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Supply chain compliance with Michael Rasmussen

The extended enterprise

The modern organization can no longer be defined by its traditional boundaries. As Michael Rasmussen, GRC Pundit & Analyst, astutely identifies in a recent webinar collaboration with GAN Integrity, today's enterprises are intricate webs of third-party relationships that extend far beyond the walls of any single company. Suppliers, vendors, contractors, and a host of other external entities are now integral parts of how businesses operate.

However, this increased interconnectedness comes with a significant caveat: the risks and compliance failures of these third parties can have severe repercussions for the organization. A vendor's data breach, a supplier's unethical labor practices, or a consultant's corrupt dealings can all inflict serious financial and reputational damage. In Rasmussen's words, "Their issues are your issues. Their risks are your risks. Their compliance failures are your compliance failures."

The imperative, then, is clear. Organizations must develop robust systems and processes to govern and manage this extended enterprise. This includes monitoring not just immediate third-party relationships, but also the nth-level suppliers and subcontractors that are nested within complex supply chains. Without this comprehensive oversight, companies are left exposed to a multitude of risks they may not even be aware of.

The task of managing the extended enterprise is made all the more daunting by the frenetic pace of change in the modern business environment. Rasmussen paints a vivid picture of this chaos, noting "Laws and regulations are changing. Global financial services firms are dealing with 257 regulatory change events every business day, coming from 1,217 regulators around the world."

This rapid regulatory evolution is particularly pronounced in areas like environmental, social, and governance (ESG) standards and data privacy requirements. Companies are struggling to keep pace as new rules and expectations emerge around issues like climate risk disclosures, human rights due diligence, and the handling of personal information.

Compounding this challenge is the fact that many organizations still rely on siloed, disconnected approaches to third-party risk management. Procurement, IT security, compliance, and other functions often operate in isolation, each using their own tools and methodologies. The result, as Rasmussen illustrates, is a critical lack of holistic visibility: "Nobody has that view into the supplier relationship, the vendor relationship that brings together the full risk exposure because everybody's got these little fragmented views."

The dangers of this fragmentation are heightened by the deeply interconnected nature of third-party risks. A seemingly minor compliance issue in a far-flung corner of the supply chain can quickly escalate and cascade, causing widespread disruption. Rasmussen drives this point home with a stark hypothetical: a case of modern slavery at a supplier site leads to a retaliatory ransomware attack from hacktivists. The message is sobering - in today's hyper-connected business ecosystem, risk events cannot be viewed in isolation. View the webinar to understand the full context.

The maze of regulatory requirements

As if the inherent complexity of the extended enterprise wasn't challenging enough, organizations must also navigate a rapidly expanding web of regulatory requirements related to third-party oversight. The global scope and specificity of these rules—which span areas as diverse as ESG reporting, supply chain due diligence, anti-bribery and corruption, and data privacy—are worth recognizing.

In Europe, legislation like Germany's LKSG and the EU's Corporate Sustainability Due Diligence Directive (CSDDD) are raising the bar for how companies monitor and manage social and environmental risks in their value chains. These laws have far-reaching implications, impacting not just European firms but any multinational that does business on the continent. As Rasmussen notes, "These have global impact on organizations, and around the world, not just to those that are headquartered in Europe."

The United States has its own formidable array of third-party risk regulations, from the Foreign Corrupt Practices Act (FCPA) to the Dodd-Frank conflict minerals disclosure requirements to California's Transparency in Supply Chains Act. The common thread running through many of these rules is a focus on rooting out unethical and illegal conduct in companies' external business relationships. Rasmussen underscores this point with a telling statistic: "Over 90 percent of FCPA enforcement actions and other bribery enforcement actions involve some type of third party that was involved and implicated in the bribery schemes of some nature."

Taking reasonable steps to manage third-party risk

In the face of these multi-faceted regulatory pressures, organizations have a clear duty to establish robust third-party risk management programs. As Rasmussen frames it, "Businesses must take reasonable steps to ensure they manage risks and maintain ethical environments and relationships across the extended enterprise."

What does this look like in practice? At a minimum, companies need to implement rigorous due diligence processes to vet potential third-party partners and monitor their conduct over the life of the relationship. This must go beyond superficial "check-the-box" exercises to encompass in-depth examination of factors like:

  • Ownership structure and beneficial ownership
  • Reputation and track record
  • Financial stability
  • Compliance with relevant laws and standards
  • Alignment with the company's ethics and values

Crucially, this due diligence cannot be a one-and-done affair. Businesses need "extensive, ongoing, and continuous due diligence in these third party relationships to be able to manage and govern them appropriately." This means regularly reassessing risks, auditing performance, and investigating any red flags or anomalies.

Of course, executing this level of sustained scrutiny across dozens, hundreds, or even thousands of third-party relationships is a mammoth undertaking. It requires significant investments in people, processes, and technology. But as the regulatory landscape continues to evolve and the consequences of third-party failures grow ever more severe, it is an undertaking that no responsible business can afford to shirk.

The extended enterprise is the new reality of commerce in our deeply interconnected world. Managing it effectively is not just a compliance obligation - it is a strategic necessity for any organization that hopes to thrive in an age of relentless change and unforgiving risk.

Taking a top-down approach to third-party risk

Given the scale and complexity of the extended enterprise risk landscape, a piecemeal approach to managing third-party relationships is no longer viable. Organizations need to take a top-down, strategic approach that integrates the various strands of third-party risk management into a cohesive whole.

At the heart of this approach is the development of a comprehensive third-party risk management (TPRM) strategy. This strategy should be spearheaded by a central function, such as Corporate Compliance or Ethics, but it must also deeply involve other key stakeholders. Procurement, IT, compliance, ESG, and the business units that own vendor relationships all have critical roles to play. As Rasmussen puts it, the goal is to "build this cohesive strategy that says, how do we manage this? This isn't the first time the organization's dealt with this."

A robust TPRM strategy should encompass the full lifecycle of third-party relationships, from initial onboarding and due diligence through ongoing monitoring and eventual offboarding. It needs to define clear policies, procedures, and governance structures for identifying, assessing, mitigating, and reporting on risks. Importantly, it must also establish the data and technology architecture needed to support these processes efficiently and effectively.

The benefits of a contextualized 360-degree view

One of the key benefits of a mature TPRM program is that it provides a contextualized, 360-degree view of risk across the extended enterprise. By breaking down silos and integrating risk data from multiple sources, organizations can gain a much more complete and nuanced understanding of their third-party exposures.

This holistic visibility enhances risk awareness at both the tactical and strategic levels. Operationally, it allows different departments and functions to share intelligence and coordinate their risk management activities more effectively. A compliance officer investigating a bribery allegation, for example, could quickly pull in data from procurement on the vendor's past performance and from IT on any security incidents.

Strategically, a 360-degree view gives leadership the foresight to anticipate and proactively address emerging risks on the horizon. By continuously monitoring the extended enterprise for early warning signs - such as deteriorating financial metrics, negative media coverage, or geopolitical upheavals - organizations can stay a step ahead of potential disruptions. This agility is essential when risks can emanate from any corner of the value chain at any time.

Perhaps most critically, a contextualized understanding of risk enables organizations to spot troubling patterns and vulnerabilities that might otherwise go undetected. Seemingly small or isolated incidents, when viewed in aggregate, can point to much larger systemic issues. Armed with this insight, companies can take decisive action to identify and contain problems before they spiral out of control - the essence of resilience.

Leveraging agile technology for efficiency and defensibility

Of course, achieving this level of risk intelligence is easier said than done. The extended enterprise generates a tidal wave of structured and unstructured data that can quickly overwhelm traditional manual processes and legacy systems. To keep pace, Rasmussen asserts organizations need agile, purpose-built technology solutions for third-party risk management.

Importantly, these solutions must be designed with usability in mind. They need intuitive interfaces and streamlined workflows that empower business owners and frontline staff to engage with the TPRM process, not just back-office risk experts. "We need technology that is highly usable, not just for back office subject matter experts on risk, third party risk, but for the line of business owner that owns that relationship for that third party vendor supplier themselves to interact with."

Equally critical is the ability to implement and scale these solutions rapidly. With new risks and regulations emerging at a breakneck pace, organizations can't afford to spend months or years on complex IT projects. They need tools that can be deployed quickly, configured easily, and updated seamlessly as requirements evolve. This agility is key to achieving a low total cost of ownership and realizing value from TPRM investments.

Under the hood, best-in-class TPRM solutions are powered by advanced analytics and machine learning capabilities that can make sense of the extended enterprise's disparate risk signals. They need to be able to ingest and integrate a wide array of data points - from due diligence questionnaires and financial reports to real-time feeds of sanctions lists and adverse media - and transform this raw input into actionable intelligence. In Rasmussen's words, the goal is to "take all these distributed intelligence and information points, integrate, analyze, contextualize these and build out action items." A holistic view is no longer an advanatage, but a clear requirement.

Finally, amid escalating regulatory scrutiny, TPRM technology must provide a defensible system of record. It must meticulously document every aspect of the third-party risk management process, from initial due diligence and risk assessments through ongoing monitoring, issue management, and remediation. This audit trail is essential for demonstrating compliance to internal and external stakeholders and, as the Morgan Stanley FCPA case illustrates, it can be a powerful shield against legal and reputational damage.

Managing third-party risk in the extended enterprise is a daunting challenge, but it is also an immense opportunity. By taking a top-down, technology-enabled approach to TPRM, organizations can not only protect themselves from downside risks but also forge more agile, resilient, and sustainable partnerships. In a world where no business is an island, that is the key to long-term success.

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