Internal luxury goods broken audit system by Reuters

By Elisa Anzoline, Emilio Parodi and Silvia Ognibene

MILAN (Reuters) – Manufactures Dior, the manufacturing arm of LVMH-owned Dior in Italy, relies on regular inspections to assess operational and safety standards in its supply chain. In some cases, such certifications have missed obvious problems, a Reuters review of unpublished court documents found.

AZ Operations, a subcontractor of Manufactures Dior near Milan, Italy’s fashion capital, has been accused by Italian prosecutors of being a front for an operation that exploits workers.

However, AZ Operations passed two environmental and social inspections in 2023, in January and July, according to unpublished audit documents reviewed by Reuters.

Reuters previously reported that the expanded Milan probe found corruption at Italian luxury goods chains Dior, Giorgio Armani and Alviero Martini earlier this year.

The audit papers, along with court documents, Reuters interviews with more than two dozen luxury sector employees, auditors, supply chain managers, suppliers, lawyers, industry experts, executives and union representatives reveal the prevalence of ineffective checks on internal social and environmental standards. Italian sprawling luxury supply chain.

A three-page letterhead review of Compliance Management Company Fair Factories Clearinghouse (FFC) conducted by Monitor Adamo Adriano on AZ Operations on January 18, 2023 stated that AZ Operations had no subcontractors. The audit did not list any irregularities.

In the year A further audit in July 2023 by Davide Albertorio Milano srl, a direct supplier to the manufacturer Dyer working with AZ Operations, also found no “nonconformities” and confirmed that the work was carried out to a high standard and according to the contract. terms

Despite passing the audits, a police investigation into his 2023 activities found AZ Operations “absolutely non-existent,” Milan said in court documents. In addition, a police investigation in April 2024 alleged that the company was a separate business front for New Leather Italy and exploited undocumented workers in a sweatshop-like manner.

That discovery was one of the reasons Milan prosecutors put Manufactures Dior under court administration in June.

Dior and LVMH did not respond to multiple requests for comment on Reuters’ findings, including the audits and the investigation of foreign manufacturers in Italy.

In a statement issued in July following revelations from Milan prosecutors, Dior strongly condemned the alleged wrongdoing by two of its contractors, saying such inappropriate actions were against “its values ​​and the code of conduct signed by these suppliers”.

“Recognizing the seriousness of the violations committed by these suppliers and the improvements to checks and procedures, the House of Dior is cooperating with the appointed Italian administrator and the Italian authorities,” the French brand said at the time.

Dyer added in a statement that the teams are working hard to strengthen existing processes: “Despite regular audits, these two suppliers have succeeded in hiding these practices.”

FFC and Adamo Adriano did not respond to Reuters attempts to contact them. David Albertario did not respond to questions from Reuters about his search for AZ Operations. New Leather Italy did not respond to a Reuters request for comment.

“Depreciation”

Global luxury groups including LVMH outsource most of their production to foreign contractors, industry experts say.

Many are based in Italy, known for its craftsmanship and accounting for 50% to 55% of global luxury clothing and leather goods production, consultancy Bain calculated.

“No matter how much control we have, there will always be something we miss,” the founder of Italian fashion group OTB, which makes Diesel’s clothing, said in September, referring to the complexities of controlling Italy’s supply chain.

Despite the risks, insiders and experts told Reuters that relying on suppliers is a deliberate strategy to reduce costs and control demand.

“The fashion business model is driven by cost-cutting methods,” says Hakan Karosman, an associate professor at Cardiff University whose research focuses on supply chain sustainability.

Although Dior did not directly abuse workers, the labor practice “was fueled by the conviction that Manufactures Dior srl … did not carry out effective inspections or audits over the years to ensure proper working conditions and environments,” Milan prosecutors said. In June court documents.

Currently, there is no strict legal requirement in Italy for luxury groups to audit their suppliers. But weak controls conflict with sustainability questions for investors and consumers about craft and corporate and social responsibility standards, leading to reputational risks and sometimes civil liability if worker exploitation is found in the supply chain.

For example, LVMH states in its 2023 social and environmental responsibility report that it “strives to ensure that its suppliers and service providers respect human rights and implement the best possible working, health and safety conditions”.

The investigation into the Italian luxury supply chain has prompted some LVMH shareholders to demand that the $330 billion behemoth, owned by French billionaire Bernard Arnault, better monitor how its contractors treat its workers.

LVMH told a group of investors in November that it was conducting an audit of all its direct suppliers and close contractors. In a follow-up statement to Reuters in November, LVMH said it had conducted more than 2,600 on-site audits globally this year.

Italy’s antitrust authority said in July it was investigating whether Dior and Armani misled consumers.

In a statement in July, Armani said the company was fully committed to cooperating with the authorities and that the charges were without merit, expressing confidence in “the positive outcome of the antitrust investigation.”

Skin-deep control

Brands dictate the depth of checks, and auditors’ scope of practice and inspection is often limited to direct suppliers, not subcontractors; Four auditors and luxury goods supply chain managers interviewed by Reuters said the biggest problem is where it most often comes from.

Audits are planned ahead of time, allowing suppliers to paint a better picture, for example, by clearing premises of workers without proper contracts, these people say.

In the year On May 9, 2023, for example, external auditor Adamo Adriano Pelletieri sent a written notice stating that he would conduct an inspection on May 26, 2023 of Elisabetta Young, another supplier of the manufacturer Dior near Milan. .

In the ad, Adriano asked to analyze employment contracts, organizational charts, pay slips and a dozen other documents.

The search was conducted, but “was significantly more formal,” investigators wrote of the audit. The review did not list any abnormalities.

In the year In March 2024, the police moved into Elizabeth Young’s workshop, which had a reference and several bedrooms. They have 23 employees, five of which are informal. The workers lived and worked in “sanitary and sanitary conditions below minimum requirements,” court documents read.

Adriano did not respond to a Reuters request for comment on the Elisabetta Young audit. Reuters could not reach Elisabetta Yang at official email addresses provided by the local chamber of commerce.

As a private actor, auditors cannot freely access factories or workshops outside agreed hours and cannot collect documents that are not provided by suppliers unexpectedly, two Italian-based luxury supply chain auditors told Reuters.

According to these people, the time allotted for on-site inspection is too short to examine documents and question employees.

Employees of five Tuscany-based luxury chains serving major brands told the Reuters workshop owners were aware of the audit in advance and would provide monitoring teams of their premises and event staff on the day of the audit to see what answers they would give.

All declined to be named for fear of losing their jobs.

“According to our (regular) overtime contract, we used to work only four hours a day,” said Pakistani-born Abbas, who works at the Prato tannery.

“How do you think we are making 1,300 bags a day with only 50 workers employed 14 hours a day, six days a week?” he added.

They added that on the day of the audit, part-time contract workers were asked to leave after completing their regular shift, but they were allowed to come back and continue working after the auditors left.

Another worker, a Pakistani-origin worker at a different leather workshop in the Florence area, said the factory owners warned workers during the inspection and asked them to lie about their working hours.

Fabio Roya, president of Milan’s court, told Reuters that companies do not invest enough in their control systems and do not routinely question the cheapest prices contractors offer to provide goods or services.

Alviero Martini, a small fashion brand famous for its leather bags emblazoned with geographic maps, has been the target of Italian inquiries for allegedly subcontracting workers to Chinese-owned companies in Italy.

Alviero Martini’s team “was careful in choosing direct suppliers … but the use of sub-suppliers was not properly investigated,” Ilaria Ramoni, who served as court administrator until October, said in an interview.

The group, which is not under court administration, did not respond to a request for comment. In September, it said it was unaware of any illegal behavior occurring in its supply chain.

Dior and Armani are still under special judicial review as part of the Milan investigation into labor exploitation.