Third-party vendors play a critical role in global supply chains, but they can also introduce significant compliance, financial, and reputational risk. Third-party vendors who violate U.S. trade laws can put your own business at risk of penalties and further scrutiny, including criminal charges. Identifying red flags in third-party vendors isn’t always easy. Learning how to identify those risks can help you avoid them and protect your supply chain, as well as your overall business.
Changes in Ownership, Identity, or Corporate Structure
Frequent name or entity changes are one of the simplest ways to identify a red flag in a third-party vendor. A supplier that frequently changes their name or re-brands may warrant additional review, particularly when combined with ownership changes, address changes, or other inconsistencies.
Frequent changes aren’t always suspicious by themselves. The challenge is identifying when multiple small risk indicators begin to form a larger pattern.
Companies that screen manually are at higher risk of missing if that third-party vendor is on a watchlist, as they could just be using the current name to broad match the vendor. Trade compliance solutions useautomated screening tools that will use all aliases associated with a vendor to get more accurate, narrowed down results.
Unexpected Changes in HTS Codes
Imagine a supplier has shipped the same electronic component to your company for the past year under one HTS classification. Suddenly, identical-looking shipments begin arriving under a different HTS code that carries a lower duty rate.
There may be a legitimate explanation. Product specifications may have changed, or the earlier classification may have been incorrect. However, an unexpected classification change should prompt additionalreview to confirm that the product description, technical characteristics, and duty treatment remain accurate.
Inconsistent classifications can lead to incorrect duty payments, post-entry corrections, customs inquiries, and potential penalties. They may also point to broader product-data or documentation issues that affect multiple shipments.
Transshipment Through a Third Country
Be alert to changes in routing patterns.
For example, a supplier that has historically shipped products directly from China may suddenly begin routing identical products through a third country before they reach the United States. While there may be legitimate commercial reasons for the change, unusual routing combined with inconsistent country-of-origin documentation, product descriptions, or supplier information should prompt additional due diligence.
These inconsistencies may indicate an attempt to misrepresent the true country of origin, avoid applicable tariffs, or circumvent other trade restrictions.
Reluctance to Comply with Compliance Requirements
Examples of United States trade compliance laws and programs are:
- Customs Trade Partnership Against Terrorism (CTPAT): a voluntary U.S. Customs and Border Protection program in which an entity agrees to protect the supply chain from security gaps by following their best practices and security measures
- Uyghur Forced Labor Prevention Act (UFLPA): prevents goods made wholly or in part by China’s Xinjiang region from getting imported into the U.S. under the assumption of the use of forced labor
- California Transparency in Supply Chains Act: requires retail sellers and manufacturers to publicly disclose their efforts in preventing human trafficking and slavery in their supply chains
A vendor’s unwillingness or inability to provide basic compliance information can be an important warning sign. . A third party that partakes in practices that go against U.S. trade compliance could also put your business at risk. You do not want to face penalties or put your business operations at risk because of involvement with a third party practicing non-compliant activities.
Third-party risk rarely stems from a single obvious warning sign. More often, it’s the combination of small changes in ownership, product data, routing, or documentation that deserves attention. Organizations with greater visibility into their suppliers and supply chains are better positioned to identify potential risks early, respond to changing regulations, and make more informed sourcing decisions. Utilizing a tradecompliance software can help you review and monitor your level of compliance across the supply chain, streamlining your involvement in global trade.