the companies that reported in 2014, 99 percent reported that they had conducted country of origin inquiries for conflict minerals. However, the companies the GAO interviewed cited real difficulties in obtaining the necessary information from suppliers because of any number of reasons: receipt of incomplete information and delays in communications involving multiple sub-tiers in the supply chain. While over 90 percent of companies reported exercising due diligence on the chain of custody, 67 percent were unable to determine whether those minerals actually came from the DRC or the covered countries, and none could determine whether the minerals financed or benefited armed groups in those countries, which was the entire purpose of the legislation. It’s a blunt tool in trying to effect the change that the stakeholders were seeking. 

At present, this reporting obligation covers only four minerals, but there could well be a continued effort by a range of stakeholders to expand that group of minerals or the countries that are involved, using this tactic in other ways. That’s something that we should be watching. 

For instance, there was a significant report by Amnesty International last month alleging child labor was used in the supply chains of key electronic brands due to cobalt mined by child laborers in the DRC that ultimately wound up in their products. Cobalt is not one of the currently covered minerals by the SEC. But is the reputational risk going to drive companies to do something more about this, and how will both the stakeholders and the corporations continue to adapt to new challenges like this? Apple, in its statement after this Amnesty report came out, noted that it was currently evaluating dozens of different materials, including cobalt, to identify labor and environmental risks, but it didn’t specifically address the issue of having due diligence measures in place for cobalt, though there has been previous reporting on its link to child labor.


Daniel F. FeldmanPartner in the international trade practice of Akin Gump, with a focus on corporate social responsibility and international trade policy matters.

Lars-Erik A. HjelmPartner in Akin Gump’s Washington, D.C., office, concentrating on customs law and policy.