by Matt Kelly, Independent Consultant, Thomson Reuters
The challenges facing the commodities sector have multiplied as corporations worry much more about compliance and reputational risks. Checking suppliers and, in turn their own suppliers, require new mechanisms and collaboration. 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 that they are not unwitting participants in violating economic sanctions or tax fraud, or whether their goods are identified as coming from undesirable suppliers. Given the already complex nature of products, the impenetrable thickets of regulation and the threat from activists ready to lay siege via lawsuit or social media, these compliance and reputational risks add to a vastly increased burden faced by commodities firms.
“Clearly companies have a handle on financial risks, but if they’re operating in emerging markets they’re dealing with multiple issues,” says Mr Talib Dhanji, a partner at EY and leader of the firm’s commodities practice. “The key is to be on top of the different ways that people can commit fraud.”
Trading firms have a somewhat different set of risks from their industrial customers, because many firms do not take physical possession of the goods in question; they only trade futures and hedging instruments with other firms or customers. The frauds they might encounter, then, are more about unreliable promises than contaminated goods.
“Just because you get a nicely published document, that doesn’t mean it’s appropriate,” Mr Dhanji says. “You’ve got to have the right quality controls in place.” Trading firms are better positioned to put those controls in place, both because they face heavy oversight from the US and European regulators, and because the thin profit margins in commodities can mean severe financial pain if they fall victim to unscrupulous dealers.
A delivery that turns out not to meet specifications on quality, place of origin, or volume, for example, might mean a hedging instrument based on that shipment is invalid or insurers would not cover the loss. That threat tends to focus the trader’s mind.
Corporations that consume raw materials are in a more difficult spot. They are facing more public scrutiny and regulatory oversight than ever before, and many still do not have the right processes or structures to manage these new commodity risks effectively.
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, as well as new collaboration among treasury, risk, procurement, and compliance departments to do the task well.
Compliance or risk committees have existed in many large organisations for years, to ensure everyone is aware of various regulatory and enforcement risks the business faces and the practical challenges of getting business done with those concerns hovering around.
Supply chain risks are no longer 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.
Excerpt from Matt Kelly’s White Paper – New risk challenges redefine commodities business
About the Author
Matt Kelly is an independent consultant who studies corporate compliance, governance, and risk management issues. He maintains a blog, RadicalCompliance.com, where he shares his thoughts on business issues; and speaks on compliance, governance, and risk topics frequently. Kelly was named as ‘Rising Star of Corporate Governance’ by Millstein Center for Corporate Governance in inaugural class of 2008; and named to Ethisphere’s ‘Most Influential in Business Ethics’ list in 2011 (no. 91) and 2013 (no. 77).