Commercial Awareness Update – W/C 10th January 2022

Fast Fashion In Crisis  

In 2021 the UK fast fashion industry was estimated to be worth £62.2 billion. However, in recent months, major fast fashion brands have recently highlighted the impact of the supply chain crisis on their profits. From congested ports to material shortages, all whilst grappling with a new Covid-19 variant, is the fast fashion industry in crisis?

As we reported back in November, the global supply chain crisis is deepening. The OECD has warned that the new Omicron variant could create more supply disruption and prolong high inflation. Fast fashion is notorious for having small profit margins, and the impact the supply chain crisis is having on this should not be understated. With shipping container costs rising tenfold in 2021, along with climate crisis issues, it is easy to see why so many fast fashion chains are now exposed to dwindling profits.

In early December, major fashion chain Boohoo announced its shares dropped to a five year low after reporting their sales growth would slow down. Chief executive, Mr John Lyttle, attributed this to an increase in customers returning items and delays to supply chains. In the past quarter, returns were up by 12% compared with the same period in 2020. Mr Lyttle speculated that a large proportion of returns could be due to cancelled Christmas parties owing to the new Omicron variant. In response to clogged ports across the globe, Boohoo has to have charter planes to shift stock, another considerable expense that has eaten away at profit margins.

Last month the founder of Missguided was understood to have agreed to a rescue deal with Alteri, an investment firm specialising in financing struggling retailers. Missguided is another huge fast fashion chain dominating the online market. They face similar issues to their competitors Boohoo, grappling with soaring freight costs and supply chain delays at ports. In October, it was reported that Missguided withdrew from acquisition talks with high-street retailer JD Sports over supply chain concerns.

Future solutions

Many large retailers such as Lululemon and Gap have begun shipping in via planes for high-value items. This has been particularly important for the festive season to ensure retailers meet demands and sell excess stock.

Some retailers are moving away from global supply chains and instead focusing on bringing production closer to home. In November, Mulberry announced it is planning to expand its Somerset factory. In a similar move, Benetton’s CEO announced they would be moving production westward to Europe and Egypt and away from Vietnam and Bangladesh. According to its 2020 annual report, Zara’s parent company, Inditex, stations 53% of its production in its home market Spain as well as other nearby countries.

It seems the crisis is encouraging fashion brands to shorten their supply chains, bringing manufacturers closer to home. Unsurprisingly, this move will be welcomed by climate campaigners. It will be interesting to see which path fast fashion brands will take in the months to come. Will they continue to grapple with longer, more strenuous chains, or will they re-think their business modules and seek to strengthen the thin profit margins?

Article written by Maddy Preedy

‘Fake It Till You Make It’ – Silicon Valley’s Con Artist Of The Century

This week’s essential information

Silicon Valley is the world’s technological and innovation epicentre. It is a location where the next generation of innovators may realise their goals. Investors like a genius with much potential. Therefore they are always on the lookout for fresh innovations to invest in. The most significant aspect of the market arguably is for investors to invest in the next grandiose idea in the hope of making headlines. For context, venture capitalists raised about $100 billion in the first nine months of 2021.

‘What do you dream for?’ was a question once posed to Elizabeth Holmes. She responded that she wished for fewer people to say goodbye to someone they cared about. Holmes had no idea that she would be saying farewell to her loved ones sooner after a jury convicted her guilty of fraud and conspiracy.

Theranos, a company started by Elizabeth Holmes, had the potential to revolutionise the medical field. She envisioned a device called ‘Edison’ that could take a small amount of blood and run 200 diagnostic tests to check for diseases such as cancer. The aim was that blood testing would be more straightforward, less expensive, and faster. The device’s efficiency meant that patients would not need to see a doctor because the testing could be done anywhere. Because of her potential medical technology, Holmes rose to prominence in Silicon Valley. Commentators had speculated that she might be the next Steve Jobs. Holmes had even persuaded some of the world’s wealthiest and most well-known figures, including Rupert Murdoch and Henry Kissinger, to invest in her firm.

In 2013, the business signed an agreement with Walgreens Boots to implement its technology in its stores across the United States. Theranos was valued at $9 billion in 2015, making Holmes the wealthiest self-made woman in the United States. A Theranos lab was shut down by regulators in 2016 owing to the risk to patients’ health. Following a series of raids, Theranos was shut down in 2018. Ultimately, the reality was that the ‘Edison’ could only perform a dozen tests, all of which were faulty, inconsistent, and falsified. Patients were alleged to have obtained incorrect test findings due to this. For example, when one woman was pregnant, she was informed she was having a miscarriage. Others were told they had HIV when they did not.

Elizabeth Holmes, once hailed as the world’s youngest self-made female billionaire, was convicted of felony charges. For swindling her investors and patients, a jury convicted the former biotech CEO of fraud and conspiracy.

Why is this case significant?

This case is significant because it is a trial of Elizabeth Holmes and a trial of Silicon Valley culture. Theranos capitalised on the raw hunger for more. In some ways, the case has shown a “fake it till you make it” mentality, in which entrepreneurs overstate their ideas to attract investors. This illustrates the interaction between innovators and investors, revealing how investors may be terrified of losing out on the next ‘Apple’ or ‘Facebook,’ so they may invest even if they have reservations.

What is the relevance to law?

Theranos’ $9 billion fabrication is a perfect example of a white-collar crime. Those accused of fraud, such as Holmes, have the right to legal defence. White-collar crimes tend to be factually complex, thus necessitating the involvement of law firms with competent and specialist legal teams.

In general, legal firms assist early-stage equity investors in digital start-ups with due diligence processes. An investor’s legal team should, in an ideal world, aid them in balancing the requirement to deploy capital with the due diligence necessary to uncover any anomalies or mischaracterisations.

Article written by Tajinder Kaur

The Legal Profession’s Compliance Struggles With Anti-Money Laundering Regulations

‘The legal profession plays an important role in the fight against economic crime and takes its anti-money laundering responsibilities very seriously’, said Stephanie Boyce, the President of the Law Society.

However, anti-money laundering (AML) regulations appear challenging to comply with, additionally emphasized with examples of either wilful, negligent or unwitting technical breaches of said rules by the legal profession. There are several reasons which account for such misfeasance.

Economic criminals are especially inventive of new inconspicuous ways of moving proceeds of crime to avoid detection, including the use of client bank accounts, which means the actual percentage of fraudulent transactions detected, some as low as 1% in some institutions, may not justify the costs involved in putting in place adequate fraud detection systems. It is difficult for any sector, including the financial sector for which AML regulations were initially intended, to manage multi-jurisdictional and cross-border AML regulations.

Additionally, the general view is that the processes, regulations and technology currently in place are complicated, and not all firms may effectively train their professionals to efficiently use such systems. For example, the risks for each client must be monitored, and each risk level amended accordingly for each client. Such tasks are onerous undertakings. Suffice to say, it is somewhat inevitable that there will be breaches of AML regulations.

The recent misfortunes of Mishcon de Reya, a long-established member of the ‘Silver Circle’ of the UK’s leading law firms is an example of such happenstance. Mishcon recently accepted a reduced penalty, although still a record sum, of £232,500 following investigations by the Solicitors Regulation Authority (SRA) over the firm’s AML misdemeanours between 2015 and 2019. Accounts of these misdemeanours include the firm not undertaking a higher level of due diligence concerning two private clients and their associated corporate vehicles in high-risk money laundering jurisdictions between 2015 and 2017. Additionally, the firm was involved in a trio of property transactions where Mishcon did not undertake adequate due diligence concerning money laundering risks.

It is Mishcon’s second penalty in three months, preceded by a fine of £25,000 imposed by the Solicitors Disciplinary Tribunal (SDT), following investigations by the SRA in October 2021 for breaking the rules prohibiting the use of law firms as banking facilities for their clients. In this instance, the firm permitted payments to third party football agents from its client bank accounts, with such conduct expressly forbidden in the SRA’s Accounts Rules alongside the SRA Codes of Conduct. It could be said it is bad form for a firm looking to be listed in the London Stock Market later this year.

Firms are not the only entities subject to the reach of the SRA in ensuring the legal profession retains its critical position in helping combat money laundering practices. Individuals also incur heavy financial penalties should liability be established for breaching AML rules.

Mr John Davis, a sole practitioner with Davis-Law Associates and a long-standing member of the legal profession since 1985, and thus with significant professional experience, was fined £30,000 by the SDT following investigations by the SRA. The SRA’s uncovered Mr Davis’ law firm’s involvement in using client bank accounts as banking facilities for 17 client matters, with 15 of those matters having no underlying legal transactions connected to them.

Furthermore, Mr Davis undertook those transactions following instructions from Mr Rodney Whiston-Dew, a non-practising solicitor. The latter was previously convicted in November 2017 and sentenced to 10 years imprisonment for his part in a conspiracy to defraud public revenue by offering a ‘green’ tax-efficient investment scheme to wealthy investors, in addition to his cheating the revenue regarding his personal tax liability.

It is therefore evident that firms and legal professionals in general, struggle with adhering to rules and regulations governing money laundering practices as AML seemingly impose what could be defined as inordinate commissions on the legal sector. As a result, such impositions undermine the legal profession’s critical standing as a cornerstone in combatting economic fraud. However, it appears such struggles has not gone unnoticed by those with the capability to enforce changes in the rules and regulations governing such practices.

Her Majesty’s Treasury (HMT) called for evidence in July 2021 in its commitment to regularly review current regulations governing money laundering practices. The HMT did so to ensure AML regulations are applicable and efficient across all sectors to include the legal profession, with Stephanie Boyce adding that ‘at its centre, the UK AML regime should be effective at reducing money laundering and terrorist financing. It must be built on an evidence-based assessment of the risks and what works to mitigate those risks.

Although it is typical for regular public body reviews in any area of law, it is pressing AML regulations are to be reviewed on a more consistent basis to enable the legal profession to efficiently combat economic fraud. Furthermore, whilst it appears there are unwitting technical breaches of AML regulations, it is perceptible that some legal firms and professionals, although few, are negligent and wilful in breaching AML regulations.

The ensuing outcome of HMT’s consultation should hopefully go some way in ensuring the enforcement of newly reviewed and reformed AML regulations tightens the leash on those who knowingly commit economic fraud, whilst also ensuring the rules are transparent enough to prevent unwitting technical breaches. Furthermore, it is hoped that the consultation results in making AML measures especially supportive to the legal sector in retaining its critical position in combating money laundering practices.

Article written by Aqua Koroma

A Look Into 2022’s Challenges

High-ranked professionals in some of the biggest corporations worldwide (e.g., Mastercard, Natura & Co) were recently asked by BBC News what their most significant challenge for 2022 would be. Answers were quite diverse, although all stemmed from and were influenced by the actual economic climate.

Global payments

Cairns, the Executive Vice-Chair at Mastercard, focused on attracting the ‘best’ talent that the company crucially needs to have their ‘massive global network’ run correctly. She added that the bulk of Mastercard’s work is ‘invisible’: “We are moving money in the background in the blink of an eye”, reaching an enormous number of individuals worldwide with their products/services (estimated to be around 3 billion people), hence the crucial need for the ‘best and brightest in the market’.

Cyber security

According to Yoran, Tenable’s CEO, the company’s most important challenge is “opening organizations’ eyes” to the extent of their exposure to cyber risk. This is to render them aware, not only of their alarming susceptibility to such crimes but mainly of the dramatic repercussions this susceptibility can have on their businesses, especially when it comes to crimes such as intellectual property theft, data disclosure, data breaches and ransomware for example. 

Energy storage 

The greatest challenge – when it comes to Carlstrom (founder and CEO of Intravolt) – “in the year of electrification 2022” lies in bringing back the supply chain, bringing back the economies, the jobs to Europe and the prosperity. According to him, there is a pressing need to have the materials and suppliers close as organizations face difficulties transporting the needed supplies “from far away”.

Making beauty products

When it comes to manufacturing beauty products, Marques, CEO of Natura & Co, focuses on the pandemic, stating that it is not to be underestimated, especially with the current rise of infected individuals across numerous markets. He adds that the COVID-19 pandemic is still of great concern, hence the need to carefully navigate its stormy seas of uncertainty and unpredictability: He believes that the year 2022 will still be filled with challenges for the majority of businesses.

The four sectors mentioned above have different areas of concern regarding their operation in 2022, hence the importance of carefully analysing each market and its main targets better to understand their opportunities and challenges for the coming year. 

Article written by Nadine AbiKanaan