SUPPLY CHAIN DUE DILIGENCE 

Due diligence is a continual process of collecting information about counterparties in your supply chain, in order to identify, prevent and mitigate risks with which a business may be associated. It is an on-going, proactive and reactive process.

Companies have a responsibility to demonstrate that they enter into business relationships with individuals and commercial entities that are respectful of the law, and that uphold the same governance, social, and environmental commitments as they themselves do. This is done by doing due diligence, which at the minimum should include:

• Ensuring that business partners are legitimate and conduct business in compliance with the law
• Engaging business partners and communicating the company’s commitments and expectations upon entering into, and throughout, a business partnership
• Identifying, assessing and mitigating risks associated with the business partners’ activities and sourcing practices
• The continuous monitoring of all of the above.

Companies involved the jewellery and gemstone sectors should develop or obtain a systematic and demonstrable due diligence procedure to understand and map their supply chains as far as possible. It should include including clear identification of their own suppliers, Know Your Counterpart (KYC) details, terms of business and any proof of provenance of materials, such as precious metals refinery certificates, invoices, Blockchain verification, etc.

To understand properly who their suppliers are and how they operate, it will necessary to obtain documented materials, such as company registrations, and study the supplier’s websites, etc. Written terms of business should be prepared and as much documentation as possible obtained about the provenance of products and/or materials.

A company’s Responsible Sourcing and/or supply chain policy should be incorporated into contracts and/or agreements with all suppliers.

As part of the understanding of a company’s supply chain, the company should undertake a risk assessment that is designed to identify any potential threats in their supply chain that may impact negatively on its Responsible Sourcing policy.

The company should also assess the risk of any adverse impacts in the supply chains for each precious metal and gem material. For example, this could involve assessing whether the supply chain may be infiltrated by precious metals or gem material sourced from an area of conflict.

There should be a formal methodology for identifying risks in the supply chain. There are a number of ways of conducting risk assessments, either based on specialist skills that the company has  in-house, or by contracting services from external parties.

If any risks are identified, a company should design and implement a strategy and action plan to respond to them, and undertake more detailed due diligence on that supply chain. Such actions may include:

1. Reporting findings of the supply chain risk assessment to designated members of the senior management of the company, even if the findings are that there are no identified risks.
2. Devising and adopting a risk management plan. This should be a strategy for responding to identified risks that is consistent with the responsible sourcing and/or supply chain policies, and appropriate to the type and scale of the risks and the company’s position along the supply chain. The plan may involve continuing to trade throughout the course of a measurable risk mitigation effort, or conversely temporarily suspending trade while pursuing ongoing measurable risk mitigation. It may require disengaging with a supplier or suppliers after failed attempts at mitigation or where the company deems risk mitigation not feasible or unacceptable.
3. Implementing the risk management plan, monitoring and tracking performance of risk mitigation efforts, and reporting back to designated senior management.
4. After a change of circumstances, conducting additional fact and risk assessments for further risks that may require mitigation.

Depending on the member company’s position in the supply chain, where possible, the company may carry out or support independent third-party audit of supply chain due diligence at identified points in the supply chain.

Mineral and gemstone supply chains can be long, highly complex and characterised by low visibility. This can make it difficult to determine which suppliers to assess, and conducting assessments of due diligence processes of multiple suppliers can be a costly endeavour. A solution could be conducting third-party verification or audits at identified points in the supply chains. This may help avoid audit fatigue, both for  those carrying out the audits and those who are subject to them.

For businesses operating in the gold supply chains, for example, the identified audit point in the supply chain is the refiner.

Where possible, the company should report on its supply chain due diligence, for example on the company websites, and in corporate social responsibility or annual reports.

A report does not have to be long or complicated but must be appropriate to the size of the business and its exposure to risk. It should include the following information:

• The responsible sourcing or supply chain policy
• The due diligence system implemented, including a summary of the methodology adopted and the results of the risk assessment
• Where risks are identified, a summary of the risk management plan and of the actions taken to mitigate risks and whether improvement was made towards eliminating such risks.