Learn how the changing tariff environment can impact your third-party risk management program.
How Tariffs Could Impact Third Party Risks and Due Diligence - Transcript
Elliot Berman: Welcome to another episode of Third Party Risk Perspectives. I'm here with Chris Sindik. I'm Elliot Berman from AML RightSource and Chris, why don't you introduce yourself?
Chris Sindik: Thanks Elliot. My name's Chris Sindik. I'm the senior director of third party risk and due diligence here at Blue Umbrella. So what that means is work with the team to help our clients meet their needs in terms of research, due diligence, software monitoring, things of that nature.
Elliot Berman: And today we're gonna talk about tariffs and how they can impact third party due diligence. So Chris tariffs have been taking up a fair amount of space in both the business press and the popular press. But there are tariffs in place by many countries most of the time. How are the new ones that are in place and some of them that have been proposed different?
Chris Sindik: It's a great place to start. Tariffs are nothing new. I think now it's really the new part of it is the speed and severity at which they are being raised. Sometimes it can be a long windup to get to a tariff.
A good example is that, after World War II, the US started investing more in chicken production. So it took a long time to get that up and running, and as a result, some European countries introduced tariffs to protect their own chicken farming that would be in place. And I think that's just a good example of how it takes some time to create that infrastructure to possibly need to put a tariff in place.
But talking about today and where we are in 2025 it seems to be happening on, a daily basis. There was definitely a string of a couple of weeks where, you didn't quite know how long they were gonna stay. Which industry was going to be next by executive order. Which products would be subject to a 100%, 200% tariff increase, which certainly changes the the dynamic of it.
Now I think it's really in terms of the framework of third party risk management is how are we supposed to handle these from a practical perspective? And that's a very challenging question right now, because again I think that companies in certain industries more than others, are experiencing whiplash. One day it's a 100% tariff, the next day it's 25%. And if they need to adjust to that rapidly and adjust their business model, or if they can ride it out.
Elliot Berman: What are we seeing where we sit vis-a-vis our clients in terms of how they're reacting?
Chris Sindik: I think that's really a unique position that we're in as Blue umbrella because we're doing work on the request of our clients to find out about risks for potential third parties, existing, third parties that they're working with, whether that's a sales agent, a channel partner, a vendor of goods or services or, any of the many types of other businesses that businesses work with.
What we've seen anecdotally is that some companies are looking at new suppliers to hedge their bets where some of the tariffs have been focused a lot of times are in parts of the world where there are, certain manufacturing of goods that, maybe don't have a whole lot of alternatives that are out there. I think China for the US is a very large trading partner, and also one where a lot of goods come to us from. I bet most people right now have something on their desk or something in their car, or they're touching something that is made in China one way or another.
We're starting to see some other alternatives being sought if it's in one of these countries, use China as an example. But there are dozens and dozens more if they have a key supplier in that area looking at where they can find alternatives in a country that doesn't have as many tariffs because it can really be a single point of failure if you can't get a widget at a decent price anymore. And it can really be a matter of finding alternatives, increasing the bench strength. I don't think that many companies are, immediately rushing to action and shutting down one's supplier and turning another one on, but taking more of a it's probably a good idea to see who else is out there, see who we could potentially partner with.
Maybe they had gone through a RFP process years ago, settled on a supplier, and now under today's circumstances, they're going back and saying who else did we look at that first time around? Maybe it's in a different country that's a little bit better for us. It maybe it isn't our first choice, but it becomes the first choice by virtue of these other fees that are being imposed.
Elliot Berman: With the efforts to look for new sourcing, whether that's in another foreign jurisdiction that's less onerous in terms of the tariff rates or it's domestic sourcing, what's the infrastructure from a due diligence and a risk management perspective that your clients need to think about.
Chris Sindik: I think when you're looking at things domestically, just from a business operations perspective, it's not like there are the exact same manufacturing factories that have been dormant for decades, and we just have to turn the switch and turn 'em on. I think it's a matter of when you're evaluating these suppliers to make sure that they're legitimate first and foremost. That they weren't created last week. They're not a big manufacturing facility that's in an apartment building.
Make sure their financial health is where it should be. Because if they, were a good source and were evaluated the first time around, maybe they were rejected for a reason, a very valid reason in that regard. So sometimes it's a matter of just setting up a regimented system if it doesn't exist already to help onboard new suppliers, whether that's technology or policies and procedures in place to have a way to evaluate suppliers, contractors, vendors, et cetera, in a very regimented consistent way.
Having that infrastructure there is important just to make sure that you document the process by which it's done and that you uncover as many risks as possible. When you're looking for a lower price, sometimes things are lower price for a reason and a good reason, and maybe one that ultimately isn't a money saver in the long run.
Elliot Berman: I think another factor in here is when there's an urgency or a perceived urgency to move, sometimes you can step away from those good regimented processes that you talked about and move faster than you really should to manage risk.
As you pointed out changing from supplier A to supplier B is not something that happens with the flip of a switch. There's all kinds of things that have to happen in addition to the vetting process in your vendor selection. So what other new risks pop up as you consider bringing on new vendors potentially from new jurisdictions where you haven't had counterparties in the past and things like that?
Chris Sindik: I think it's always an interesting scenario when a company is going into a new country that they haven't been in before. Or maybe they're there, but they haven't gone into it in the scale that's being proposed right now. And one of the things that we'll often find in some of our work is that these entities that are being researched can be very low profile.
Sometimes depending on how long they've been around their particular formation, industry, ownership, et cetera, it can be that they have a website, they have a corporate registry entry, and that's it. They haven't been involved in too many lawsuits. Maybe they aren't mentioned in the media, et cetera.
So when you're faced with that, they exist, they're out there, they appear to be legitimate, but we don't know more about them. It's what do you do? It's hard to make a determination on that. And sometimes it can be a matter of conducting things beyond open source intelligence due diligence, where it's a site visit. Discrete inquiries, maybe looking at their facilities seeing if they have equipment, trucks moving every day. They have appropriate signage. It looks like a legitimate office building.
Sometimes that does play into the scale of the relationship. If it's a $2,000 relationship, it may not make sense to go to that level. But again, if we're talking about seismic shifts here I think it does make sense to, go that extra mile and look at some things that maybe you wouldn't necessarily look at.
And also understand the climate of maybe some risks that you do find. For example, a company may have found to be delinquent on their tax payments. Okay, that's not good obviously, how big of a deal is it? We found in some jurisdictions it's kind of common practice. I won't say it's a positive finding by any means. It's something that happens, a clerical mistake if you will, that maybe companies fall into whatever it might be. So how to interpret some of those risks there that they might find they have connections to a government entity.
Okay, that's, again, something to look into more. But if it turns out that particular industry, everything is touched by the government in one way or another, levels the playing field for that risk. And you would want to make sure that there are other appropriate controls that would be in place there.
And I will say too, that in the times when people can be more cost conscious, which tariffs, I think that's, what it comes down to at the end of the day, remaining profitable. If you were making 10% margin before and then, tariffs make it 5%, okay, maybe you gotta move twice as many units to stay at a level of profitability that is sustainable.
Then it motivates the sales team sometimes perhaps to bring in that additional volume. And there are other risks that are created beyond just the third party themselves, but internal risks there as well. Creating new sales channels creates all sorts of interesting risks. Gray market, counterfeits goods depending on the industry. Trade secrets, we're gonna hire a new vendor. Give 'em the secret recipe and, who knows where that's gonna go at the end of the day.
Elliot Berman: All good thoughts for our audience. Before we wrap up any last thoughts?
Chris Sindik: I will say that in times of trouble, or times of strife it can be tempting to cut corners or to give in to pressures from the business. And, pressures from the business is certainly something that you know isn't to be trifled with. But at the same time, it's not a reason to throw the controls out of the window. That third party doesn't need to take time to fill out a questionnaire. We've heard of them. They're fine. Just, approve 'em and bring them on. That's the sort of a recipe for disaster.
And again, it's doing more with less. We have to find new vendors. That's not easy. It's time consuming. So again, it's doing more with less. Another topic that's frequently mentioned is AI and technology. It's a little bit tangential, but using some of these tools to lessen burdens in other areas can help free up some time to explore some of these new projects that maybe people weren't necessarily thinking about in the future.
I'd say it's certainly staying true to the program. Trying not to cut any corners too. But, certainly realizing that finding alternatives is a necessity sometimes until we hear something else.
Elliot Berman: Sounds good Chris. Thanks for your thoughts on this topic. I look forward to talking to you again in the near future as we explore other topics in third party risk management.
Chris Sindik: Yeah, likewise. Thanks for your time, Elliot. I.