Mastering Internal Processes for Third-Party Procurement: A Legal Perspective

Zinta Strydom, February 2025

This article provides an international view, as well as some specific aspects for South African clients.

In recent years, the landscape of third-party procurement has evolved significantly, with legal frameworks tightening to mitigate risks.

In today's volatile commercial landscape, organisations must employ robust internal processes to manage third-party procurement effectively. Such procurement, if inadequately managed, poses significant legal risks, including corruption, money laundering, and financing of terrorism.

This article outlines the key internal processes necessary for mastering third-party procurement, with a focus on due diligence, bid processes, Broad-Based Black Economic Empowerment (BBBEE) for South African purposes, procurement administration and logistics management.

The Importance of Due Diligence

Due diligence is a critical component in mitigating risks associated with third-party procurement. Engaging in thorough due diligence helps organisations ensure that their processes are transparent and that they adhere to prevention and corruption activities legislation.

Corruption, Money Laundering, and Terrorism

When evaluating potential suppliers, organisations must assess the risk of corruption, money laundering, and terrorism financing. This assessment involves:

Background Checks: Conducting comprehensive background checks to identify any history of fraudulent or corrupt activities. This includes checking international sanctions lists and adverse media.

Financial Reviews: Identify any irregularities that could indicate money laundering.

Corporate Structure Analysis: Understanding the ownership and control of the supplier can reveal potential conflicts of interest.

Integrity Questionnaires: Sending out a detailed questionnaire that peers into the supplier's ethics and compliance frameworks. This could include questions about previous criminal charges, ongoing litigations and notable changes in management.

An example might involve a company sending a standardised due diligence form to new suppliers, requiring them to disclose any relationships with politically exposed persons (PEPs) or any financial transactions that may raise suspicion.

Bid Process Oversight

In the realm of public sector procurement, adherence to the relevant local laws, such as the South African Preferential Procurement Policy Framework Act for South Africa, is crucial. This ensures fairness, transparency, and equitable treatment.

Key components of an effective bid process include:

Clear Specifications: Defining precise project specifications to avoid ambiguity in bids.

Documented Process: Establishing a defined procedure for the procurement process that includes tender notice, bid submission, and evaluation criteria.

Bid Evaluation Criteria: Applying objective evaluation criteria to assess bids transparently and avoid favouritism.

Cases, such as Mokoe v City of Joburg 2019, have highlighted the importance of adhering to stringent procurement regulations and the consequences of failing to ensure transparency and fairness in the processes.

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Conflict of Interest Policy

Implementing policies to prevent conflicts of interest among evaluators, including disclosures from all parties involved.

A practical approach would see the procurement team drafting a procurement plan that details each step in the bid process and communication with suppliers. This may include a detailed checklist to ensure all legal obligations are met at each stage.

BBBEE Compliance – SA Clients

In South Africa, the Broad-Based Black Economic Empowerment (BBBEE) Act plays a pivotal role in procurement. It aims to foster inclusivity and rectify historical imbalances.

For effective compliance:

Verification: Engaging with a recognised verification agency to assess and validate the BBBEE status of potential suppliers.

Documentation: Collecting and maintaining evidence of the supplier’s BBBEE score and related documents as proof during the procurement process.

Supplier Development: Actively seeking to engage with BBBEE-compliant suppliers to boost their capabilities, thus creating a more inclusive supply chain.

Moreover, an organisation may opt to create a database of BBBEE-compliant suppliers and keep this updated, facilitating better access to procurement processes.

Procurement Administration and Logistics Management

Administrative efficiency is paramount in procurement management. This involves systems and processes that ensure accountability, traceability, and compliance with legal standards.

Contract Management: Maintaining thorough records of contracts, including amendments, renewals, and terminations, ensuring these documents comply with South African contract law.

Purchase Order System: Implementing a purchasing system that tracks orders from initiation to completion, allowing for real-time monitoring and potential issue resolution.

Logistics Coordination: Collaborating with logistics partners to ensure timely and compliant delivery of goods and services, while also taking into account customs regulations and import/export controls.

For instance, an organisation can implement a digital procurement platform where all purchasing activities are logged and can be accessed by multiple stakeholders for transparency.

Engaging with International or National Business Processes

Engagement with business processes is essential for sustained supplier relationships and procurement success. This means continuous communication, feedback loops, and adaptation to changing regulations.

Supplier Training: Offering training to suppliers on compliance requirements and procurement standards helps foster better relationships and ensures adherence to legal obligations.

Feedback Mechanism: Instituting a feedback mechanism for suppliers which allows for the sharing of insights on the procurement process and areas for improvement.

Regular Reviews: Conducting regular reviews of procurement processes to identify potential risks and adapt to changes in law and business conditions.

As a practical example, an organisation may schedule semi-annual meetings with key suppliers to discuss performance metrics, regulatory changes, and improvement opportunities.

Mastering internal processes for third-party procurement is not merely a best practice; it is a legal necessity.

By focusing on due diligence, bid processes, BBBEE compliance (for SA), and efficient procurement administration, organisations can mitigate legal risks and promote sustainable supplier relationships.

These strategies, grounded in international law, not only contribute to legal compliance but also enhance overall operational efficiency.

Implementing structured processes, with practical examples and continuous engagement, paves the way for a robust procurement environment that supports business objectives while safeguarding against legal pitfalls.

ZS Attorneys can assist you to put robust policies in place, with training as well as due diligence forms.

For any legal queries, contact

Zinta Strydom, Managing Director

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