Supply Chain Risk Management

147

8

Supply Chain Fraud, Corruption,

Counterfeiting, and Theft

Groeb Farms, a major U.S. honey supplier, was involved in the nation’s

largest food fraud: an incident that eventually forced the company into

bankruptcy. is honey laundering case involved a German company,

ALW, that illegally imported cheap and sometimes adulterated Chinese

honey. While the honey itself is not illegal, mislabeling the product and

avoiding taris is a dierent story. ALW had its oces in China use inde-

pendent brokers to procure honey that eventually became honey “not

from China.”

e motivation behind the honey fraud is that honey from China to the

United States is subject to taris that can triple its cost. Fiy- gallon drums

of Chinese honey procured by ALW were shipped to India, Malaysia,

Indonesia, South Korea, Russia, Mongolia, ailand, Taiwan, and the

Philippines, where they were relabeled and oen ltered to remove traces

of their origin. Fake documents would then be produced to move the

honey through U.S. customs. Groeb Farms, based in Michigan, red two

executives who produced fake documents and lied to their board of direc-

tors about the origin of the honey the company was procuring, even when

the company’s internal auditors raised concerns that the honey was ille-

gally imported. Groeb Farms paid a $2 million ne and was required to

dispose of the Chinese honey it had in inventory—something that was

very expensive considering that the replacement costs of honey were rising

at the time. Amid the company’s nancial troubles, it fell behind on pay-

ments on a bank loan. U.S. honey producers and distributors who claimed

that they were harmed by Groeb’s actions led several lawsuits also. is

fraud, besides being ethically and legally wrong, clearly exposed the com-

pany to risk.

148 • Supply Chain Risk Management: An Emerging Discipline

In this chapter we explore fraud, corruption, counterfeiting, and the

and discuss how these issues impact everyone from the supplier to the

consumer. We’ll provide examples of companies that have been accused

and convicted of fraud, corruption, or counterfeiting and think about the

nancial impacts emanating from these risk events. We will present some

new terminology and address the vast amount of new rules and regula-

tions coming from many countries. And we’ll share new tools, techniques,

tactics, solutions, and methodologies to help stamp out corrupt practices.

SOME KEY CONCEPTS

A detailed report on fraud, corruption, and counterfeiting, which surveyed

more than 114,000 professionals in 107 countries, came up with a startling

nding. e study concluded that one in four people had recently paid

some form of a bribe over a 12-month period.

1

While this seems shocking,

we have to remember that not all countries or cultures view this topic the

same way. Fraud, corruption, counterfeiting, and the are a large part of

supply chain risk.

e following provides a quick summary of some key concepts that are

important parts of this chapter.

Bribery

Bribery is trying to persuade someone, typically illegally or dishonestly,

to act in one’s favor by oering a gi of money or other attractive induce-

ment. While supply chain managers in the United States know that brib-

ery is illegal, the same is not true around the world. In some countries,

bribery is referred to as “facilitating payments,” a term that is much more

benign sounding. In Greek, the word fakelaki, literally meaning “little

envelope,” is used in Greek popular culture as a term referring to the brib-

ery of public servants and private companies by Greek citizens in order to

“expedite” service. Not that long ago the Greek parliament actually made

this practice legal.

In many countries bribery is an accepted way of doing business. More

than three out of four people in Liberia and Sierra Leone, for example, said

they paid a bribe over a 12-month period. Bribery rates are more than 50%

in Cambodia, Senegal, Cameroon, Ghana, India, Tanzania, Kenya, Libya,