Are You at Risk? Understanding Default Compliance in Manufacturing

Imagine you’re a company that’s been in the manufacturing business for years now. You’ve fallen into your industry routines, and you pretty much know what to expect on a day-to-day basis. However, you receive an email one day from a client asking about some law you’ve never heard of and requesting substance information on your products. None of your other clients have ever asked about this over the years you’ve been active. You brush off the request as not applicable to you, and you don’t hear back from them. Only next year, you are notified of a noncompliant product containing a regulated substance. Now you need legal representation and must prepare for audits, litigation, fees, and damage to your company. But surely you can’t get in trouble for something you don’t know about, right?

Ignorance does not hold up in court. 

Regulations Impact Everyone in the Supply Chain

As part of your responsibilities for placing products on the market, you must understand the factors that affect that market and recognize your part in the supply chain beyond your clients. This includes product regulations on multiple levels, as well as your role in the supply chain for the product. A regulation one of your clients may face may not be applicable to all clients, and you may not be aware of other client’s compliance policies or practices. 

Environmental Compliance and Supply Chain Responsibilities

Believe it or not, a majority of environmental regulations enforcement comes from post market surveillance, and a growing number of regulations require multiple players in the supply chain to be aware of what substances are present in the parts used in their products in the first place. What this means for players in a supply chain is the growing presumption of compliance, also known as default compliance. 

What is “Default Compliance?”

Default compliance means that regardless of your knowledge on the subject, simply placing a product for sale in a particular market is a statement of compliance in itself and you are held responsible for that action.

The Risks of Default Compliance

While some default compliance regulations may hold the end company responsible, and others may hold multiple players in a supply chain responsible, a majority of product regulations require due diligence within the supply chain. This means that while you may not be the end company, you might be surveyed to assist your clients in their legal obligations. Being unable or unwilling to provide that assistance causes your clients to spend more money to cover the risks presented by your products. With due diligence becoming an industry standard method of compliance, clients will factor in your ability to provide them with material information on your products, and ignorance may cost you when your clients opt to use other suppliers with a higher knowledge base.

Noncompliance Comes With Great Financial Risks

The presumption of compliance brings several risks to your company, especially in regulatory and legal contexts. Default compliance (also sometimes called assumed compliance) can lead to a lack of vigilance in maintaining and checking adherence to standards and regulations. This can result in undetected non-compliance issues that can grow in severity over time. If an organization is found to be non-compliant after compliance is presumed, it can face significant legal penalties, fines, or lawsuits. These financial penalties can be particularly harmful if the regulations account for the duration of the non-compliance when determining the severity of the penalties.

Non-compliance can severely damage an organization's reputation, eroding customer trust and stakeholder confidence. This can have long-term negative effects on the business, such as recalls or financial losses. Additionally, failing to comply with financial regulations can impact an organization’s ability to operate in certain markets. A non-compliance event can draw increased scrutiny from regulators too. Default compliance can also lead to compliance based on outdated standards or regulations, especially in dynamic regulatory environments where rules and expectations can change frequently. This can lead to more frequent audits, stricter regulations, and a more challenging operating environment.

Proactive Strategies for Environmental Compliance

To mitigate these risks, organizations should implement preemptive robust compliance programs, regular internal audits, continuous monitoring, and a culture of transparency and accountability, regardless of where they fall in the supply chain or what regulations they may be familiar with. Prioritizing due diligence programs, engaging with experts, and embracing full material declarations (FMDs) can preemptively tackle any regulation changes and help companies quickly determine compliance and adapt to new challenges market regulations may bring, including default compliance. 

FMDs ensure that companies are proactively meeting environmental regulations, such as REACH (Registration, Evaluation, Authorisation, and Restriction of Chemicals) in the EU and RoHS (Restriction of Hazardous Substances) in various regions, as well as assumed compliance regulations such as California Proposition 65 (CalProp) or the U.S. Toxic Substance Control Act (TSCA). This detailed material information makes it easier to demonstrate compliance during regulatory audits and inspections by providing clear, traceable, and detailed information about the materials used in products, enhancing transparency throughout the supply chain. This helps identify and manage any potentially hazardous substance risks you may face and can help you answer client inquiries you may not be familiar with.

Building a Sustainable Future Through Compliance

Proactive compliance aligns with corporate social responsibility (CSR) initiatives and sustainability goals, demonstrating a commitment to environmental stewardship. Consumers are increasingly demanding transparency about the environmental impact of products. A solid compliance program can build consumer trust and loyalty by showing that a company is committed to environmental responsibility. Companies that can quickly adapt to environmental regulations and offer compliant, sustainable products gain a competitive edge in the market due to streamlining their material sourcing, and reducing costs associated with managing hazardous substances, and ensuring compliance to avoid costly fines and sanctions associated with non-compliance. 

By adopting an adaptable and transparent compliance program, companies not only comply with current regulations but also position themselves as leaders in sustainability and environmental responsibility. This strategic move supports long-term success and resilience in an increasingly environmentally conscious market.