Trade Tariffs and Fraud: The Hidden Risks of Shifting Supply Chains

Trade tariffs are powerful policy tools used to protect domestic industries, retaliate in trade disputes, or influence foreign policy. For businesses, however, changes in tariff structures can mean higher costs, squeezed margins, and operational disruption. The most common response? Rethinking sourcing strategies.

Yet behind these shifts lies a complex web of fraud risks, ethical pitfalls, and reputational threats. In the rush to reduce exposure to tariffs, many companies inadvertently open the door to misconduct—sometimes with significant financial and legal consequences.

 
New Suppliers and New Customers: Fertile Ground for Fraud
When tariffs hit, companies often scramble to establish relationships with new suppliers or customers in alternative markets. But fast-tracking these partnerships can create serious vulnerabilities:

Fake Suppliers: Fraudsters may create shell companies offering below-market prices or rapid delivery. Businesses that don’t perform proper due diligence can find themselves paying for goods that never arrive.

Substandard or Counterfeit Goods: In new markets, particularly those with lower regulatory enforcement, there is a higher risk of receiving non-compliant or dangerous products.

Non-Payment by Customers: New buyers in unfamiliar jurisdictions may engage in fraudulent purchase agreements, delay payment indefinitely, or vanish altogether after receiving goods.

Bribery and Corruption: In certain jurisdictions, government approvals and customs clearances are influenced by corrupt practices. This puts businesses at risk of violating anti-bribery laws such as the U.S. FCPA or UK Bribery Act.
 
Politically Connected Persons (PEPs): Influence with Strings Attached
One often-overlooked risk is unknowingly engaging with politically connected persons (PEPs). These individuals—government officials, their relatives, or close associates—may be involved in ownership or control of suppliers or customers.

Risks include:

Preferential Treatment and Corruption: PEPs can exert influence to win contracts unfairly, sidestep regulations, or secure favorable terms—sometimes in exchange for kickbacks or illicit favors.
Sanctions Violations: Engaging with sanctioned PEPs or their affiliates can trigger regulatory penalties, seizure of assets, or loss of market access.

Reputational Fallout: Being tied to politically exposed individuals—particularly in regions with poor human rights or governance records—can irreparably damage a company’s brand.
Proper vetting and the use of specialized databases are essential when engaging new partners, especially in high-risk jurisdictions.

 
Hopping Borders to Avoid Tariffs: A Risky Strategy
In a bid to lower costs, some companies attempt to change the stated origin of goods to benefit from preferential trade agreements. This “tariff engineering” often involves:

Transshipment Fraud: Goods are rerouted through third countries, relabeled, and declared as originating from a lower-tariff country, even though no meaningful transformation occurred.

Falsified Documentation: This includes forged certificates of origin, manipulated shipping manifests, or altered customs declarations—all of which carry serious legal consequences.

Third-Party Brokers: Shady intermediaries may facilitate these schemes under the guise of “logistics optimization,” masking fraudulent practices from their clients.
Such tactics, even if indirectly sanctioned, can expose a company to fines, blacklisting, and customs seizures.

 
The Ethical Dimension: Child Labour and Environmental Abuse
Switching to new jurisdictions often lowers regulatory and compliance barriers, but it comes at a moral cost:

Child Labour: In countries with lax labor laws, cheap sourcing often correlates with exploitative working conditions. Companies may unknowingly become part of a supply chain that uses underage or forced labor.

Environmental Violations: Unscrupulous suppliers may ignore environmental protections to cut costs—dumping waste, polluting rivers, or overexploiting resources. These practices are not only unethical but can provoke consumer backlash and investor divestment.

Greenwashing Risks: Suppliers may falsely claim environmental certifications or labor standard compliance, banking on the buyer's limited ability to verify those claims.

In today’s ESG-conscious environment, companies face growing pressure from stakeholders, regulators, and consumers to ensure their supply chains are not complicit in these abuses.

 
Mitigating the Risks
To protect against financial loss, legal exposure, and reputational damage, companies should implement robust risk management protocols:

Thorough Due Diligence: Vet all new partners—screen for sanctions, PEP connections, labor violations, and environmental breaches.

Supply Chain Audits: Engage third-party auditors to inspect factories, validate sourcing claims, and evaluate working conditions.
Contractual Safeguards: Include clauses that allow termination for ethical breaches, misrepresentation, or legal non-compliance.

Ethical Sourcing Policies: Communicate clear standards to all suppliers and enforce them consistently.
Employee Training: Equip procurement and compliance teams to detect red flags, spot inconsistencies in documentation, and challenge unethical sourcing.
 
The global economy thrives on adaptability—but in the age of tariffs, that adaptability must be balanced with vigilance. As businesses race to reconfigure their supply chains, they must resist the temptation to cut corners.

Fraud, corruption, and ethical lapses aren’t always obvious at first glance—but once exposed, the fallout can be devastating. With proper oversight, transparent sourcing, and rigorous compliance practices, companies can protect their operations, their reputation, and their values—no matter how turbulent the trade winds become.