My general disbelieve around private certifications including ecolabels is not new, written a lot about it. So this week I started to think a lot on how come certification seems to be continued in the Pacific tuna fleet albeit they are operating without any observer coverage? FAD use vs free-school and compartmentalisation is already flaunted in many cases... so how would they be guaranteed now?
what you mean CoC?
My understanding is that in the case of MSC it is entirely subject to the Chain of Custody certificate that comes along with the fishery certificate requirement. Yet without external verification, the potential for fraud is there and really tempting.
And by chance, I came across the following one-pagers by my colleague Miodrag Mitic, whom I have known for a while describing why Chain of Custody certification alone can no longer support eco-label claims. The articles are a summary of lectures given to various organisations by him. He has lots of experience on the topic, in fact, he was MSC’s Supply Chain Standards Program advisor for a while. He was very kind in allowing me to transcribe his first 4 articles and I believe there are more to come on his LinkedIn page, make sure you follow them, the man knows his stuff!
I enjoy reading this work as it hits the issue of long term mass balance right in the head, with a key area that we work a lot on our CDS work with my friend Gilles Hosch. But also on the blunt conflict of interest, that implies being paid by the people you certify… I’ll have much less of a problem if they were paid by consumer organizations, as apparently the consumer seems the moral backbone of private certification work (not true in my opnion)
Fraud in Ecolabels
Selling non-certified products as certified is fraud regardless if done in error or for economic gain. The purpose of Chain of Custody (CoC) certification is to assure consumers and corporate customers that products sold as certified in fact originate from one or more certified sources. Eco-labels use CoC certification to assert that certified products are not substituted or diluted with non-certified products. However, most CoC standards simply verify that a company has a working traceability system. Eco-labels altogether make few attempts to detect fraud, which is used as the main justification for imposing the cost of CoC certification on supply chain participants.
The inconvenient truth is that companies that perform certification fraud are almost always holders of valid CoC certificates. The possession of a CoC certificate is a precondition for being recognised as a supplier of certified products in the first place. At the many production, trading and processing points in the supply chain, the most frequent rationale for fraud is to opportunistically prevent revenue loss by fulfilling a customer order for certified products with non-certified ones. This may at first occasionally happen when a business is temporarily short on certified products. Undetected and unopposed, it has the potential become a standard business practice.
The fraud process that begins sporadically as an opportunistic act at a farm or fishery, builds upon itself as some of the subsequent supply chain actors also find themselves short on certified products and further dilute customer orders with non-certified products. As the occurrence of fraud gradually spreads, and increasingly larger quantities of non-certified products are supplied as certified, what was thought to be a sporadic and opportunistic act of fraud of relatively small significance can result in a disastrous snowball effect. It is a vicious circle, amplified over time as more and more managers learn they can get away with fraud without any consequences.
When there is a tangible price difference between certified and non-certified products, the incentive for fraud is no longer just to avert revenue loss, but to also make an extra profit derived from the price difference. Certified products are diluted with non-certified ones and sometimes substituted altogether. At this point I usually receive a first question from the audience: what is the prevalence of certification fraud? A comparison between the supply capacity of certified primary producers upstream and the quantity of products sold as certified downstream in the supply chain, minus conversion losses, yields an estimated quantity of products that are fraudulently sold as certified.
Nothing prevents eco-labels to estimate the prevalence of certification fraud in their supply chains. On the other hand, should they choose to disclose the estimated quantity of labelled products fraudulently sold as certified, they would also have to declare the control measures put in place to adequately prevent fraud, and appropriate management control procedures to ensure their effectiveness. Many are in competition with other eco-labels and do not wish to "antagonise" consumers and corporate customers with bad news. A sensible first step is to introduce control measures to detect fraud and evaluate their effectiveness prior to making further improvements.
Chain of Custody and Traceability
Certification fraud has become a common occurrence in many agriculture and food supply chains. Chain of Custody (CoC) certification was initially introduced by eco-labels to assert that certified products are not substituted or diluted with non-certified ones. The inconvenient truth is that companies involved in certification fraud nearly always hold valid CoC certificates. This is a paradox given that eco-label integrity was the stated reason for imposing the cost of CoC certification on supply chain participants. The time has come for CoC standards to focus on detecting certification fraud rather than verify the functioning of traceability systems and sloppy mass balance calculations.
Traceability and CoC are often wrongly considered as identical. These are two distinct systems used for different purposes. A product can be perfectly traceable and yet fail the crucial CoC requirement for segregation between certified and non-certified products. While traceability concerns multiple product content and/or production process attributes, CoC is exclusively concerned with the certified origin attribute and segregation from non-certified products. Traceability is used to mitigate the negative consequences of safety or quality failures by means of targeted product recalls, while CoC is used to mitigate the risk of certification fraud.
Records created in traceability systems are important because they are used in CoC audits to identify suppliers and quantities of inputs received, composition of production batches/lots, and customers and quantities of outputs shipped. While a functioning traceability system is a pre-condition for CoC certification, it does not prevent a company to fraudulently sell non-certified products as certified. A work order that stipulates the use of certified inputs can be ignored. Warehouse records can be manipulated to dissimulate the disparity between certified and non-certified inputs. However, commercial and financial records are more consequential and risky to falsify.
CoC audits should spend much time on mass balance calculations to detect fraud. Performed as input-output reconciliations, they are currently carried out on a single production batch/lot or short time-period because of time constraints imposed by audit duration. To become an effective fraud detection tool, the calculation should cover the entire fiscal year and include certified and relevant non-certified inputs and outputs. The emphasis must be on establishing the quantities of product input and output flows via financial records and comparing them with storage, transformation and shipment records minus conversion losses. Eventual discrepancies will have to be explained.
Unjustified inconsistencies between financial, commercial, logistics and production records should result in penalties and loss of certification. If centred on a meaningful input-output reconciliation, CoC audits would change their focus from inspecting traceability management systems and procedures to fraud detection via mass balance calculations. Given that traceability is verified in food safety certification schemes already, verifying it all over again in CoC audits is a duplication. Traceability systems should have to be verified in CoC audits only when a company cannot produce a valid certificate from a recognized food safety scheme or in a separate traceability audit altogether.
Trustworthiness of Eco-label Claims
The only assurance that current CoC audits can realistically provide is that on the day of the auditor's visit the company had a traceability management system and segregation procedures in place, and that the auditor could trace-back one certified product to its immediate suppliers. Traceability is not verified back to the certified primary producers upstream, just one-step-up in the company's supply chain. Because of time constraints a quick input-output reconciliation is conducted for a single production batch/lot or short time-period, and is usually only based on storage and transformation records rather than a full set that also includes commercial, financial and shipping records.
Unannounced audits are not worthy of their name because they are always announced several days in advance to ensure access and presence of relevant staff. Companies can thus arrange to have what is required to demonstrate compliance with CoC requirements on that day of the audit and do as they please thereafter. They are allowed to shop around for less rigorous certifiers. Considering that the main audit cost element is the auditor, the certifiers who charge the least usually employ the most junior auditors. Moreover, the certifier is never truly independent from the company it audits because the two have a commercial relationship identical to a supplier and customer.
This situation could dramatically change if companies seeking certification would pay the audit fee directly to the eco-label, which would contract and supervise the certifiers. The company seeking certification would no longer decide who performs the audit and there would not be any economic relationship between the certifier and company it audits. Additionally, traceability systems could be audited separately as a pre-requisite for CoC audits. These could then concentrate on performing a mass balance calculation covering an entire fiscal year that includes both certified and relevant non-certified inputs and outputs. This could eradicate nearly all fraud from eco-label supply chains.
Successful eco-labels generate millions in logo licensing fees, push their own advertising narratives onto consumers, and are well integrated with marketing strategies of the brands they serve. The key barrier to change is that eco-labels are not financially impacted by certification fraud as long as consumers continue to unknowingly buy non-compliant products. Whilst aware of supply chain certification fraud, eco-labels do not publicly quantify nor address the subject in fear of antagonizing consumers and jeopardising logo licensing revenue. In such a reality, a more tactful and gradual approach is required to initiate the reform of CoC certification.
While self-serving interests stifle most attempts to quantify and address the scale of certification fraud, a possible way forward is to improve the quality of CoC certification in incremental steps. The bare minimum is to introduce unique identification of certified companies, certificates, certifiers, auditors and audit reports to lay the foundations for future monitoring and analysis. Authentication of certificates, identification and labelling of shipments, logistic and trade units, and mandatory requirement to match quantities of certified products received with quantities stated in delivery documents and purchase orders can improve the credibility of current input-output reconciliations.
Certification fraud is a well known risk to eco-labels.
They encounter it on a regular basis in what many believe are isolated events of small consequence. Most decision makers come to this conclusion without studying the effectiveness of CoC audits or conducting a formal risk assessment. Experts know that if the supply capacity of certified primary producers upstream is considerably less than the quantity of products sold as certified downstream then the eco-label has a real problem. When left unattended the scale of the problem can reach enormous proportions over time. It is an unrewarding subject for staff to address because it runs against eco-label's marketing narratives.
Experts are also aware not only that certification fraud is a complex problem to solve, but also that it is likely to be exposed to the public eventually. While the precise nature and timing of such an event is not predictable with high probability, the severity of the consequences are. When the scandal erupts the brands that display the eco-label on products will most likely turn against their suppliers and blame them. Because the suppliers are required to have valid CoC certificates in order to supply the brands, they will involve the certifiers who will defend the certificates they issued. The spat may quickly spin to CoC certification, expose its deficiencies and point the finger towards the eco-label.
In such a scenario due diligence is the eco-label's best defence. To be successful it has to demonstrate that risks were identified, assessed and systems put in place to prevent certification fraud. But are they really? Eco-labels are hesitant to address fraud in fear of undermining their marketing narratives and antagonizing the brands they serve. The good news is that it is absolutely possible to discreetly assess the risks and improve the effectiveness of CoC certification in incremental steps by adding an integrity assurance component to it. The first obvious step is to identify the supply chain risks, and then develop and implement appropriate mitigation measures.
The known CoC risks are: a) erroneous or deliberate substitution and dilution of certified with non-certified products, b) auditor competence, c) auditor integrity, and d) counterfeit certificates. Given that companies that perform certification fraud are nearly always holders of valid CoC certificates, it is necessary to analyse the audit reports issued over the past few years to determine the baseline from which to draw the levels of risk and required monitoring for each certificate holder. The level of risk is determined by spotting a pattern of signs that point to the probability of erroneous or deliberate substitution and dilution of certified with non-certified products and substandard audits.
The indications that can land a company on the high-risk list usually entail a history of sanctions, complaints, investigations, repetitive non-conformances, high staff turnover and/or change of certifiers. The volume of certified products they buy and sell, as well as auditor, customer and supplier profiles also play a role. Risk mitigation measures for high-risk companies include research (know your customer), visits to obtain firsthand information (human intelligence), company news monitoring, observation of audits, and when appropriate re-audits by the integrity assurance team.