The Chinese government’s decision to close factories in January 2020 was completely unexpected and took most companies by surprise. China, after all, was considered “the factory of the world,” and the widespread business closures created a lot of confusion and anxiety for companies without alternative supply chains. With the rapid spread (and fear) of COVID-19 globally, business and public life have been totally disrupted.

The COVID-19 pandemic has changed the way that we live, work, communicate, and socialize. Borders have closed, along with factories and nonessential businesses; people are working from home while many others are on forced leave or have lost their jobs.

In this alert, we focus on the customs and international trade implications and dangers facing global business in respect to fraud, direct and indirect tax evasion, corruption, and money laundering, which should be of particular concern during the COVID-19 pandemic. The rapidly evolving situation and increased pressures on certain supplies have given rise to opportunities, particularly arbitrage opportunities, as well as opportunistic actions. As the world slowly reopens for business (China has already started doing so, and many other jurisdictions are considering going back to work), we have drafted this alert to provide cautionary reminders about core compliance responsibilities.

By all accounts, the global commercial environment will have changed substantially due to the COVID-19 pandemic. The business networks and relationships (partners and contacts) built up over years in various markets may no longer exist or may not exist in the pre-pandemic form. Workers who are fully trained in certain industries and operations may not return to work. Third-party service providers may no longer be in business, or, due to the implementation of regulatory measures taken during the pandemic, relationships between business partners and obligations between buyers and sellers may be stressed.

For example, as part of its effort to relieve the financial and supply burdens of its companies, the Chinese government has issued a record number of so-called “force majeure certificates” to allow companies to break contracts with local as well as foreign suppliers and buyers. Given the tight and urgent demands for medical supplies, companies are worried that some of these certificates may be granted to medical suppliers to allow them to only cater to local needs.

Unexpected events like the COVID-19 pandemic present an ideal climate for enterprising, if not necessarily unscrupulous, opportunists.

In late March 2020, as a result of complaints from the Netherlands, Turkey, Spain, and the United Kingdom and the return of faulty medical equipment and personal protective equipment products to suppliers in China, the Chinese government tightened rules governing the export of medical equipment in an attempt to address the concerns of those countries. It announced that only manufacturers who were accredited to sell their products within China could export test kits, surgical masks, protective gowns, ventilators, and infrared thermometers.

Since the rule change, China Customs has confiscated 11.2 million medical supplies from unaccredited manufacturers, according to customs data released on April 5, 2020. This included 9.9 million masks, 155,000 protective suits, and 1.08 million testing kits. Unfortunately, there are also recent reports of new “traders” and “suppliers” sprouting up in other countries offering such medical supplies to customers around the world.

During these trying times, companies are facing additional pressures and risks to supply chain and distribution networks. In a rush to procure materials or goods, or obtain needed services, internal procedures in assessing new third-party suppliers or service providers may be loosened. Companies may also face a variety of new regulations, including closer scrutiny of exports and imports, which could affect their operations and/or products. Authorities in various countries are also on the lookout for price gouging, commercial scams, low-quality goods, and corruption. Companies involved in cross-border trade must thus be on alert as brands and business reputations can be at risk.

Evaluate Regulatory Change

To gain a better understanding of what is going on in your operations and identify risk areas, companies should actively review and evaluate regulatory changes in the various markets where they do business or trade.

• As government departments put out updates, law firms, consultancies, anti-corruption specialists, and export control specialists are producing and disseminating good overviews and in-depth analyses on various developments; much of which can be accessed free of charge. We suggest that companies designate at least one person to gather and disseminate such information.
• Where companies have a presence in different locations, local personnel are good sources of on-the-ground information. Companies should have effective internal communication channels so information can be shared from people on the ground to relevant business units, such as legal, logistics, supply chain, trade/customs, and purchasing/procurement departments.

Companies should take a step back, assess, and, where necessary, realign their priorities to ensure continued success operating in the new international trading environment.

• It is important that companies draft and implement short-term plans that take into account their current priorities and determine how to realign those priorities in order to fully support the reopening and continuation of their businesses.
• Businesses considering diversification of their global footprint or even divesting from a specific market should obtain proper advice before making any moves. In the current political and economic climate, countries have resorted to retaliatory “saber rattling,” urging companies to relocate back to home countries or pressing them to exit host countries. Exiting any market totally or partially must be well planned, and all potential risks (both short term and long term) must be fully evaluated. Otherwise, companies may find their assets and inventories confiscated or, even worse, be totally locked out from the market.

In a crisis such as the current pandemic, a company’s critical compliance functions that would normally serve to mitigate risks can be severely tested and overwhelmed. Business should maintain their focus on all areas of compliance. Customs and trade due diligence, anti-corruption, and third-party due diligence are just a few essential areas.

• Despite the lockdown in many countries, the authorities responsible for investigating corruption and bribery have not stopped working. Many have, in fact, set goals of increasing their investigations and enforcement of anti-corruption and anti-bribery laws. Those in the supply chain, procurement, and customs/international trade community should be sensitive to and be vigilant against the potential surge in incidents of kickbacks, rebate arrangements, and suspect commissions; under-the-table payments to government officials and family members; and payments to third parties and individuals unrelated to the manufacturer or supplier. Revenue authorities will review invoicing and import/export documents to identify what may appear to be questionable payments to offshore third-party entities and unconventional invoicing techniques.
• For operations in key locations severely affected by the pandemic, companies may need to employ new staff or new service providers. It is important that a sound and robust hiring process and a third-party due diligence process be or continue to be in place.
• Worker safety, labor conditions, product quality, and consumer protection are all becoming major components of a sustainable business. For sourcing and purchasing, companies should consider having a trusted agent or employee on the ground in the sourcing country to review the manufacturing conditions and the quality and standard of products.
• The pandemic has created an ideal environment for the sale and supply of defective, contaminated, and second-hand or reused goods. Companies should be vigilant about unauthorized production of branded products, knock-offs, or products that are not appropriately audited or inspected for quality, safety, and labeling.

As part of supplier and third-party risk mitigation, we encourage companies to thoroughly scrutinize new and existing suppliers and analyze proposed business transactions. We suggest the following best practices:

• Collect as much information and documentation about the supplier(s) and verify that the supplier is duly qualified, in good standing, and that the individuals representing the supplier are properly authorized representatives.
• Request a copy of its business license, proper identification, and other relevant registrations and certifications.
• Where the third party is a supplier of services, such as customs brokers and logistics services providers, request copies of the qualifications of their employees that will be handling the work on behalf of your company.
• If you have a standard supplier or third-party questionnaire, make sure it is updated, relevant, and covers key matters such as:
  • background information;
  • qualifications and required licenses;
  • legal and regulatory compliance, including appropriate customs licenses and approvals;
  • exporter/importer approval status, and
  • contractual obligations and considerations.
• Verify the information provided through online research on the supplier(s) and third parties as well as related individuals and entities. This should also include research on ownership, the significant owners, shareholders, and management, as well as any affiliated entities, agents, and consultants. Other information, such as credit history, financial health, adverse inspection findings, import alerts placed by any regulatory authority, and noncompliance incidents, is also important.
• It is important to conduct thorough due diligence to identify the level of risk of a proposed transaction. It will also identify potential red flags that could prevent the transaction from going through and provide an opportunity to consider possible legal or regulatory solutions.

Given the volatility of the current supply chain and customs environment, we will continue to review and report on the evolving situation.