Product level compliance is coming
We have all come to terms with the fact that compliance is central to what we do - and that compliance mistakes are disproportionately costly.
And this is relevant to the whole sourcing process - not just the compliance teams. Treasury, procurement, finance and logistics teams - organisations are going to need a joined-up approach.
Product level compliance is a new requirement
Compliance has historically covered:
Counterparties (who are we dealing with?)
Trades (are these legitimate business transactions?)
The new compliance "frontier" is:
Products (what's in them, where has it all come from?)
Here's a scary story:
The US prohibits the import of products that have been made with forced labour in the western Xinjiang region and other areas in China under the Uyghur Forced Labor Prevention Act of 2021.
"Import of thousands of Volkswagen cars blocked over claims of forced labour in supply chains"
Financial Times: "US Porsche, Bentley and Audi imports held up over banned Chinese part"
Click the links to read the full articles (FT is behind a paywall).
This is a "guilty until proven innocent" model.
1000s of cars were held up because of a suspicion that a small electronic component might have been sourced from a supplier located in Western China.
So this is a supply chain thing?
Yes it is. There is both live and new legislation that requires businesses to be able to show that nothing in the goods being sourced is a product of slavery, and that any claims to be made about the goods can be substantiated with evidence.
We call these two new checks:
Proof of source
Proof of claim
These two proofs apply to the products that your business is sourcing. And the implications of obtaining (or not obtaining) these proofs are profound.
Compliance's new frontier - implications
Putting these into context:
Counterparty checks:
This compliance requirement is normally handled with periodic (eg: annual) reviews of a supplier.
Questions to be answered are: Who owns you, who runs you, what are your policies, sanction checks, and nothing adverse being found in the media.
Transaction checks:
This typically arises each time there is a payment to make.
Most transactions sail through, but when there is a question, it is typically handled with paperwork that the buyer has in hand (invoice, purchase order, transport document etc).
So the above two checks can be done easily by the buyer and initiated centrally.
Counterparty checks are carried out by the compliance team who vet suppliers and file away their conclusions. Transaction checks are done on a reactive basis, and the paperwork needed (invoices, purchase orders, transport documents) to ensure that things go smoothly is already in the buyer's files.
But products have unique supply chains
Yes.
Product-level compliance cannot be done at any level above the product itself. Each product needs its own "proof of source" and "proof of claim" paper trail.
But that's crazy - that's 100,000s of documents?
Yes it is.
Imagine a factory making t-shirts. Two styles are being ordered, made and delivered in the same shipment and in the same container by the same factory.
But t-shirt (1) is made of organic cotton sourced in China but not in Western China; and
t-shirt (2) is made of recycled polyester sourced in India.
Two completely separate sets of paperwork within the same shipment from the same supplier.
Cash against compliance - the solution
Cash against data platforms, like PrimaTrade, have the solution.
Cash against data is already endorsed for supply chains of manufactured products. Suppliers provide documents and then self-digitize those documents to lift off the data that is on them, warranting the data and are then paid against the data - "cash against data". There are huge efficiencies arising from this process.
And the same approach can be extended to compliance - or "cash against compliance".
PrimaTrade's platform can be used to ask for as many documents as a buyer wants, including proof of source and proof of claim. Suppliers provide documents against the list requested, converting the documents to useful data which can be automatically checked, and the document/data package is then stored to provide the evidence of the two proofs for each of the products in the shipment.
And the supplier's performance can be linked directly to payment - which will provide the control needed to ensure that compliance is properly done.
Do we really have to do this?
Yes.
The list of existing and new laws is long.
Proof of source - modern slavery - examples
Germany: Lieferkettengesetz (German supply chain due diligence law)
EU: CSDDD, the EU Corporate Sustainability Due Diligence Directive
EU: ESPR, the new ECO digital passport (product-level), required in 2026
US: Uyghur Forced Labor Prevention Act, and the active operation of the Forced Labor Division of CBP, implementing WROs since 2018
Proof of claim - consumer advertising - examples
UK: Competition and Markets Authority actions (see here) under general consumer protection legislation
EU: GCD, the EU Green Claims Directive (see here)
US: Federal Trade Commission actions (see here) under general consumer protection legislation
What do I do next?
You may well find that there is already a team within your business that is collecting documents from suppliers, perhaps filing them on a server via multiple directories and keeping a control sheet in Excel. This is how product-level compliance usually starts.
But this is not scalable and has the buyer doing all the work. The efficient approach is to have a process that:
Automatically requests documents from suppliers needed for each product (or set of products)
The supplier uploads those requested documents and digitizes them - which means extracting data from the uploaded documents to make them useful
Checks the extracted data against what's expected, stores the documents and reproduces them on demand.
Links the accurate provision of the paperwork to payment.
PrimaTrade has the platform that delivers this process - and it is live and available now - handling 100,000s of documents per year across 26 countries (Dec 2024).
Contact us here to understand more about this area - and to see if there is a path to a scalable and integrated future for product-level compliance.