MILAN: LVMH-owned Dior’s production arm in Italy, Manufactures Dior, relied on formal inspections to assess working and safety standards inside its supply chain last year. In some cases, such certifications missed glaring problems, a Reuters review of unpublished court documents has found. AZ Operations, a sub-contractor of Manufactures Dior tasked with the production of leather items and based near Italy’s fashion capital Milan, was accused by Italian prosecutors in June of being a front for an operation that exploited workers.

However, AZ Operations passed two environmental and social inspections in 2023, in January and July, according to unpublished audit documents reviewed by Reuters. Widespread Milan investigations have uncovered malpractice inside the Italian luxury goods supply chain of Dior, Giorgio Armani and Alviero Martini this year, Reuters has previously reported.

The audit papers, along with court documents, Reuters interviews with more than two dozen luxury sector workers, auditors, supply chain managers, suppliers, lawyers, industry experts, executives and trade union representatives reveal the pervasiveness of ineffective checks of social and environmental standards inside Italy’s sprawling luxury supply chain.

In the case of AZ Operations, a three-page assessment on letterhead from compliance management company Fair Factories Clearinghouse (FFC), carried out by monitor Adamo Adriano on Jan 18, 2023, stated that AZ Operations did not have sub-contractors. The audit listed no irregularities. In July 2023, a further audit by Davide Albertario Milano srl, a large direct supplier of Manufactures Dior that worked with AZ Operations, also found “no non-conformities” and certified the work was carried out to a high standard and in accordance with contractual terms.

Despite passing the audits, a police investigation into its 2023 activities found AZ Operations was “de facto non-existent”, according to Milan court documents. Furthermore, police inspections in April 2024 alleged the company was a front for a separate business, New Leather Italy, that exploited undocumented workers in sweatshop-like conditions, the same documents showed.

“Aware of the gravity of the violations committed by these suppliers and the improvements to be made to its checks and procedures, the house of Dior is collaborating with the designated Italian administrator and the Italian authorities,” the French brand also said at the time.

Dior added in the statement that its teams were working intensely to reinforce the existing procedures: “Despite regular audits, these two suppliers had evidently succeeded in hiding these practices.”

FFC and Adamo Adriano did not respond to Reuters attempts to reach them. Davide Albertario did not respond to queries by Reuters on inspections at AZ Operations. New Leather Italy did not reply to a Reuters request for comment.

Global luxury groups including LVMH usually outsource most of their production to a myriad of external contractors, industry experts say. Many are based in Italy, famed for its artisanal skills and accounting for between 50 percent and 55 percent of the global production of luxury clothing and leather goods, consultancy Bain calculates.

“No matter how many controls we do, there is always something we miss,” Renzo Rosso, founder of Italian fashion group OTB, which makes Diesel clothing, told a business event in September, in reference to the complexity of overseeing Italy’s supply chain.

Despite the risks, insiders and experts told Reuters relying on suppliers is a deliberate strategy to keep costs down and manage demand. “The fashion business model is driven by cost-reduction tactics, leading fashion brands to switch suppliers,” said Hakan Karaosman, Associate Professor at Cardiff University, whose research focuses on supply chain sustainability.

Even though Dior did not directly abuse workers, the mechanism of labour exploitation “was culpably fuelled by Manufactures Dior srl which... did not carry out effective inspections or audits over the years to ascertain the actual working conditions and environment,” Milan prosecutors said in the June court documents.

Currently, there is no firm legal requirement in Italy for luxury groups to audit their suppliers. But poor oversight can clash with sustainability claims made to investors and consumers over craftsmanship and corporate and social responsibility standards, leading to reputational risks and in some cases civil liability if workers’ exploitation is found within the supply chain.

LVMH, for example, said in its 2023 Social and Environmental Responsibility Report it “endeavors to ensure its suppliers and their service providers uphold human rights and to support them with applying the best possible employment, health and safety conditions.” The investigations into Italy’s luxury supply chain have prompted some LVMH shareholders to ask the $330-billion behemoth, owned by French billionaire Bernard Arnault, to better monitor how its contractors treat workers.

In July, Armani expressed confidence in a “positive result following the (antitrust) investigation”, saying in a statement that its companies were fully committed to cooperating with the authorities and that it believed the allegations had no merit.

Brands dictate the depth of the checks and the auditors’ scope of action and inspections are often limited to direct suppliers and not to sub-contractors, where the biggest problems usually lie, four auditors and luxury goods supply chain managers said.— Reuters