COVID-19 has clearly affected supply chains worldwide. The most disruptions are being caused by factory-closures, that are resulting in lack of parts and components. Customs and port operations have slowed, leading to glut in some segments of supply chains and gaps in others. The shipping industry has been hard-hit due to transportation restrictions as well as its dependence on Asian labor. As countries in Asia put in place mandatory lockdowns, the ripple effects went beyond their shores.
For companies in the pharmaceutical sector, a major concern is complying with export control bans on certain countries, and governments setting up broad controls and then carving out/explaining exemptions, such as for humanitarian assistance. For global companies, whether American or European, keeping up with the changing regulatory carve-outs has added yet another task for teams focused on maintaining oversight and operations. Some extra steps have been required to clarify the scope of a given country’s export ban versus the items actually being shipped and authorizations or exemptions available.
Supply chains of dual-use items, including defense-related dual use items, face some additional challenges. Shippers and their customers had to increase security as well as scrutiny of consignments against criminal networks who remain active in diversion of both dual-use and regular goods. Embargoed countries and their agents are expected to remain active in exploiting opportunities to circumvent the bans, using humanitarian aid as a conduit to access goods and technologies.
The compliance function, however, has not been disrupted. Compliance professionals have quickly adapted to remote access, under-lining the often-unrecognized truth about export controls and sanctions: a vast proportion of functions performed by regulators and by industry compliance professionals is “paper-based” or records-scrutiny. Neither party requires physical access to the goods they are licensing or for doing any due diligence.
The experiences during the pandemic are likely to have several different and simultaneous impacts. First, management may become more open to the idea of tele-working for compliance professionals, but at the same time, place more restrictions on their travel to manufacturing or R&D sites: “if compliance can be done remotely, why would compliance professionals need to travel?” Second, for teleworking to become the norm, management would need to invest in secure communication platforms, training personnel in their use, and establishing new processes to accommodate telework. Third, in certain segments of the dual-use and defense industry, regulators have been reluctant to make exceptions for transnational data transfers and cloud storage by companies, even when the sites are secured, and personnel can only access these through secure servers. But if personnel have to be provided access from homes, a whole new set of security issues have to be dealt with, to assuage the concerns of regulators. Finally, when it comes to cross-company communications and collaborations, manufacturers might have to establish screening protocols for verifying the security platforms and practices of their partners/collaborators: much like banks in one jurisdiction verifying the trustworthiness of correspondent banks for AML (Anti Money Laundering) compliance.
Enforcement function, on the other hand, does require some physical access, as does movement of cargo at key points: transportation, warehouses, docks and ships. However, trade-facilitation measures over the past decade have emphasized online filing by industry. This follows WCO’s recommendations for reducing face-time between industry and customs officials, as one of the ways to reduce corruption. At the same time, computerization of record helps in more efficient use of scarce enforcement resources: Customs and port authorities can mine this data for developing risk-profiles, identifying anomalies in transactions and focus physical checks on a smaller sub-set of high-risk consignments. The enforcement experience during COVID-19 may well accelerate this trend. However, customs officials are already divided about the minimization of human footprint in enforcement. Lessons from the pandemic experience would need to be analyzed further.
Overall, a few trends are already visible in discussions about supply chains. First, the need to diversify sources of materials, unfinished and finished goods – away from over-dependence on China, for instance. Second, the need to establish Digital Supply-chain Management (DSM) for some if not all parts of a company’s supply chain. In almost all sectors, some companies are already using predictive analytics to optimize inventory allocation, forecast demand and have visibility across different functions. For companies dealing with dual-use products, where diversion can have consequences well beyond economic, DSM would be an option worth exploring. This would require exploring how artificial intelligence, machine learning, internet of things, and robotics can help in tracking products. Distributed ledger technology (DLT) – commonly referred to as blockchain – can then help secure the information exchanges (transactions data) generated by these. Third, regulators, whether national or inter-governmental, have to become more open to the idea that these new technologies need to be harnessed soon if they have to understand how the regulated businesses are organizing themselves.
Black Swan events always impact the way we organize our societies and our businesses. Exactly how this pandemic will change the fields of supply chain management and compliance will become visible in the coming months, once the economy re-opens.