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Innovative Technological Solutions to Enhance Supply Chain Integrity and Transparency
Illicit trade involves money, goods or value gained from illegal and otherwise unethical activity. It encompasses a variety of illegal trading activities, including human trafficking, environmental crime, illegal trade in natural resources, intellectual property infringements, trade in certain substances that cause health or safety risks, smuggling of excisable goods, trade in illegal drugs, and a variety of illicit financial flows. These activities generate a wide range of economic, social, environmental or political harms. Estimates of the global retail value of illicit trade vary, but recent estimates by Global Financial Integrity (GFI) place the total at US$ 650 billion for goods, and at US$ 2 trillion, if illicit financial flows are included.
Illicit trade distorts markets, imposes heavy regulatory burdens and associated costs, and is a big source of revenue for transnational criminal networks. Illicit trade favours short-term profit over human development and longer term growth, drives global economic disparities, and destabilizes states.
Building on its work during the previous three years on the measurement of illicit trade and the evaluation of its political, economic and social impact for the public and private sectors, this year the Council focused on an issue which is becoming a primary concern for business – supply chain integrity and transparency.
A large proportion of illicit trade uses the infrastructure of the legitimate economy, and in particular global supply chains and the global financial system. This is a situation that governments and law abiding citizens can no longer tolerate. In the current legal, social and business environment, the integrity of supply chains cannot remain a marginal concern. Shareholders, consumers, civil society and government share growing expectations that company executives will be knowledgeable about, and accountable for, what happens in their extended supply chains, and do not deliberately use them to shift profits across borders, to avoid or evade taxes at will.
Illicit traders, traffickers and unscrupulous business actors all benefit from global supply chains to launder or legitimize a wide array of illegal activities, with potentially devastating social, environmental and economic impacts.
Developing a successful brand risks becoming a magnet for counterfeiters, and also that counterfeit items might infiltrate legitimate supply chains. The growing complexity and interconnectivity of supply chains makes it very difficult to monitor suppliers and ensure they respect labour rights and safety standards, use environmentally friendly practices, and provide safe and reliable components and raw materials.
Although not directly responsible for any illegal acts committed by producers and importers, shipping and logistics companies are nevertheless increasingly expected to ensure they are not transporting illegal shipments. The freight forwarding and brokering industries likewise need to ensure the authenticity of documents in the cross-border goods clearance process. Retailers who want to ensure they do not sell products that are not legitimate, safe and ethically produced, have limited abilities to monitor the flow of incoming goods.
A few examples illustrate the scale of the problem:
- According to various studies, including a collaborative investigation by the World Health Organization and Interpol1, 50% of medications for malaria and 10% for tuberculosis are fake2.
- Illegal fishing represents approximately 18.5 billion tons per year.3 Meanwhile, tests in stores and restaurants showed that fish was mislabelled 50% of the time.4
- The number of counterfeit incidents detected in the US defence and industrial supply chain rose from 3,868 incidents in 2005 to 9,356 in 2008, due to “demonstrated weaknesses in inventory management, procurement procedures, recordkeeping, reporting practices, inspection and testing protocols, and communication within and across all industry and government organizations”.5
In a shifting legal, social and business environment, supply chain integrity and transparency are becoming a primary concern for business.
Being responsible and accountable. Shareholders, consumers, civil society and government have growing expectations that company executives will be knowledgeable about, and accountable for, what is happening in their extended supply chains.
Growing regulations. In many industries, these growing expectations are being translated into a dramatic increase in domestic and international regulations, and there is a corresponding need to harmonize these regulations to avoid legal confusion when managing global supply chains.
Impact on business in developing countries. There is a concern that ever-growing regulations to curb trade in illicit products alter the conditions of competition, to the disadvantage of suppliers from developing countries. The costs of compliance with new regulations may unfairly penalize suppliers in developing countries and act as protectionist barriers to international trade.
Reputational risks. Companies that do not proactively address the environmental and social practices of suppliers at all tiers of their supply chain face significant risks to their reputations and product liabilities, which may be exacerbated through the social media and by other means of instant communication.
Emerging markets. Emerging markets are seen as the main engine of growth in many business sectors. Yet the relatively high level of corruption in these markets can significantly affect supply chain integrity at all levels, from production to retail.
Incentives for illicit trade will increase, not decrease. While production of goods continues to be commoditized, there will be a continuing trend towards industries and markets that capture higher profit margins. High margins are generated through innovation, brand development and ethical business practices. But these intangibles are invisible in the finished product and therefore provide free-riding opportunities for infringing parties.
Innovative Solutions to Illicit Trade
Systemic approaches are effective in solving the multi-faceted problems of illicit trade, and examples of collaborations between the private sector, governments and civil society have demonstrated that multi-stakeholder initiatives can prove successful. New technologies currently in development are becoming more sophisticated, allowing new initiatives to be seamlessly implemented. For example, as mobile communication, product tracking and authentication technologies converge, new collaborations can emerge more quickly and naturally. Two connected phenomena are at play:
- Bringing higher visibility to international supply chains: since the 1990s there has been growing interest in addressing the needs of the market by increasing the safety and security of products moving through global supply chains. The latest developments include new coding and authentication technologies to ensure that any item can be unambiguously and securely identified and tracked, and its integrity verified. Agreed standards and norms and the convergence of tracking and mobile communication technologies allow more transparency in supply chains and improved focus on problem areas.
- Enriching information flows: mobile devices enable a large number of stakeholders, potentially the whole population, to access relevant traceability and provenance information. Each time a product or item is checked, a feedback loop is created enriching the flow of information and reinforcing the system. Due to the quantity of data which can be generated by tracking analytics, mapping and the understanding of illicit markets can be made much easier and more precise than it used to be.
The shift to a data-centric world represents a change of paradigm in the way that illicit trade, that exploits the infrastructure of the legitimate economy, can be addressed:
- Digital footprints and accountability: when coding and authentication technologies become part of the process to record relevant traceability information, stakeholders are held accountable, and successful fraud, such as falsification of paperwork, becomes much more difficult because the coherence of the digital trail must be maintained. Readable tags become the equivalent of digital signatures, testifying that, for example, the supplier has respected environmental or workers’ rights requirements.
- Turning a business risk into a business opportunity: investments in supply chain transparency and integrity can deliver an excellent return on investment if they go beyond addressing niche markets of ethical consumers or disrupting criminal organizations. The same product tracking and authentication technologies can be used to address the needs of corporations regarding integrity of supply and distribution channels, safe procurement, brand protection, developing a direct communication channel, and market and consumer analytics. They enable companies to take a global vision on their operations, mitigate risks, and identify and quickly seize new business opportunities.
However, no matter how advanced the technology is, it does not represent a solution in itself. It may aid or enable increased integrity, accountability and transparency but will not eliminate illicit trade per se, and only allow companies and governments to protect consumers and markets more efficiently.
Although the move towards a data-centric world allows a number of components of illicit trade to be assessed, it also opens the way for new forms of illicit activity which circumvent, attack, or take advantage of, trusted digital infrastructures. A constant cooperation between the public and private sectors is, therefore, crucial in order to develop timely solutions, exchange information, and assist all parties in the fight against illicit trade.
A digital identity framework needs to be developed at the cross-council level to address certain urgent issues related to cyber security in general, and illicit trade in particular. One possible solution would be an Identity Ecosystem, which would allow the creation of an environment where individuals, organizations, services, and devices can trust each other because authoritative sources establish and authenticate their digital identities.
Transparency in the Global Financial System
The Council proposes five recommendations to increase transparency in the global financial system:
- Beneficial ownership: every nation and every financial institution should know with whom it is doing business. This a necessary step toward transparency in the global financial system, as already recommended by the Financial Action Task Force (FATF) in Paris.
- Country-by-country reporting: full reporting of sales, profits, and taxes paid should be required of all multinational corporations, in each jurisdiction where they are established.
- Automatic exchange of tax information between countries: a global standard should be adopted, and the European Union Savings Tax Directive would be a good base model for such an initiative.
- Curtailing abusive trade mispricing: both importers and exporters should be required to confirm on commercial documents that there has been no trade mispricing for the purpose of profit shifting or manipulating customs duties and taxes.
- Tax evasion should become a criminal offence: while in many countries it is a civil offence, the next logical step is to make tax evasion a criminal offence under any circumstances, whether connected to a money laundering scheme or handling proceeds from domestic sources, or from abroad.
At the World Economic Forum Annual Meeting 2012 in Davos, keen interest was shown in the subject of illicit trade, particularly supply chain risk and the application of new technologies. In both of these areas, clear opportunities exist for stronger collaboration with other Global Agenda Councils, the Risk Response Network, and associated companies and regulators. The Council shared its recommendations and best practices, received feedback on them, and explored the interests of various stakeholders in further collaborations on the issue of illicit trade.
Major Innovative Solutions Required: Illicit Trade – This roundtable discussion included participants from three companies: a European port authority; a national export promotion agency; and a national drug enforcement agency. Participants shared their perspectives, with particular attention to trade chain security technology, illicit finance flows, and the need for action by companies and authorities dealing with trade infrastructure and supply chains.
Transforming the World as We Know It: The New Technologies Revolution – This cross-Council roundtable discussion included participants from the Global Agenda Councils on Illicit Trade, Emerging Technologies, Genetics, Future of Government, Benchmarking Progress, Digital Health, Internet Security, Organized Crime, Robotics and Small Devices, ICT, and Rule of Law. The majority of participants were from companies or applied research institutions. Discussion focused on mapping new technologies, digital security, and new approaches to behavioural change. There was strong interest in continued dialogue and cooperation between these groups.
The Council has continued to populate the website, www.illicittrade.org, which it created in 2010. The website serves as a repository for materials produced by the Council and other relevant information on illicit trade and aims to raise public awareness globally regarding the threats posed by illicit trade.
- Illicit Trade Estimates (updated in January 2012).
- Broad, Steven, “Innovative solutions required to fight the dark side of commerce”, 28 January 2012.
- “Responses to Illicit trade: Compendium of Case Studies and Best Practices”, January 2012.
The Council plans to pursue a multi-pronged communication/advocacy strategy to increase awareness of, and action against, illicit trade within the more established components of the World Economic Forum, particularly through the Risk Response Network, supply chain risk collaboration, new technology partnerships, and the initiative on corruption. This could be complemented by adding other groups that have so far been harder to reach, for example, financial systems and those working on rule of law and international governance.
The opinions expressed here are those of the individual members of the Council and not of the World Economic Forum or any institutions to which they are affiliated.