Supply chains – EU proposal to ban products tainted by forced labour

Corporate supply chains are becoming an ever more prominent legal and risk issue. The supply-side shock imposed on many economies in the wake of the Covid pandemic and the Russian invasion of Ukraine, together with Western sanctions, has emphasised the importance of supply chains as an operational resilience, and even national security, issue. They are also a critical ESG issue, giving rise to regulatory, commercial and reputational risk.

The latest development in this area is the European Commission’s proposal on 14 September to ban all products made with forced labour. The proposed ban would apply to imports and exports, to and from the EU. It will apply to all products, of any type including their components, and captures the full length of the supply chain; forced labour will taint a product where it was used “at any stage of their production, manufacture, harvest, and extraction, including working or processing related to the products”.

Where European authorities identify such products, the proposal is that such products will be removed or destroyed. The relevant businesses will bear the costs of disposing of the prohibited product. Businesses which fail to comply will then face penalties under the relevant national law.

The full proposal document is available here and a related FAQ document is available here.

Context

There is increasing focus worldwide on whether businesses are conducting their operations in a sustainable way, and without violating human rights (see Environmental pollution and climate change claims and Human rights claims). There are significant risks here, which will differ depending on the sector and the jurisdictions in which a business operates.

The EU proposal in particular falls within a context of a greater focus across many jurisdictions on forced labour and modern slavery.

• The EU proposed earlier this year a Corporate Sustainability Due Diligence Directive which will set out due diligence obligations for larger companies to identify, prevent, mitigate and account for actual and potential adverse impacts on human rights, including labour rights and the environment along global supply chains. There is already Guidance in place to assist EU businesses taking appropriate measures to address the risk of forced labour in their operations and supply chains, as a bridge towards mandatory horizontal due diligence legislation.
• There is also action in particular member states. For instance, from the start of 2023 in Germany companies with more than 3,000 employees will be obliged to put in place systems and controls to check whether suppliers are involved in human rights abuses. Failure risks fines of up to 8 million Euros or two per cent of annual global turnover.
• The UK is committed to bringing forward measures to “strengthen and future-proof” the Modern Slavery Act, and to “ensure that large businesses and public bodies tackle modern slavery risks in supply chains.” A new Modern Slavery bill was announced on 10 May 2022. It has not yet been published, but in line with previous announcements the new bill is expected to strengthen the requirements on large businesses to publish an annual modern slavery statement and, critically, to introduce civil penalties for organisations that do not comply with the reporting requirements. (See our previous article here for more detail on reform of the Modern Slavery regime in the UK)
• The USA prohibits the import of any product mined, produced or manufactured by forced labour. This is becoming an increasingly significant component of overarching international trade policy. Notably, the USA introduced the Uyghur Forced Labor Prevention Act in December 2021. Unlike the above regimes, this is targeted at a specific jurisdiction. The Act imposes a ban on imports subject to a rebuttable presumption that forced labour was used to manufacture products specifically from the Xinjiang Province of the People’s Republic of China.
• Each of the EU, UK and US now have in place ‘Magnitsky’ sanctions regimes that enable the specific targeting of persons suspected of involvement in human rights breaches, including persons suspected of involvement in the use of forced labour (albeit that these measures have to date more frequently been used with respect to persons accused of offences breaching the right to life and the prohibition on torture and inhumane or degrading treatment).

Impact

The proposed EU ban now needs to be discussed and agreed by the European Parliament and the Council of the European Union before it can enter into force. It will then come into effect 24 months later. As such, any ban is unlikely to apply for some years, but clearly this is an indicator of increased focus and regulation in this area. If the law comes into force, it will have a significant impact on globalised supply chains, but - as with similar EU proposals - it is likely to have a significant effect on businesses’ approach to supply chain management well before its full implementation. Given the significance of the EU market, that effect will be felt far beyond the borders of the EU.

More broadly, legal teams and corporate governance professionals should be aware of the growing risk of scrutiny (by regulators, shareholders, consumers, employees and other stakeholders) of conditions in corporate supply chains, and take steps to ensure they comply with the increasingly onerous due diligence and disclosure obligations in jurisdictions relevant to them.

Geopolitics and the pandemic have prompted many companies to look more closely at their supply chains to ensure their resilience and also their sustainability. Alongside governance matters such as financial crime and bribery risk and environmental sustainability, we see an increasing focus on social concerns such as forced labour and modern slavery. These must be considered as part of any holistic audit, both internal and external. Failure to do so will expose companies to significant enforcement risk in the future.

Companies operating in the UK need to ensure they comply with the existing provisions of the Modern Slavery Act 2015 (we’ve published some guidance here) and begin working to ensure their operations are future proofed against more onerous due diligence and reporting requirements that are en route.

There is also significant litigation risk where companies fail in this regard. In the UK a series of cases, culminating in the Supreme Court decisions in Vedanta (see our article here) and Okpabi (see our article here) have made it possible to hold a parent company to account in the English Court for the acts of its subsidiaries abroad. A series of mass tort claims have been launched in the English Court for harms conducted by subsidiaries of a UK parent company overseas. These include claims for environmental damage, use of child labour in the supply chain and human rights violations. Such litigation can cause significant financial and reputational harm for companies.