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Monday
Apr292013

The Dhaka tragedy: Another look at supply-chain audits

Like many, I have followed the news of the deadly Rana Plaza building collapse in Dhaka, Bangladesh with sadness and dismay.

Only five months after a fire at another clothing factory in Tazreen, Bangladesh killed 112 workers, this apparently avoidable and predictable human tragedy resulted in around 380 deaths with another 1,200 people injured.

We don’t know the full facts and any kind of conclusions may prove to be flawed. Yet the inevitable circle of blame is now spreading from those closest -- the building owner, factory owners, building inspectors -- to wider players. While those closest are surely culpable, so too are any regulators who failed to act.

There is already pressure on those North American and European businesses linked to the factories. After many years of advising companies on third party due diligence programs, I am painfully aware of the challenges. At least two of the factories had been reviewed by a European specialist safety auditor, whose managing director has been quoted as saying, “It’s very important not to expect too much from the social audit."

This comment reminded me of my time as a trainee financial auditor 25 years ago, when we talked about the “expectation gap” in financial audit: society expected more than financial auditors’ scope gave. It seems to me that there is a similar -- and dangerous -- expectation gap here: narrowly with respect to factory safety audits, but wider in relation to supply chain management.  The time has come for the scope of supply chain safety audits to be reassessed: declaring a factory “safe” (according to society perception of the social audit function) when it is housed in a building apparently built without proper planning consent and of unsound construction for the site -- or even on a site unsuitable for such a construction -- cannot be appropriate.

Professional skepticism also leads me to question the role of corruption (both nepotism and bribery) in allowing Rana Plaza to be built where and how it was, and to remain open despite apparent signs of impending disaster. There were warning signs about the suitability of the site for development, planning consent or lack thereof, building design and construction, apparent failure of authorities to act despite irregularities, failure to evacuate building and area despite sign of imminent danger, and claims by local journalists that they were turned away after cracks appeared but were certified as “safe” by inspectors shortly before collapse.

Corruption prior to American and European businesses contracting their production to factories in Rana Plaza would be too legally remote for FCPA or U.K. Bribery Act liability. Probably any ongoing but secret corruption that enabled the factories to remain open would also fall outside the scope of current legislation, although arguably the pressure of production deadlines and low supply prices negotiated by retail clients gave them undue benefits derived from any improper action by the building and factory owners.

Regardless of legal liability, this disaster calls into question the quality of third party compliance programs -- can a compliance and ethics program really be regarded as effective if it fails to identify and reject a supplier potentially engaging in widespread and regular corruption to keep production costs down? Of course, it has not yet been proven that such corruption was taking place, and only time -- and diligent investigation -- will show exactly how clearly catastrophically unsafe conditions systematically escaped local regulators. The fact that the factory owner was a prominent local politician may eventually answer some of these questions, but as a Politically Exposed Person (“PEP” in risk geek-speak) was involved in these operations, due diligence awareness should have been heightened.

It is easy to criticize others: I am also reminding myself -- as a consumer -- of my responsibilities, including exercising my own due diligence on products I choose to buy.

_________

John Higgins is an ethics and compliance advisor.