Monday, 10 May 2021
Using Blockchain to Revolutionize Compliance in Supply Chains
Fraudulent claims can upend a supply chain, having lasting impacts on businesses, their workers, and our forests. FSC’s blockchain verification technology aims to tackle fraudulent FSC claims and non-conforming forest materials and support “know your materials” compliance.
By Michael Marus, Chief Information Officer and Director of Information Technology, FSC International
Information Technology is playing an important role in evolving FSC’s toolset to protect our reputation and credibility, strengthen assurance, and combat fraudulent trade claims. We’ve expanded our capabilities to detect and respond to risks to include more integrated digital solutions, and the most recent initiatives include the FSC GIS and Earth Observation Portal and Digital Audit Reporting.
Today, I am pleased to announce the launch of a pilot program for high-risk supply chains of the FSC Blockchain Beta digital verification platform, our latest technology innovation that aims to revolutionize FSC materials traceability and trade compliance with blockchain technology.
I want to share some important learnings from our integrity investigations, so that we cut through the hype of blockchain technology and shed light on why I believe it fits the bill to solve issues with fraudulent claims that plague supply chains.
Why are materials compliance checks and traceability so important?
FSC trademarks are valuable to all our stakeholders, and we work to protect our reputation and enforce our trademark rights by monitoring trademark compliance and investigating false claims. Certified organizations are licensed to use the FSC trademarks for on-product labelling and promotional use, and at the point of trade, organizations’ trade documentation carries FSC claims that tell trading partners the materials they are buying are certified.
When we find fraudulent claims and non-certified materials in FSC supply chains, there is a breakdown of trust, and the achievements of compliant certified organizations can be significantly obscured. FSC’s supply chain investigations and Transaction Verification allow FSC to investigate, uncover, and address fraudulent activities carried out by certified organizations. It is important that I share two essential and recurring realities that emerge from our investigations and the use of Transaction Verification.
First, certified organizations want timely verification that the certified materials received from their trading partners are compliant and accounted for all the way back to the source. Investigations allow FSC to address problems that occurred in the past, often once the damage is done and materials have already passed through the supply chain even to the point of end-user sales. Fraudulent activities carried out by one certified organization in the supply chain can cause lasting damage to the credibility and reputation of FSC and to all the certified organizations that fully meet our standards. Transaction Verification is suitable for supporting investigations, but ex post facto data and verification offer little immediate and direct value to those certified organizations that are compliant with FSC’s certification standards.
Second, Transaction Verification is used in FSC’s supply chain investigations over a specific and past time period, and focusing on a specific high risk supply chain. This offers very little ability for FSC to adjust or scale to real-time monitoring during or after an investigation. The process of conducting Transaction Verification requires multiple steps and interventions by certified organizations and their certification bodies to support maintaining the privacy of business relationships across the supply chain.
Compliance checks and undisputable traceability of materials are important to certified organizations and for FSC, and Information Technology tools can help overcome the obstacles of the lack of efficiency and not having timely verified information while protecting the privacy of business relationships.
What is blockchain and how can it support integrity in FSC supply chains?
Simply put, blockchain is a record-keeping digital technology, and it registers transactions into a digital ledger that cannot be changed (a concept known as immutability). These transactions are recorded in the ledger as a chain of data blocks via a consensus protocol that defines the veracity and data integrity of each transaction before it can be recorded on the ledger. Unlike public blockchains associated with cryptocurrencies, consortium or “permissioned” private blockchain ledgers allow for access restrictions governed by parties’ permission to participate in the blockchain, even if the parties are not “known” to each other.
Like many global supply chains, forest-related supply chains rely on paper documentation, including a paper trail of invoices, bills of lading, and other “wet” signature/stamp trade paperwork. Paper systems open the potential for fraudulent claims by cause of tampering with or falsifying documentation to inflate material volumes. Blockchain can fundamentally change how compliance and traceability of FSC materials across supply chains are verified using secure technology, breaking free of paper-based documentation, and exclusively relying on paperwork exchanged amongst organizations to assert trade claims that imply that materials are compliant.
Another important aspect of blockchain is that it helps overcome IT “architectural” and operational limitations related to delivering a full package of immutability, information security, and consensus when the participating parties may be either known or unknown parties to each other. A certified organization clearly knows their direct suppliers, but generally they do not have knowledge of their trading partners’ suppliers. Blockchain allows trading partners to be connected to all parties handling materials down to the source and to verify the compliance of the materials as they move through the supply chain, without the need to reveal or even identify business relationships beyond those direct relationships an organization already has today.
I believe blockchain can offer value to certified organizations to support verification that the materials they trade are compliant and traceable to the source. Today, FSC-certified organizations are required to maintain up-to-date material accounting records of the certified materials they trade, and we can tap into these records with blockchain to securely share and verify these point-of-trade exchanges across the supply chain.
What is the FSC Blockchain Beta?
The FSC Blockchain Beta is a “permissioned” private blockchain ledger platform designed to verify materials trade compliance across FSC supply chains. We are conducting pilot tests of our technology from April to October 2021, and these pilots focus on high-risk supply chains. A select control group of certified organizations will be contacted to participate in the pilot program during this period.
The goal of the pilot program is to demonstrate blockchain technology’s facility to transform trade compliance verification. The pilots will gauge organizations’ means of meeting requisite criteria to share standardized point-of-trade data, and we will gather information on features that would be indispensable to certified organizations. Our pilot program will offer the space to validate blockchain technology with real data and to determine the conditions that enable us to develop enhancements towards wider general availability to certified organizations in the future.
I believe the FSC Blockchain will transform materials trade compliance verification and traceability with a secure and trustworthy self-service digital platform to verify real-time “point-of-trade” inputs and outputs of FSC-certified materials.