a quick overview of how US companies deal with Foreign Contractor Compliance

1. Foreign Contractor
Compliance
March 2, 2016
Team 11
Baqer Al-Shakhs
Farzia Kaufman
Hien Nguyen
William Talmage
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2. Agenda
Background: Contract Manufacturing
Foreign Contractor Compliance: What? and Why?
Non-Compliance
Red Flags
Successful Compliance Program
Mechanisms to Ensure Rules are Followed
Takeaway Points
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3. Background
Contract Manufacturing:
The process of hiring a manufacturing firm to produce one or more components,
assemblies or completed products.
Reasons for Contract Manufacturing:
● Expertise
● Lower Cost
● Speed to Market
● Innovation Possibilities 3

4. What is Foreign Contractor Compliance?
Foreign Contractor Compliance refers to the area of Management and Law that deals
with issues ranging from forced and coerced labor (FAR and California Transparency
in Supply Chains Act) to governmental bribery and improper recordation (FCPA).
Many countries have enacted laws that attempt to manage the actions of companies
utilizing Foreign Contract Manufacturers.
U.S.A. - Foreign Corrupt Practices Act, Federal Acq. Register anti-trafficking, FDA
Regs.
U.K. - Modern Slavery Act
European Union - Directive of the European Parliament and of the Council Concerning
Various Disclosures. 4

5. Why focus on Foreign Contractor Compliance?
Corruption not only affects workers but also firm’s ability to conduct business
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6. Non-compliance: Case of NIKE, just do it!
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7. Nike’s Manufacturing Scandal
Imports: 1964 (4%); 2014 (98%)
Problems revealed in 1990s
In 1991 in Indonesia: Low wages and poor working condition (by Jeff Ballinger)
In 1992, Indonesian worker wage: 14 cent/hour (Ballinger)
Protest at Barcelona Olympic Games in 1992, provoke mainstream media attention
Response from the company?
DO NOT own the factories ⇒ NOT responsible for the problem
(Phil Knight, CEO/Co-Founder).
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8. Scandal cont’d
In 1996, scandal related to child labor in Pakistan
“Six cents an hour" (Life Magazines)
Reaction?
Deny: Claimed the photo was staged
Defer: Contractor failed to comply
Excuse: Breach of the code due to large order
Later in 1998, the CEO was forced to admit, in speech
“Nike had become synonymous with slave wages, forced overtime and
arbitrary abuse"
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9. NIKE: has it got better?
2002-2004, ~ 600 factory audits
World Cup 2006, photos of Pakistani children stitching soccer balls revealed
In 2008, “match rivals’ cost and margin advantages" ⇒ rushed to new supply chain in Bangladesh,
Nike had reduced its footprint in Bangladesh from 10 to 4 factories in 2013.
3 months after, the tragedy of Rana Plaza Collapse (Bangladesh) in April 2013, killed 1,129 people.
What were the reactions? (other companies and NIKE).
Wal*Mart and 170 other companies chose to stay, signed agreement pledging to draw up safety
standards and help fund improvement.
NIKE DID NOT join the force. It claimed it can be better use its resource in countries where it has bigger
footprint!
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10. Consequences of Non-Compliance
Cost of non-compliance
- Brand damaging
- Pressure from consumer
advocacy group
- Pressure from NGO
- Class action lawsuit
Why is it so hard to comply?
● Cost, cost and cost!
○ Pressure from matching rivals' cost and
margin advantages.
○ It costs more in term of money, time and
effort to set up a compliance factory.
● Due diligence & inspection
○ Factory owners: trick, cheat, or bribe
● Corruption
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11. Caution Indications
High-risk countries
Disregard for anti-bribery laws
Dependence on third-parties for government
related affairs
Payments to government officials “representing” third
party
Payments in cash
Excess commissions or compensation
Insistence on a particular supplier 11

12. A Successful Compliance Program
Case Example: Levi Strauss & Co.
Established Terms of Engagement (TOE)
Financially rewards suppliers who score high on TOE Assessments
Supports International Labor Organization’s Better Work program
Developed a Worker’s Rights Grant
Raised awareness of stigma and initiated community advocacy
Publicly released list of all contract and licensee factories associated with brand
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13. Mechanisms to Ensure Rules are Followed
● Know what you are getting into: conduct risk assessment and follow through with due
diligence.
○ 3rd party organizations can also provide due diligence and other similar services
● Assignment of Managerial and Governance Responsibility. Enact and enforce
meaningful policies.
● Establish your rights in the contracts made with Suppliers (Audit rights, cooperation,
action plan.).
○ Management needs to have remedies to protect their interests if there is
suspected wrongdoing.
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14. Takeaway Points
Due Diligence
Organization Commitment
Contract Provisions
Collaboration and Incentivization with Suppliers
Regular FCPA and other applicable Compliance Review
Documentation of Compliance Efforts
Actively Monitor Political Developments and Security Situation
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15. Thank you
&
Questions?
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16. References
1. https://www.weforum.org/agenda/2015/12/how-corruption-affects-businesses-around-the-world-in-5-charts
2. http://www.jonesday.com/files/Publication/9133964a-5d55-44ad-88c1-
1818beb27a64/Presentation/PublicationAttachment/37355ae7-2a9d-4b71-a9bd-8eb2848f21bc/The%20Elements.pdf
3. http://levistrauss.com/suppliers-operations/
4. https://www.procurementleaders.com/blog/my-blog--paul-teague/levi-strauss-smart-thinking-on-supply-chain-ethics-485590
5. http://ww2.cfo.com/supply-chain/2015/11/how-to-deal-with-anti-slavery-laws-modern-slavery/
6. http://www.mdiconsultants.com/pdf/supply-chain-oversight.pdf
7. http://scholarship.law.gwu.edu/cgi/viewcontent.cgi?article=1037&context=faculty_publications
8. http://www.wsj.com/articles/SB10001424052702303873604579493502231397942
9. http://www.independent.co.uk/news/world/asia/factory-workers-are-forced-to-lie-during-adidas-safety-inspections-7644018.html
10. http://www.kroll.com/en-us/due-diligence
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