The Rise of Fiber Fraud: Lifting the Lid on Fashion Transshipments

Laundering is a common criminal activity in the financial sector, where money is moved from location to location so that by the end of the journey it’s virtually impossible to tell where it came from.

The reason it’s done is because that original source is often illegal, and involvement would risk serious repercussions for participants.

It’s happening in the world of fashion right now, except that it’s cotton rather than money that is being laundered. This practice is often referred to as transshipments.

How do we know this is occurring? If you look at the Customs & Border Protection (CBP) dashboard, you can see the countries with higher detentions under the UFLPA. Surprisingly, given the remit of the regulation, the main source of detentions are not the usual suspects.

This reflects the changing nature of material sourcing. When raw materials change hands and move between countries, often multiple times, traceability can be lost – and that puts brands in the apparel and footwear sector at risk.

Now more than ever, brands can't take the position of just trying to extinguish risk once it occurs – they must be proactive. Let’s dive into this to understand why and what the industry can do.

What are transshipments – and why do they matter?

Transshipments, or for our conversation cotton laundering, are when cotton products grown in risk origins associated with forced labor are transported, whether that’s as fiber, yarn, or fabric, through other countries to foreign manufacturing hubs before being shipped internationally. It's done to bypass sanctions such as the UFLPA legislation, and others across the world, which would otherwise prohibit these goods from import into various markets.

For manufacturers, it can be extremely difficult to distinguish cotton products from different sources because they may have been mixed while being transported – either deliberately or inadvertently.

At Oritain, we find a significant amount of cotton is being exported as both yarn and fabric from these risk origins for final assembly and manufacturing in countries such as Cambodia, Vietnam, Bangladesh, India, Pakistan and others.

The result is that international fashion brands may potentially be procuring prohibited products from factories that have no obvious ties with risk origins.

But regulators are also keeping close track of this trend. UFLPA enforcement is stepping up and detention of goods could cost fashion brands hundreds of thousands of dollars – not only in the direct costs of the goods that have been detained, but also having them held up in ports of entry, then having to work through the legal consequences.

There are indirect costs as well: damage to brand reputation, potential loss of customers, loss of contracts and licensing agreements, and increased government scrutiny.

Diversified sourcing can help – but masks critical risks

In speaking with fashion businesses every day, it’s clear to me that, while some are far more advanced in terms of maturity, most brands and retailers are doing their best to manage the situation.

That means understanding the true nature of their products and the materials that go into them. Recently, speaking on a panel at the Sourcing Journal Fall Summit, there were a plethora of different discussions about traceability solutions.

However, a lot of brands and retailers think that simply relocating a portion of their sourcing out of a particular country is going to minimize the risk of prohibited materials being present within their products.

Unfortunately, attempting to divest your supply chain from those areas is not necessarily going to minimize the risk. It actually lures businesses into a false sense of security and leaves them exposed from a risk perspective.

That’s because a significant portion of the inputs that are provided are still coming from prohibited origins. Manufacturing may have been relocated to Vietnam, Bangladesh, or India, but the raw materials may still come from places that are problematic. And that’s the point of greatest risk.

Compliance can’t rely on documentation alone

In this environment, it’s essential for fashion businesses to protect themselves from transshipment risk. Documentation plays an important role in this, and the UFLPA mandates the collection of this, but relying solely upon documentation leaves brands and retailers at considerable risk.

We must remember that a lot of the documentation that's provided is self-submitted by the supplier. That doesn’t necessarily mean it’s inaccurate, but it does mean businesses would be unwise to simply accept it at face value.

Having the ability to overlay a level of forensic verification as part of this process is absolutely critical to ensure the veracity of the implicit or indirect information that's provided.

At Oritain, we analyze the isotope ratios and trace element concentrations that naturally occur in cotton to test fashion and textile products at any point in the supply chain, whether that be fiber, yarn, fabric or finished garment. This enables us to verify the origin of the cotton.

We've spent almost a decade mapping over 95% of the world's cotton producing countries. That gives us a baseline across the globe that we can compare samples from any source against and provides us insights we can pass on to our clients.

Every day we see the benefits for brands and retailers in implementing programs with Oritain. It's not only the detection of non-compliance in their supply chains and reducing the risk of unapproved substitutions that's valuable.

It also empowers brands to communicate to their vendors and suppliers that they have this forensic testing capability as part of their compliance program. And that’s a significant deterrent to non-compliant behavior.