Top red flags for illicit seafood in supply chains

Every time you buy a fresh-caught fish, there is a one-in-five chance it was procured illegally, according to The Pew Charitable Trusts.

That’s bad news for the planet, as the environmental consequences of illegal, unreported, and unregulated (IUU) fishing can be devastating. It leads to the accelerated depletion of fish stocks and can have a long-term impact on marine food chains, which reduces the resilience of marine ecosystems to climate change, according to the World Wildlife Fund.

Unfortunately, reducing risk of exposure to IUU fishing is not always easy or straightforward. “The seafood sector suffers from a unique lack of transparency due to the often remote areas where fishing takes place and the complexity of fisheries governance and supply chains,” said Max Schmid, a London-based deputy director at the Environmental Justice Foundation.

However, there are good reasons for organisations to put in the effort. First, IUU fishing presents a major risk to companies that rely on the availability of affordable and sustainable seafood stock. Merchants that sell illegally caught fish are able to set prices artificially low, while the resulting depletion of stock increases the market rate for everyone else. Then there is the financial and reputational damage associated with being caught selling seafood of questionable origins.

While CFOs are not likely to have time to dig into the granular details of supplier due diligence, finance departments — and particularly management accountants, when reporting potential risks to the CFO — should have a broad understanding of red flags and high-risk practices, since the penalties for companies found to be selling illegal seafood can be steep.

“The financial and reputational damages can be truly staggering,” said Peter Horn, the project director of Ending Illegal Fishing at the nongovernmental organisation International Fisheries in London.

Four key areas of jurisdictions oversee fishing: the flag state (the country where the vessel is registered and that is responsible for ensuring the vessel obeys laws); the coastal state (the country that governs the territorial waters where fishing takes place, up to 200 nautical miles from the shore); the port state (the country governing the landing of goods at port); and the market state (the country where the fish are sold). Because of fishing’s global nature, it is not uncommon for all four countries of jurisdiction to be different, making it challenging for companies to trace compliance.

“When seafood has gone through so many regulatory regimes, different languages, and paperwork standards, it can be very difficult to get an assurance that it was caught legally,” Schmid said.

Here are some of the top indications that seafood may not have been procured legally.

The fish is rare or subject to restricted fishing. Any supplier selling seafood that is considered endangered or for which there are fishing restrictions automatically warrants additional scrutiny, Schmid said. This rare and valuable seafood includes shark fin, sea cucumbers, abalone, and the swim bladders of fish such as totoaba and Nile perch — the so-called marine treasures regarded as delicacies in Cantonese cuisine. Bluefin tuna and sturgeon are other highly valued fish, for which additional due diligence should be automatic.

The price is suspiciously low. In addition to remaining alert to what species is purchased, a price that seems too good should raise red flags — even for ordinary seafood stock — according to UK-based David McDiarmid, the corporate relations director at international food and drink group Princes Group.

“If you suddenly get approached by a new supplier, and the price is abnormally low, there’s a high chance that they are doing something illegal — like not paying their crew or forcing them to work inhumane hours,” he said. “If it seems too good to be true, it probably is.”

Lack of transparency around vessel ownership and operations. Suppliers should be able to provide documentation to identify the fishing vessels responsible for catching seafood — for example, certification of vessel name or ownership, or a unique vessel identification number. It is a good idea for someone in compliance to check these details against lists of violations provided by jurisdictions overseeing the registration and operation of vessels.

Any reluctance or inability by a new supplier to provide necessary documentation should automatically raise red flags, as it could indicate that the ship or the ship’s registered owner is associated with prior violations.

“The next question is, ‘Where is the ship?’” Horn said. “It’s important to check where they are fishing and how they use their tracking systems.”

Vessels that fish beyond the waters of their flag state should be fitted with vessel monitoring systems, which transmit where and when they are fishing, Horn said. This is both so that flag states can verify they are following proper fishing procedures and so that they can signal for help should they run into any issues while at sea. While it is unrealistic to check the ship location of every fishing vessel, location tracking should be a part of routine audits, Horn said.

“Other than in areas where piracy or vessel hijacking is common, why wouldn’t a fishing vessel be happy with people knowing where it is?” he said. “If they aren’t prepared to let you know where they are, it’s a red flag.”

Vessels fly flags of convenience. Fishing vessels are required to follow the laws of the country whose flag they fly. While regulations and laws governing fishing vessels vary, certain countries offer expedited vessel registration — sometimes in under 24 hours — without requiring much in the way of due diligence. Countries that offer these so-called flags of convenience use vessel registration primarily as a means of raising revenues and are known for lax oversight and enforcement of controls over their registered vessels, Schmid said. The International Transport Workers’ Federation maintains an up-to-date list of the 35 countries and territories offering flags of convenience.

“It’s really common for vessels involved in IUU fishing to fly flags of convenience, so that’s automatically a big red flag,” Schmid said.

Routine use of substandard transshipment or ports. Similarly, the routine use of “ports of convenience” — ports located in geographies that are not signatories to the Agreement on Port State Measures (PSMA), the prevailing international law to combat IUU fishing — warrants additional scrutiny, particularly if the fishing vessel also flies under a flag of convenience.

“If you have a vessel that flies a flag of convenience and they land in a port that is not a party to the PSMA and that doesn’t seem to have strong port controls, the risk that they are selling IUU fish is extremely high,” Horn said.

While the practice of transshipment — in which vessels exchange crew, fish, or other supplies while at sea rather than doing so at port — is relatively common, vessels that routinely engage in transshipment and remain at sea for extended periods warrant additional due diligence.

“While some use of transshipment is often just a fact of business, it needs to be properly monitored and authorised, or it’s a significant red flag,” Horn said.

Resistance to reasonable audit requests. McDiarmid recommends that companies seeking to reduce their risk of exposure to IUU fish seek to create long-term relationships with a few reliable suppliers. Carrying out proper supplier due diligence can be resource- and time-intensive, and limiting the number of suppliers to a trusted few makes supply chain transparency easier and more affordable.

However, even long-term suppliers should be audited regularly, and any resistance to routine audits requires additional scrutiny. For example, as a part of routine audits, Princes asks its suppliers to have their employees complete online “worker voice surveys” about working conditions and has recently run into challenges with one of its suppliers, which refuses to have its staff fill out the surveys.

“It’s not automatically a red flag because it could be indicative of something like a language barrier — or it simply may not be something they are used to being asked to do,” McDiarmid said. “But you have to ask yourself, ‘Why don’t they want to comply with this very basic due diligence?’”

In such situations, he recommends trying to find other ways of getting the required information. If suppliers resist those efforts as well, “we may have to rethink the relationship”, McDiarmid said. “Ultimately, you have to think about your company’s reputation, and that’s something that’s hard won and easily lost.”

— Malia Politzer is a freelance writer based in Spain. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.