Logistics & vessel ownership in the pharmaceutical supply chain

Threats to the supply chain in the pharmaceutical industry are legion.

The adulteration and counterfeiting of ingredients for economic gain or terrorism nonwithstanding, the number of third-party suppliers and subsidiaries dependent on shipping & logistics is vast in the pharmaceutical sector.

A survey of the Chartered Quality Institute’s guidelines on supply screening in the pharmaceutical industry provide an indication of the scale of the challenge.

Typical Pharmaceutical Supply Chain hierarchy. Source: The Chartered Quality Institute

Typical Pharmaceutical Supply Chain hierarchy. Source: The Chartered Quality Institute

Each of these suppliers need to be assessed for capital investment, agents and brokers, capability, relationships, financial viability, legal status, ethical/political issues, and risk-screened.

This is a complex process, requiring business intelligence every step of the way.

“Transparency goes beyond gaining visibility into the extended supply chain. It is the process by which a company takes action on the insights gained through greater visibility in order to manage risks more effectively.”

Deloitte, The path to supply chain transparency

The World Health Organisation are acutely aware of this problem, and have highlighted likely causes of supply chain failure for Pharmaceutical companies. In their list of recommendations, Good Distribution Practices for Pharmaceutical products, one particular recommendation stands out:

“[5.8] If a distributor or his or her agent subcontracts an activity to another entity, the person or entity to whom the activity is subcontracted must be appropriately authorized to perform the subcontracted activity and should uphold the same standards as the distributor”
World Health Organization

Managing third party suppliers, and tracking ownership amongst vessels in an industry on the cusp of moving towards one-stop-shop will require improvements both in visibility and technological strategy.

“Getting a list of current clients is great, but truly understanding what those clients get from that partner, and how big they are, is more important”... “Much like real estate lives by the credo location, location, location, the first step in chain of custody best practices is document, document, document”.
- Inbound Logistics

Visibility is also a peculiar challenge to the pharmaceutical industry because drug shipments are subject to so many different network handlers internationally, with many potential mistakes to be made along the way.

Beneficial Ownership of Vessels

As the B-Team have highlighted, an emerging threat to industries dependent on shipping is the lack of traceability of the vessels of shipping companies. Vessels can even operate anonymously as offshore companies, with dire implications for corruption. This also enables them to avoid liability in business relationships, by exploiting complex ownership structures.

There is an obvious challenge in assessing beneficial ownership - for example, in identifying control vs. mere ownership, or verifying the ownership information when acquired. Law firm Clyde and co have demonstrated how a case can entirely be thrown by the obscurity of this information. The European Parliament are working on this issue, and in February, overwhelmingly voted in favour of beneficial ownership transparency for fishing vessels within the EU.

Pharmaceutical companies have recently run afoul of errant control of their subsidiaries, particularly within shipping. Novartis recently paid to settle illegal shipping allegations to the tune of $16 million, after a subsidiary of theirs shipped into a sanctioned jurisdiction:

Novartis subsidiary Alcon made illegal shipments, according to a settlement agreement reached with the U.S. Department of Commerce. As a result of these, and of other exports to Sudan, Alcon Labs and Alcon Pharmaceuticals will have to pay a civil penalty of more than $16 million to the U.S. government. While companies such as Novo Nordisk are expanding into Iran and making the most of new markets as sanctions begin to lift, Alcon (rather expensively) seems to have taken its eye off the ball here.

On June 23, OFAC announced a $107,691 settlement with HyperBranch Medical Technology), Inc. to resolve apparent violations of the Iranian Transactions and Sanctions Regulations (ITSR) prohibition on the direct or indirect exportation of goods to Iran. According to the settlement announcement, HyperBranch exported about 4,000 units of various medical supplies to its United Arab Emirates-based distributor that it knew or had reason to know were ultimately destined for Iran. OFAC considered HyperBranch’s lack of a sanctions compliance program at the time of the apparent violations as an aggravating factor in the calculation of the civil penalty.

Many vessel owners hide their identity of ownership. The reasons for this vary - it may be undertaken for acceptable legal reasons, but it poses a big problem for third party risk. It also facilitates vessel owners who don’t want to advertise that some of their vessels are poorly maintained, with crews suffering in poor working conditions, with frequent ship detentions. Some may even have illegal or terrorist intent. Whilst open registers exist, there are various financial mechanisms that allow the real beneficial owners to have their corporate identities obscured, often via nominees and holding companies spread across jurisdictions.

The OECD published a report on ownership and control of ships, and their findings were damning:

“[It is] very easy, and comparatively cheap, to establish a complex web of corporate entities to provide very effective cover to the identities of beneficial owners who do not want to be known.” OECD

Bearer shares, for example, do not carry the name of the owner and may be carried from person to person without money changing hands, particularly when issued to private limited companies. Their use is even promoted by certain open registers, according to a recent research paper. The use of nominee shareholders and nominee directors are effective methods of hiding beneficial ownership. Jurisdictions may have little incentive aside from collecting registration fees to prevent this invisibility.

“Given that the USA is probably the State most focussed on the security of shipping arriving at its ports, there is a certain irony in the fact that the open register, which facilitates anonymity, was a creature of their creation” - Michael Galley, Journal of Legal Studies

Many owners of single-ship companies, who have little consideration for the usage of their ships and crew, are therefore highly incentivized to hide beneficial ownership and barely discouraged from registers in doing so.

Geographically mapping due diligence research

Pre-qualifying a third party is dependent on available financial information, and an understanding of the ownership, directors and officers. Past litigation and administrative sanctions need to be heeded on a continual basis, assessing other information such as:

  • Corporate information, proof of ownership
  • Governance structure
  • Litigation/criminal information
  • Negative news
  • Appearance on sanctions lists
  • Relationships with PEPs, government officials and employment of PEP owned-companies down the supply chain.

Sourcemap demonstrate effectively the value of mapping supply chains. Paired with effective research tools, due diligence across the supply chain can be conducted highly efficiently. For example, Chain-of-custody reporting requires timely data at any any scale, corroborating shipment history with materials. Controlled products such as pharmaceuticals are subject to particularly strict reporting requirements in these area, such as documenting the products chain of custody *in every jurisdiction * where it is sold. Risk heatmapping (of the kind Sourcemap has pioneered) would be a soluble solution for highlighting the areas which require due diligence research.

Paired with a solution which automates manual searches across local language information, such as Investigator, and third party risk is not only mitigated on a case-by-case basis, with risk probability heat maps, but in real-time with alerts.


Arachnys Investigator is a search tool which allows pharmaceutical companies to gain visibility on the supply chain from end-to-end, via business information, corporate registries, shipping & litigation information.

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