How AI can transform your supply chain due diligence


Supply chain due diligence is now a corporate necessity

Conscientious consumers, investors and employees, plus globalised supply chains and enhanced regulations have made it vital to know who you are in business with. Equipping yourself with the due diligence right tools has never been more important.

Conscientious consumers, investors and employees, plus globalised supply chains and enhanced regulations have made it vital to know who you are in business with. Equipping yourself with the due diligence right tools has never been more important.

It is no longer enough for companies to ensure their actions and principles comply with environmental, social and governance (ESG) standards. They must also make sure that those they do business with uphold similar standards.

Record temperatures and droughts this summer placed companies’ green credentials firmly on consumers’, investors’, and employees’ agendas. Whilst, the war in Ukraine threw up huge social and governance questions for businesses dependent on global supply chains.

And the internet gives anyone who’s interested a window into corporate priorities. Disgruntled employees can share companies’ environmental, social or governance failures with the world in seconds.

On top of that, new regulations are coming into force that make careful supply chain due diligence a legal requirement. Companies must assess and monitor their suppliers all the way down the supply chain, and their clients upstream, to ensure they do too.

In this climate, supply chain due diligence is a lengthy but crucial task that typically requires analysts to research companies large and small, frequently in multiple languages. The ramifications of overlooked ESG failures can be legally, reputationally, and financially grave.

The best way for companies to improve their supply chain due diligence, so they truly know who they are doing business with, is to leverage new technologies that can carry out time-consuming research tasks for them. This equips decision-makers with a full picture of who their suppliers and clients are enabling more informed, quicker decisions.

Why it matters

Global supply chains

In today’s ultra-connected world, supply chains are longer and more cross-global than ever. According to current estimates, 80% of worldwide trade now relies on global supply chains.

Many early stages of extraction and production are now taking place in developing countries and emerging economies. For example, the overwhelming majority of the world’s cobalt, the mineral used in electric vehicle, smartphone and laptop batteries, is located in fragile states. More than 70% of global supply is found in the Democratic Republic of Congo, where allegations of child labour, armed group financing, bribery and corruption often emerge.

Russian sanctions

The complex web of sanctions arising from Russia’s invasion of Ukraine is estimated to have affected more than 550,000 businesses in the US alone, and far more around the world. Many businesses were surprised to learn that their supply chains contained entities connected to Russia and the Kremlin.

Different countries are under the jurisdiction of different sanction lists, which often change quickly. This makes the task of identifying which sanctions your organisation must comply with extremely challenging.

Organisations typically use automated tools that consolidate these lists and enable rapid searches for sanctioned entities or individuals. But when someone is sanctioned, there is often only a short time window for organisations to ‘offboard’ them as a client or supplier.

The huge volumes of newly sanctioned Russian entities were an unwelcome surprise to most organisations who had to scramble to comply, upsetting global supply chains. However, here at Xapien, the depth and context that our reports provide revealed individuals’ and businesses’ proximity to the Kremlin ahead of sanction rulings. Our clients were able to see early on which entities were likely to have sanctions put against them.

Direct and indirect breaches of sanctions can lead to penalties for organisations of all sizes. Checking lists and databases, though necessary, is not sufficient. The burden is on institutions to map out networks and associations of sanctioned entities in order to prevent association with any implicitly related entities.

New regulations

Long before sanctions were put in place against Russia, and this year’s scorching summer put climate change high on the corporate agenda, regulators increasingly demanded companies conduct thorough due diligence on their supply chains. More legislation is coming into force all the time.

The Act on Corporate Due Diligence Obligations in Supply Chains was passed in Germany in 2021. It makes it the responsibility of German companies to respect human rights and the environment in global supply chains. Companies are required to analyse risks, take action to prevent violations and measure the effectiveness of these actions.

The proposed EU Due Diligence Act will replicate the rules current in Germany across the bloc. Large companies that are either based in the EU, or have a considerable turnover within it, will need to conduct due diligence to identify, prevent and mitigate human rights and environmental violations throughout their supply chains.

From next year in the UK, companies and large asset managers and owners must start explaining how they will help the UK reach its 2050 net zero target. Comprehensive supply chain due diligence will be an obvious starting point for this.

The US ENABLERS Act, which the House passed in July, will expand anti-money laundering legislation. If it is passed into law by the Senate, businesses such as law and accounting firms will need to conduct supply chain due diligence to ensure they are not aiding corruption.

Information overload

These new regulations are in no way a comprehensive survey of the enhanced supply chain due diligence companies will need to conduct, but they give a sense of the scale of the task ahead.

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This task is made particularly complicated by the amount of data there is out there on suppliers and clients. And unlike typical risks that businesses face – say fraud or criminal activity – ESG risks are thematic and poorly defined, making them hard to spot.

A deep due diligence dive on a company with a major online presence can take a team of analysts days. Even one with a small presence will take several hours not just to research, but to analyse and summarise into anything that could reasonably be used as the basis for a decision. This is particularly the case when foreign languages are factored in, which is common when looking at global supply chains.

Insufficient tools

Almost half of companies say a lack of data on suppliers’ ESG credentials is the biggest factor preventing them from meeting their ESG goals, according to research by Coupa. Reliance on technology not designed for compliance with ESG standards affects 36% of the companies surveyed.

Existing tools for identifying due diligence risks rely on structured data from sanctions lists or corporate disclosures. But ESG risks depend upon themes and patterns of behaviour. Traditional technologies can only give “yes/no” answers about certain keywords and a presence on lists. They are unable to provide the full, textured understanding of an entity, including its historical conduct and associations.

For example, a company may have a reputation for mistreating workers in various different ways. There isn’t a list that will group all the different mistreatments in one place. Human analysts need to invest time reading different blogs, social media posts, articles and more, about each mistreatment and contextualising it to gain an understanding of the overall picture.

Another common problem is that sanction lists are updated constantly, and tools for searching databases don’t always update in real-time.

Many of these tools also have a huge issue with false positives. These can be caused by limitations in translingual name matching, fuzzy name matching and entity resolution technology. False positives can cause major delays in compliance processes, as they need to be sifted through by an analyst. These delays have serious financial consequences.

Xapien’s solution for supply chain due diligence

Xapien’s AI-powered solution gives you total clarity on your supply chain, in just a few minutes.

Our system, powered by machine-learning and Natural Language Processing, can read, process, and understand the vast quantities of data that exist on the internet, picking up and flagging risks that you may have missed due to language barriers or time constraints.

It automates the process of looking for patterns of risk by reading each internet site, media article or blog about a company. It spots risks and identifies patterns which are then extracted and summarised for you.

As a result, hours of manual due diligence on suppliers or clients can be done in minutes by entering a few brief details into our search tool. Our reports are free from false positives and filled with nuanced, contextual information.

Xapien uses real-time data from across the world, running searches on PEPs and sanctions databases, then cross-referencing that data against news and media articles, corporate records and wider internet data from sites such as LinkedIn, Wikileaks, offshore leaks, and more.

It joins dots analysts can miss by reading and ‘learning’ with each search. For example, if a news article identifies a business associate, Xapien will make the link to corporate data which gives a date of birth that could previously have been missed. That will then allow us to confirm an entity has been sanctioned.

It is unique in being an all-in-one know your customer (KYC) and ESG due diligence solution, which can be run on people or companies, in over 130 languages.

Our Natural Language Processing functions go beyond keyword searching for explicit sanctions. Instead it “reads” all the material on the internet, then ingests and understands it. This then enables it to highlight contextual information from business associates to locations. Affiliations, assets, family members and other crucial insights about a subject are presented in a readable, shareable report, so you can detect potential areas of risk.

What does this look like in practice? It doesn’t just highlight sanctioned or criminal entities, but flags when an individual is mentioned in media articles as a ‘close friend’ of a problematic figure. Traditional sanctions checks would not flag these risks, but Xapien can identify key networks and affiliations.

Xapien’s detailed, accurate reports give businesses the confidence to move quickly with clients and suppliers, while being certain that they have the full picture.

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