Practice Notes: Lessons Learned from Supply Chain Due Diligence in Conflict Areas

This Practice Note provides five lessons learned from supply chain due diligence and investigations in conflict zones. It aims to inform practice and client thinking on how to conduct this type of work effectively.

An Evolving Legal Framework

The EU's new Corporate Sustainability Due Diligence Directive (CSDDD) requires companies to address sustainability risks in their supply chains. It will start with larger companies in 2027, then medium-sized companies, and finally smaller ones by 2029. Companies must establish a due diligence policy and take steps to identify, assess, and mitigate adverse environmental and social impacts. Ongoing monitoring and reporting are required, and non-compliance can result in significant fines. The new CSDDD builds on existing EU legislation regarding conflict minerals. The CSDDD does not replace this specific conflict minerals regulation, but it will broaden the scope of companies that need to consider conflict risks in their supply chains.

Our Work

INCAS' Social Impact Practice supports clients with responsible sourcing, including from conflict-affected areas. Our work for companies involves:

• Strengthening controls in their supply chains to align with emerging legislation.

• Human rights audits of existing suppliers.

• Due diligence of potential suppliers.

• Investigations of allegations of supplier misconduct, including bribery and corruption, fuelling conflict, and indirect terrorist financing.

Most of the supply chain due diligence and investigations we've undertaken have been in areas affected by violent conflict, including Afghanistan, the Kivus in the Democratic Republic of the Congo, and Nigeria.

Conducting this work in conflict-affected areas is sensitive, challenging, and presents unique challenges for companies seeking to comply with existing and emerging legislation while continuing to source.

The Lessons

Lesson 1: Follow the Journey

We typically track the entire journey of a sourced commodity from its origins, through transport and storage, across borders, and to export terminals. This provides a holistic view of our client's exposure to human rights and environmental risks, such as labour exploitation and poor environmental practices at mine sites or plantations, corruption and bribery at checkpoints during transport, and poor health and safety at storage facilities and export terminals.

Lesson 2: Understand the Political Economy

The purpose of due diligence (and often investigations) of supply chains in conflict zones is to ensure sourcing does not directly or indirectly finance armed conflict. This requires mapping stakeholders and patronage systems associated with a specific commodity (and its source), the governance (or lack thereof) of the commodity's exploitation, and how violence is used to control the production, transport, and sale of the commodity. It's difficult work, and much of what you're trying to understand is deliberately hidden. But it is necessary also to help identify individuals who may be on sanctions lists or known criminals.

Lesson 3: Get on the Ground

Desk-based due diligence and investigations of supply chains in conflict zones will only yield a partial picture. Deploying a field team to source locations and following the commodity's journey is necessary to gain adequate insight and evidence. We deploy field teams from the areas where the commodities are sourced, and depending on the journey itself, other teams may travel different stretches. Local teams are crucial in this work. They can move more easily and provide valuable insights and understanding of the data collected. However, data collection on these topics can also be dangerous. Careful and conflict-sensitive stakeholder engagement, transparent messaging about the purpose of the work, detailed journey management, and training for field teams on safe and secure field research are essential.

Lesson 4: Understand How Tainted Commodities Become Acceptable

There are often legitimate or illegal mechanisms used to ensure tainted commodities pass through scrutiny. Two simple examples include:

• Customs processes that show duty paid but fail to capture origin details or mislabel them.

• The mixing of commodities of different origins in storehouses and labelling them as only from reputable sources.

We've also seen more sophisticated methods involving international cartels and brokers. Scrutinising the methods of scrutiny, along with loopholes, and ambiguities in tracing methods is key.

Lesson 5: Move from Due Diligence to De-risking

Our experience suggests that conflict-area commodity suppliers often have and easily turn to clients from jurisdictions with less stringent due diligence requirements. This entails a loss for a key beneficiary group of these due diligence efforts: the people who draw their livelihoods from work related to the commodity, but suffer from poor labour conditions, corruption, and human rights violations. There is a missed opportunity when a company that prioritises human rights and environmental standards has to withdraw because of risk exposure. While due diligence is essential, it's rarely followed by efforts to de-risk the supply chain. In fact, only on two occasions over the last decade have we had clients willing to engage with governments and other stakeholders to find de-risking solutions. De-risking supply chains in conflict zones is undoubtedly challenging, but it's a necessary step – perhaps the next area of focus for better guidance in this space by the OECD - OCDE and other relevant organisations.

Note: These Practice Notes offer technical insights on specific issues within the business and human rights field. They are targeted at a small, but important, group of readers. As always, we welcome your comments. For more information about our responsible sourcing work, please visit www.incasconsulting.com or contact our Social Impact Practice Lead, Elodie Grant Goodey .