Elisa Anzolin, Emilio Parodi and Silvia Ognibene
MILAN (Reuters) – The manufacturing arm of LVMH-owned Dior in Italy, Manufactures Dior, relied on official inspections to assess labor and safety standards within its supply chain last year. In some cases, such certifications missed obvious problems, a Reuters review of unreleased court documents showed.
AZ Operations, a Manufactures Dior leather goods subcontractor based near Italy’s fashion capital Milan, was accused by Italian prosecutors in June 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However, AZ Operations passed two environmental and social inspections in 2023, in January and July, according to unpublished audit documents reviewed by Reuters.
Widespread Milan investigations uncovered abuses this year within the Italian luxury goods supply chain of Dior, Giorgio Armani and Alviero Martini, Reuters previously reported.
The audit documents, along with court documents, Reuters interviews with more than two dozen luxury sector workers, auditors, supply chain managers, suppliers, lawyers, industry experts, executives and union representatives reveal the pervasiveness of ineffective checks on social and environmental standards within the Italian luxury supply chain.
In the case of AZ Operations, a three-page assessment on the memorandum of compliance management company Fair Factories Clearinghouse (FFC), conducted by observer Adamo Adriano on January 18, 2023, states that AZ Operations had no subcontractors. The audit did not reveal any irregularities.
In July 2023, a further audit by Davide Albertario Milano srl, a major direct supplier to Manufactures Dior working with AZ Operations, also found “no non-conformities” and confirmed that the work was carried out to a high standard and in accordance with contractual conditions.
Despite passing audits, a police investigation into its activities in 2023 found AZ Operations to be “de facto non-existent,” according to court documents in Milan. Furthermore, police inspections in April 2024 claimed the company was a front for a separate company, New Leather Italy, which exploited undocumented workers in factory-like conditions, the same documents showed.
That revelation was one of the factors that prompted Milanese prosecutors to place Manufactures Dior under judicial administration in June.
Dior and LVMH did not respond to multiple requests for comment on Reuters’ findings, including the audits, and the inspection process for outside manufacturers in Italy.
In a statement in July following revelations from an investigation by prosecutors in Milan, Dior said it strongly condemned the illegal practices uncovered by two of its contractors, saying such unseemly practices were contrary to “its values and the code of conduct signed by these suppliers.”
“Aware of the seriousness of the violations committed by these suppliers and the improvements that need to be made in its 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.
Dior added in a statement that its teams are working intensively to strengthen existing procedures: “Despite regular audits, these two suppliers have apparently managed to hide this practice.”
After this article was published, FFC’s owner, Worldly, responded to Reuters inquiries, saying it had never offered facility audit services to Worldly or FFC customers, adding that it asked customers to hire third-party verifiers to ensure unbiased, transparent audits. “Regarding headers in court documents, this is a template available to users within the FFC platform,” Worldly added in its statement.
Adamo Adriano did not respond to Reuters’ attempts to reach them. Davide Albertario did not respond to Reuters inquiries about the inspections at AZ Operations. New Leather Italy did not respond to a Reuters request for comment.
“COST REDUCTION”
Global luxury groups, including LVMH, tend to outsource most of their production to countless outsourcers, industry experts say.
Many are based in Italy, known for its artisanal skills and accounting for between 50% and 55% of global production of luxury clothing and leather goods, according to Bain consultancy.
“No matter how many controls we do, there’s always something we’re missing,” Renzo Rosso, founder of Italian fashion group OTB, which makes Diesel clothing, said at a business event in September, discussing the complexity of overseeing the Italian supply chain.
Despite the risks, insiders and experts told Reuters that relying on suppliers is a deliberate strategy to cut costs and manage demand.
“The fashion business model is driven by cost-cutting tactics, which is why fashion brands are switching suppliers,” said Hakan Karaosman, an associate professor at Cardiff University, whose research focuses on supply chain sustainability.
Although Dior did not directly abuse the workers, the mechanism of labor exploitation was “criminally instigated by Manufactures Dior srl which … did not conduct effective inspections or audits over the years to determine the actual working conditions and environment,” Milan prosecutors said in June court documents.
There is currently no firm legal requirement in Italy for luxury groups to audit their suppliers. But poor oversight can conflict with sustainability claims made to investors and consumers in relation to standards of craftsmanship and corporate and social responsibility, leading to reputational risks and, in some cases, civil liability if labor exploitation is discovered within the supply chain.
LVMH, for example, said in its 2023 Social and Environmental Responsibility Report that it “seeks to ensure that its suppliers and their service providers respect human rights and supports them in applying the best possible employment, health and safety conditions.”
Investigations into the Italian luxury supply chain have prompted some LVMH shareholders to ask the $330 billion giant, owned by French billionaire Bernard Arnault, to better monitor how its contractors treat workers.
LVMH told a group of investors in November that it was auditing all of its direct suppliers and direct contractors. In a subsequent statement to Reuters in November, LVMH said it had conducted more than 2,600 on-site audits worldwide this year.
Italy’s antitrust body said in July it was investigating whether Dior and Armani misled consumers.
In July, Armani expressed confidence in “a positive outcome after the (antitrust) investigation,” saying in a statement that his companies are fully committed to cooperating with authorities and that he believes the allegations are unfounded.
SKIN DEEP MONITORING
Brands dictate the depth of checks, and the scope of auditors and inspections is often limited to direct suppliers rather than subcontractors, where the biggest problems tend to lie, said four luxury goods supply chain auditors and managers interviewed by Reuters.
Audits are usually planned in advance, allowing suppliers to paint a better picture by, for example, clearing premises of workers without proper contracts, these people said.
For example, on May 9, 2023, external auditor Adamo Adriano sent Pelletterie Elisabetta Yang, another Manufactures Dior supplier based near Milan, written notice that he would hold an inspection on May 26, 2023, according to audit documents reviewed by Reuters.
In the notice, Adriano requested an analysis of employment contracts, organizational charts, payrolls and a dozen other documents.
The review did take place, but it was “more formal than substantive,” investigators wrote of the audit. The assessment did not reveal any irregularities.
In March 2024, the police entered Elisabette Yang’s workshop, which also contained a dining room and several bedrooms. They found 23 workers, five of them irregular. The workers lived and worked “in hygienic and health conditions that are below the minimum required,” according to court documents.
Adriano did not respond to Reuters requests for comment on Elisabetta Yang’s audit. Reuters was unable to contact Elisabetta Yang at official email addresses provided by the local chamber of commerce.
As private actors, auditors cannot freely access factories or workshops outside agreed working hours and must not collect documents not spontaneously submitted by suppliers, two Italy-based luxury supply chain auditors told Reuters.
The time allotted for on-site inspections is often too short to review documents and talk to employees, these people said.
Five workers at the Tuscany-based luxury chain, employed in separate workshops serving major brands, confirmed to Reuters that the workshop owners knew in advance of the audits and would clean their premises and prepare staff on what answers to give to inspection teams on the day of the inspection. .
All declined to be named for fear of losing their jobs.
“We said we only work four hours a day, according to our (formal) part-time contract,” said Pakistan-born Abbas, who works at a leather manufacturing center in Prat.
“But how could they think we were producing 1,300 bags a day with 50 workers working only four hours a day?” added Abbas, who said he worked 14 hours a day, six days a week.
On the day of the audit, employees with part-time contracts were asked to leave as soon as they finished their formal shift, but had to return and resume work after the auditors left, he added.
Another worker, also from Pakistan and employed at a separate leather workshop in the Florence area, said the factory owners warned workers when an inspection would take place and asked them to lie about their working hours.
Fabio Roia, president of the Milan court, told Reuters that companies do not invest enough in their control systems and usually do not review the extremely low prices that contractors offer to deliver goods or services.
Small fashion brand Alviero Martini, known for leather bags decorated with geographical map patterns, has also been the target of Italian investigations for allegedly subcontracting jobs to Chinese companies in Italy that mistreated workers.
The Alviero Martini Group was “careful in selecting direct suppliers … but the use of sub-suppliers was not actually properly vetted,” Ilaria Ramoni, who worked as a court administrator overseeing its operations until October, said in an interview.
The group, which is no longer under court administration, did not respond to a request for comment. In September, it said it was unaware of illegal behavior occurring within its supply chain.
Dior and Armani remain under special judicial scrutiny as part of the Milan investigation into labor exploitation.
