MILAN — Over the past two years supply chain scandals have rocked the luxury fashion industry in Italy, shaking both its reputation and business practices.

Investigations by a Milan court that uncovered ties of luxury brands such as Loro Piana, Valentino, Dior and Giorgio Armani, among others, to subcontractors involved in sweatshop schemes have raised concerns about the industry’s ability to manage its supply chains effectively.

Overall, prosecutors identified the brands’ negligence in properly auditing their supply chain partners. As a result, all the above brands have been put under judicial administration to correct and enhance audits and oversight through court-mandated procedures, with Loro Piana’s and Valentino’s probes fully resolved and the judicial oversight lifted.

Subcontracting is a common practice in the fashion industry, offering flexibility, but it can result in weak oversight. Additionally, these incidents have shined a light on the gap that can exist between brands’ public commitments to ethical standards and the reality of their supply chain operations. To this end, the Italian Competition Authority, or AGCM, imposed sanctions of 3.5 million euros on Giorgio Armani for alleged misleading advertising linked to its sustainability claims.

In response, brands have begun strengthening their internal controls and compliance measures. Loro Piana has reaffirmed its commitment to improving its supply chain auditing, severing ties with suppliers found in violation of its agreements, as did Valentino, Giorgio Armani and Dior.

The issue of supply chain oversight is not limited to isolated incidents, observers claimed, saying that the existing audit systems, which are often checklist-based, need to be restructured to provide more focused, risk-based assessments of each supplier. This shift could help mitigate future risks by addressing specific vulnerabilities within different tiers of the supply chain.

As brands work to improve their compliance measures, they also face external pressure from policymakers. The European Union is to enforce several new directives aimed at increasing transparency in supply chains, such as the Corporate Sustainability Reporting Directive, the Corporate Sustainability Due Diligence Directive, as well as the EU Forced Labor Regulation. The latter, set to take effect in 2027, will ban within the EU the sale of goods made using forced labor, affecting all stages of the supply chain.

At the national level, Italy’s fashion industry associations and trade unions have urged the creation of a mandatory, nationwide protocol promoted by the Ministry of Enterprises and Made in Italy to standardize supply chain auditing practices. But legislation on the latter isn’t expected to progress in the short term.

Meanwhile, the Milan Prefecture has introduced a memorandum of understanding to tackle worker exploitation, undeclared work, tax evasion and unfair contractual practices in the fashion supply chain. The initiative — undersigned by Confindustria Moda, Confindustria Accessori Moda and Camera Nazionale della Moda Italiana, among other entities — is limited to the Lombardy region, but could lay the foundation for a countrywide system.

The pressure on high-end fashion brands to maintain their aura of quality, exclusivity and ethics is mounting amid an already challenging luxury landscape, which is being impacted by a global spending downturn.

Observers say that fashion companies and luxury groups must continue to improve their compliance mechanisms to address labor exploitation and work-related risks effectively, forging collaboration with lawmakers, their suppliers and industry associations to ensure the survival and prestige of the Made in Italy supply chain.