Global Supply Chains Bring Increased Risk of Corruption and IP Infringement

Sue Reisinger

Corporate Counsel

12-21-2012

It’s no secret that U.S. companies are increasingly turning to emerging markets like China and India for supplies. And according to a new research report from The Conference Board, with that move comes increased risk of corruption and infringement of intellectual property.

The report, released Wednesday, is titled “Safeguarding Intellectual Property and Addressing Corruption in the Global Supply Chain.”

“IP theft and corruption are two separate issues, but we brought them together because they share similar attributes,” said Pamela Passman, founding president and CEO of the Center for Responsible Enterprise and Trade (CREATe.org), which partnered with the Conference Board on the project. Both the Board and CREATe are nonprofit groups seeking better solutions to business issues.

Passman, a former deputy general counsel at Microsoft, explained that both IP and corruption laws are enforced inconsistently in high-risk, emerging markets. Second, she added, is that foreign companies “that are critical players in the supply chain tend to have very weak internal compliance systems of their own.”

The research project brought together people from different disciplines—IP and anticorruption attorneys, compliance officers, ethics leaders, and procurement chiefs—from across large multinational companies. Passman said while some of them actually worked for the same company, they hadn’t worked together before, despite the similarity of their problems

Participants in the research group, which worked over eight months, included DuPont, Microsoft, ARAMARK, Emerson, TE Connectivity, Rockwell Automation, Siemens, plus law firms and several nonprofit groups.
 
The report identifies key challenges for global companies and outlines recommendations for reducing IP theft and corruption.

It also reflects findings from a benchmarking survey of compliance and IP attorneys at leading companies, with respondents from 55 Fortune 500 and Fortune Global 500 companies.

Among the report’s key findings:

• About half of the executives surveyed perceived extensive risk of IP infringement in emerging markets when engaging suppliers (43 percent) and when engaging agents/business partners (48 percent). Passman said this risk grows every year as the world becomes more digital, which makes IP theft easier.
• Respondents also believed their companies face extensive risk of corrupt activities when engaging agents/business partners in emerging markets (70 percent), and a smaller but significant number felt there was extensive risk when engaging suppliers (46 percent). “Companies felt they had a good sense of who they were contracting with,” Passman said, “but knew that each third party had its own supply chain and subcontractors” that the companies couldn’t assess.
• Executives believe the theft of trade secrets presents the greatest IP risk. About two-thirds said they felt such theft presents extensive risk in emerging markets, but only 36 percent rated their companies’ compliance programs as very effective in managing these risks.
• About 51 percent indicated that business solutions were very effective in addressing IP violations in emerging markets. This compares to 30 percent for lawsuits in local courts, and 27 percent for other enforcement procedures.
• Some 85 percent of those surveyed said an independent program that would certify third parties on the strength of their IP compliance procedures would be helpful, including 62 percent who said it would be very helpful. Programs of this type are being developed by CREATe and the Business Software Alliance.

Passman said her experience at Microsoft taught her that companies want to do right thing, but they need the ability to do it in a cost-effective way. That’s why she sees support for a third-party certification program that could be developed over time to monitor a company’s growing compliance.