Effectively managing Caporalato-related supply chain risk: Rapid and legally sound crisis management

Part 1 of a two-part series on effectively managing Caporalato-related supply chain risk

Earlier this year, we examined the growing investigative and litigation trend in Italy concerning labour exploitation in supply chains (see link). Recent developments and increased media scrutiny have reinforced the importance of this topic for companies across Europe, particularly those relying on multi‑tier subcontracting in labour‑intensive sectors. Although Caporalato is rooted in the Italian legal framework, its legal, commercial and reputational effects can rapidly extend across borders through integrated European and global supply chains.

Our first article in a two-part series focuses on the immediate steps companies may consider when facing a Caporalato-related crisis within their supply chain. Our second article will address the priorities for executives and senior leadership to contain governance risk and liability.

Understanding the nature of a Caporalato crisis

Italian Criminal Code Article 603-bis addresses two categories of unlawful conduct. The first concerns intermediaries who recruit or place workers under exploitative conditions. The second concerns employers who, during execution of the work, hire, use or employ workers under exploitative conditions or take advantage of workers’ state of vulnerability.

Indicators of exploitation used by authorities can include:

• repeated underpayment of wages, including payments below applicable collective agreements;
• excessive or disproportionate working hours or rest-period violations;
• breaches of health and safety obligations;
• degrading housing or surveillance arrangements for workers.

When these indicators surface at suppliers or subcontractors, authorities frequently examine whether upstream companies maintained adequate systems of oversight and whether governance structures allowed early detection of risk.

Three key steps for a prompt and effective response to a Caporalato crisis

When labour exploitation concerns escalate into a Caporalato crisis, companies must act decisively and with legal precision:

• Step 1 – Taking control: the immediate response
• Step 2 – Gaining clarity: Initial fact-finding and rapid risk assessment
• Step 3 – Managing the Narrative

Step 1 – Taking control: the immediate response

The moment an allegation becomes public, your organisation faces a critical challenge. Your ability to respond quickly and strategically will dictate the outcome. Clear leadership, decisive action, and transparent communication are essential to maintain trust and protect your organisation’s reputation. To achieve this, the following actions should be taken without delay:

1. Establish a crisis response team: Set up a steering group that includes external advisers. Define clear roles and responsibilities for members and implement reporting lines and communication protocols to ensure coordination and accountability.
2. Conduct an initial assessment: Determine whether the misconduct is ongoing and identify which product lines, departments, locations, and subsidiaries are affected. Assess which authorities are relevant, whether they have already been involved, and if their involvement is required. Evaluate the level of risk exposure to prioritise actions effectively.
3. Target the immediate problem: Act swiftly to stop the misconduct and limit further damage. Apply a risk-based approach that weighs the costs of action against the risks of inaction. This may involve legal or disciplinary measures as well as practical interventions such as freezing cash flows or suspending certain interactions with suppliers to stabilise the situation.

Step 2 – Gaining clarity: Initial fact-finding and rapid risk assessment

Once the immediate threat has been contained, the next priority is to establish the facts. A well-structured investigation is essential to identify the root cause, anticipate regulatory findings, and inform the company’s overall strategy. This phase requires speed, precision, and legal awareness.

1. Define the scope of the investigation: In Caporalato cases, investigations often focus on suppliers rather than in-house operations. Depending on the level of risk and any ongoing external inquiries, the scope may range from a single supplier to a full forensic audit of multiple tiers in the supply chain. Investigating a third party, often in another jurisdiction, poses unique challenges because companies lack direct control and cannot compel supplier cooperation (for an outline of the key challenges and factors see link). Where proactive contractual safeguards – such as audit rights, proof of compliance obligations, and penalty clauses – are missing, investigations must rely on alternative strategies. This can include forensic analysis of internal data to spot anomalies like unusually low unit costs, reviewing communications for hints of undisclosed subcontracting, and using open-source intelligence to map ownership structures. Setting up whistleblower channels and applying legal or commercial pressure once evidence of breaches emerges can also help overcome supplier resistance.
2. Secure and analyse key documentation: Once the scope is defined, the next step is to collect and review all relevant records. This includes employment data such as contracts, payroll, time tracking, and health and safety documentation; financial data such as invoices, payment records, supplier audits, due diligence reports, procurement files, and selection criteria; and communications with subcontractors and staffing agencies. Document review must anticipate potential deception. For example, invoices should be cross-referenced with production capacity and workforce size.
3. Ensure data protection compliance: Accessing supplier data can trigger GDPR obligations. Transfers within the EU require a lawful basis, while investigations involving non-EU jurisdictions often demand complex legal analysis and navigation of blocking statutes.
4. Define investigation objectives: The investigation must clarify the company’s exposure across all relevant risk areas. This includes financial losses, regulatory sanctions, criminal liability, and reputational harm. It is also essential to determine whether reporting obligations exist and to assess the likelihood and scope of media attention. For Caporalato cases, the following categories require particular scrutiny:
   • Criminal liability under Article 603-bis: Assess whether organisational deficiencies could be considered as enabling exploitative conditions and confirm compliance with Italian Model 231 standards; 
   • Judicial administration risk: Assess the risk that authorities may impose court-appointed administration if internal controls appear insufficient, even in the absence of intentional wrongdoing;
   • Civil and contractual liability: Evaluate potential joint liability for unpaid wages, social security contributions, and insurance premiums for up to two years after contract termination. Determine whether any employee was aware of the misconduct and whether such knowledge can be attributed to the company or its leadership. Anticipate disputes arising from supplier termination or disruption;
   • Tax exposure: Factor in potential reassessments of VAT deductibility, unpaid withholdings, and IRAP (Imposta Regionale sulle Attività Produttive, Regional Tax on Productive Activities) obligations;
   • Consumer and competition law exposure: Review ESG and sustainability statements, as misleading claims can lead to sanctions for false advertising. Consider the impact of media scrutiny and NGO engagement, which can amplify legal and financial consequences even before regulatory outcomes.

Step 3 – Managing the Narrative

During a Caporalato crisis, controlling the narrative is as critical as addressing compliance failures. Strategic communication shapes both immediate impact and long-term trust.

1. Coordinate communications: Align internal and external messaging across all stakeholders – employees, regulators, customers, and media. Ensure consistency, especially in cross-border cases, and have all statements reviewed by legal to avoid liability risks.
2. Engage with authorities: Consider whether self-reporting offers strategic benefits. If you engage, keep regulators updated and document all interactions to demonstrate cooperation.
3. Reactive vs proactive messaging: Prepare reactive statements early and define clear responsibilities for press and regulator inquiries. Handle suppliers diplomatically to maintain cooperation.
4. Preventing, mitigating, and remediating authority sanctions: Moving beyond the immediate crisis requires demonstrating a genuine commitment to remediation. This approach can help avoid sanctions, restore reputation, and prevent or shorten court-appointed administration.
5. Prove “self-cleaning” capability: Structure your crisis strategy around achieving and documenting “self-cleaning” milestones (autopurazione) as quickly as possible. Implement corrective measures proactively rather than waiting for regulatory orders.
6. Implement supplier measures: Terminate non-critical risk exposed suppliers and work with critical risk exposed suppliers to achieve compliance. Strengthen contractual clauses to require adherence to labour laws and allow audits. Document improvements using clear KPIs and timelines aligned with regulator’s expectations.
7. Avoid court-appointed administration: Show willingness to implement internal monitoring systems similar to those imposed by administrators. Courts expect measures such as a tailored Model 231 focused on labour exploitation, an ethical code prohibiting labour exploitation through subcontracting, and periodic supplier audits.
8. If administration is appointed – cooperate constructively: Grant inspection access, share due diligence results, and involve administrators in compliance meetings. Effective cooperation can lead to early termination, as seen in recent high-profile cases.

Conclusion

Recent enforcement trends in Italy demonstrate how quickly labour exploitation concerns can escalate within complex supply chains, often triggering multi-agency scrutiny and significant reputational risk across borders. Companies operating in labour-intensive sectors should prioritise robust crisis-management frameworks, ensure governance structures enable early detection of irregularities, and prepare for the legal and operational challenges that arise when allegations surface at suppliers or subcontractors.

As trusted advisors, we support clients end-to-end and internationally – from preventative risk management and boardroom governance, through regulatory engagement and cross-border investigations, to defence in enforcement and litigation matters. Our extensive experience in risk and crisis management enables us to guide organisations through high-stakes situations swiftly and strategically.

To discuss how these challenges may affect your specific circumstances, we invite you to contact us.