High-value, high-risk: Bribery, corruption and fraud threats to the luxury goods sector
11 min read
As Coco Chanel once said: "Fashion changes, but style endures." And "endurance" has been a key word for the global luxury goods sector in recent years; it has seen exceptional growth in defiance of high interest rates, geopolitical instability and the economic fallout from the Covid-19 pandemic.1 However, with demand for personal luxury products slowing to 8% in 2023 and persistent inflation and geopolitical uncertainty on the horizon, a slowdown is expected in 2024. Analysts are forecasting growth of around 5 to 6%, almost in line with inflation in the industry and a significant reduction from post-pandemic sales growth.2
Numerous geopolitical and economic risks exist, not least the intense election cycle in 2024: of the 17 key national elections scheduled over the next year, over a third are currently too uncertain to call, presenting possible negative impacts on business operations and consumer confidence. In addition, geopolitical tensions mean growth in relevant markets is curtailed to a certain extent, with luxury goods providers variously facing the consequences of sanctions, boycotts and supply chain issues.3
Inflation also continues to present a challenge to consumer spending, with companies’ rising energy and material costs reflected in higher prices for goods and services. Whilst affluent individuals – a key target market for the sector - are less likely to be affected by an economic downturn, the majority of luxury brands’ customers are expected to adapt spending habits in the face of economic uncertainty by reducing discretionary spending.
Despite this, the luxury sector is expected, in 2024, to outperform the broader fashion market, which is predicted to grow between 2% and 4%. Looking ahead, growth is predicted to continue until 2030, albeit at a slower rate. This continued growth presents opportunities for luxury goods providers. But global trends present numerous compliance risks, which these companies will have to mitigate in order to take full advantage of consumer demand and avoid the reputational and legal costs of non-compliance.
In this, the first of our series of articles on compliance risks facing the sector, we look at how bribery, corruption and fraud risks could impact luxury goods companies over the coming year.
Reputational risks from perceived corruption
Luxury Goods Linked to Corruption
The familiar image associated with bribery is cash in a brown envelope. However, bribes can take many forms, including luxury goods.
Desire for an affluent lifestyle is also seen as a driver of corruption, and associations between a corrupt elite and high-end goods – or such goods being used as bribes – can create reputational risk for brands. In particular, this perception may mean that brands are subject to additional scrutiny by the media, consumers and law enforcement. Those operating in the luxury sector are therefore advised to ensure that their policies and procedures – and the effective implementation of those procedures – are beyond reproach, so that – regardless of how their products are used by others – luxury goods providers are seen to be as robust in the fight against corruption as possible. This is particularly important in a market where brand values are a key factor in consumer spending and social media-led boycotts are on the rise.
Shift to the East
Jurisdictional risks may also be changing for those operating in the luxury sector, with brands increasingly looking beyond Europe and the United States to address various economic challenges. In fact, the United States experienced an 8% decrease in luxury purchases in 2023 when compared to 2022,4 with nearly 75% of consumers in the United States and Europe having stated that they planned to decrease their discretionary spending by at least 6% in 2023.5 The sector has adapted by increasing its sales to consumers in regions where the middle class, and disposable income, are burgeoning:
- China: Customers in China are expected to account for 35 to 40% of the personal luxury goods market by 2030 (roughly equal to the market share projected to be taken by the entirety of the United States and European customer base);6
- The Gulf: The personal luxury goods market in the Gulf states is projected to account for 8% of luxury goods sales globally by 2030,7 making the region one of the fastest growing luxury goods markets (increasing in value by almost 40% since 2019);8 and
- India: India’s luxury goods market could increase to 3.5 times its size by 2030, bringing an additional 35 to 40 million new mid- and high-income consumers to the luxury goods market.9
Other economic considerations, such as inflation, are also contributing to this shift. Although inflation in the largest ten consumer markets is beginning to ease, only China and Brazil are expected to experience inflation below pre-pandemic levels.10
The international nature of the luxury goods sector has, in many ways, been its saving grace in turbulent times, but exposure to new jurisdictions can present compliance risks. For example, some of these jurisdictions have higher levels of perceived public sector corruption: Brazil scored only 38 out of 100 in the 2022 Transparency International Corruption Perceptions Index,11 with India scoring 40 and both representing a relatively high risk of corruption.12 Whilst these markets present commercial opportunities, companies may need to consider whether their compliance programmes should be adapted to reflect heightened compliance risks.
Financial crime risks in supply chains
Bribery and Corruption
Various compliance risks stem from the supply chains of luxury goods companies, including in relation to bribery and corruption. Corruption is particularly prevalent in supply chains relating to the sourcing of raw materials, such as diamonds and gemstones, in high-risk jurisdictions,13 and risks can be heightened in the face of additional economic pressures.
For all companies with a supply chain, third party risk remains a key consideration. The most significant international bribery and corruption laws, in the United States and the United Kingdom, can hold companies liable for the actions of their third parties. Under UK law, a company even can be held liable for failing to prevent bribery by an individual or entity acting for or on its behalf (such as an employee, agent or supplier), even where the company had no knowledge, and did not approve, of the misconduct. These international laws have wide extra-territorial reach, meaning multinational companies and their directors and employees may be subject to criminal liability, even where they are acting outside of the jurisdiction. Beyond the reputational and commercial repercussions of being found liable for a "failure to prevent" bribery offence, it also can result in the imposition of an unlimited fine.
The only defence to the UK "failure to prevent" offence is for the company to have "adequate" procedures in place to prevent bribery by those acting for or on its behalf. The key elements of an effective compliance programme, which will help companies to reach the "adequate" procedures standard, are set out below.
Fraud
Fraud is increasingly at the forefront of the agenda of many governments and law enforcement authorities. Fraud can take many forms. Therefore, all companies should be mindful of the risks, but those companies with exposure to supply chain and other third party risks, such as the luxury goods sector, should pay particular attention.
A major development affecting international companies with a link to the United Kingdom is the introduction of an offence under UK law of failing to prevent fraud.
Under the new Economic Crime and Corporate Transparency Act - introduced by the UK government at the end of 2023 - a company will be liable where a fraud offence is committed by an associate. "Associate" is widely defined to include employees, agents, subsidiaries and their employees and any other person who performs services for or on the company’s behalf. The offence will be committed where the associate commits the fraud intending to benefit the company or any other person to whom the associate provides services on the company’s behalf. It does not matter whether senior management instructed or had knowledge of the fraud. The only available defence will be where the company had "reasonable fraud prevention procedures" in place.
Companies that are intended to fall within the jurisdiction of the offence are those that meet two out of three of the following criteria in the financial year preceding the year of the offence: more than 250 employees, more than GBP 36 million turnover and/or over GBP 18 million in total assets. Numerous luxury goods companies will therefore be affected and would be advised to develop associated anti-fraud compliance programmes. Indeed, this is likely to change the compliance landscape in relation to fraud, as many companies will look to shore up their anti-fraud procedures in response to the new law and are likely to require others in their supply chain to do the same.
Whilst organisations’ existing financial crime policies and procedures should mean that compliance teams will not need to start from scratch, ensuring that this framework is sufficiently tailored to the prevention of fraud is still likely to represent a significant compliance burden for organisations, particularly as fraud is more difficult to define. The UK government is required to publish guidance – expected in early 2024 – on what reasonable fraud prevention procedures should entail. It is likely that the guidance will be similar in certain respects to the guidance that already has been published in respect of the failure to prevent bribery and failure to prevent facilitation of tax evasion offences. It also is likely that it will include the key elements of an effective compliance programme summarised below.
As with the failure to prevent bribery offence, companies convicted of failure to prevent fraud that do not have reasonable prevention procedures in place could face an unlimited fine.
Getting ahead of the trend
Against the backdrop of difficult trading conditions, increased scrutiny and additional regulations, what should luxury goods companies be doing in the field of compliance to protect their position?
There are certain key elements of a compliance programme that can be universally implemented:
Compliance resourcing
In light of the financial and reputational costs associated with involvement in bribery, corruption and fraud, luxury goods companies should ensure that their compliance functions are adequately resourced and that they seek external legal advice when necessary – and particularly in order to keep up to date with legislative developments. In addition, senior management should ensure that a culture of compliance is promoted throughout the company.
Risk assessments
Luxury goods companies should conduct regular, documented bribery and fraud risk assessments, taking into account the specific risks they face. These should consider factors such as jurisdictional changes in customer base and suppliers, expansion into new territories and the evolution of applicable national and international legislation and regulations.
Policies and procedures
Anti-bribery and corruption and anti-fraud policies and procedures should be tailored to mitigate the specific risks identified in the risk assessments and should be monitored and reviewed on a regular basis to ensure that they remain fit for purpose. The relevant policies and procedures should be communicated within and, where appropriate, outside the company, and training should be provided to ensure that employees are familiar with, and understand, the red flags to look for and the employees’ corresponding obligations. A whistleblowing channel should also be implemented to enable internal and external parties to raise concerns of misconduct. Where groups have subsidiaries across jurisdictions, these policies should generally be standardised against the international benchmark to ensure consistency in compliance.
Due diligence and third party management
Anti-bribery and corruption and anti-fraud due diligence should be carried out on third parties engaged by luxury good companies and should be tailored to the risk they pose, whether based on the jurisdiction in which they operate or the role they perform. This is key to managing third party supply chain risk. This should be conducted prior to onboarding and should be repeated on a periodic basis to confirm that the information remains accurate. Luxury good companies should also seek to monitor and manage the conduct of third parties throughout the engagement to mitigate risks of improper third party conduct.
Compliance will not be going out of fashion
The luxury goods sector is in a prime position to grow despite the prevailing geopolitical and economic headwinds, and participants will want to make the most of opportunities – but the bribery, corruption and fraud risks inherent to the sector are all too apparent.
Luxury goods companies that take stock of the risks they face and implement comprehensive compliance programmes will put themselves in a prime position and be able to walk into next season confident that the threat of financial penalties, criminal convictions and reputational damage has been mitigated as much as possible.
1 https://www.ft.com/content/ace8104d-ae80-4969-949b-62d301239d29.
2 https://www.ft.com/content/9ef8b2f6-1797-4dfd-81a6-c5eb01c3dbe8.
3 https://www.fitchsolutions.com/bmi/consumer-retail/consumer-retail-key-themes-2024-weaker-outlook-pockets-opportunity-amid-volatility-29-11-2023?fSWebArticleValidation=true&mkt_tok=NzMyLUNLSC03NjcAAAGQagUDr8VXybWa7TcfFaNRSYSsIrW7AOrcHUvJicuLI-aUFhbE5egv2AW5EAT-cNZYLoP0o6q_DOiygqKXgxagi9DUurY9CEU6N2huzh4yt-TbmiJN2w
4 https://www.bain.com/about/media-center/press-releases/2023/global-luxury-market-projected-to-reach-1.5-trillion-in-2023-a-new-record-for-the-sector-as-consumers-seek-luxury-experiences/.
5 https://www.jpmorgan.com/insights/research/luxury-market.
6 https://www.jpmorgan.com/insights/research/luxury-market.
7 https://www.bloomberg.com/news/articles/2023-01-06/lvmh-richemont-set-to-benefit-from-middle-east-s-fast-growth.
8 https://www.chalhoubgroup.com/full-report-gcc-personal-luxury-in-2021.pdf.
9 https://www.bain.com/about/media-center/press-releases/2022/global-luxury-goods-market-takes-2022-leap-forward-and-remains-poised--for-further-growth-despite-economic-turbulence/; https://www.jpmorgan.com/insights/investing/investment-trends/digital-reinvention-fuels-a-fast-growing-luxury-sector#:~:text=Bain%20projects%20that%20the%20global,luxury%20consumers%20reduce%20their%20spending
10 https://www.fitchsolutions.com/bmi/consumer-retail/consumer-retail-key-themes-2024-weaker-outlook-pockets-opportunity-amid-volatility-29-11-2023?fSWebArticleValidation=true&mkt_tok=NzMyLUNLSC03NjcAAAGQagUDr8VXybWa7TcfFaNRSYSsIrW7AOrcHUvJicuLI-aUFhbE5egv2AW5EAT-cNZYLoP0o6q_DOiygqKXgxagi9DUurY9CEU6N2huzh4yt-TbmiJN2w; https://www.eiu.com/n/campaigns/consumer-in-2024/.
11 The Transparency International Corruption Perceptions Index annually ranks jurisdictions by their perceived levels of public sector corruption, scoring on a scale of 0 (highly corrupt) to 100 (very clean): https://www.transparency.org/en/cpi/2022.
12 https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER%20India%20full.pdf.coredownload.pdf.
13 https://www.bsr.org/en/primers/10-human-rights-priorities-for-the-luxury-sector.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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