What Companies Should Know About Modern Slavery

Fox Rothschild LLP

Fox Rothschild LLP

Companies are increasingly focusing on the environmental, social and governance (ESG) aspects of their businesses. In 2019, 90% of the S&P 500 index companies published sustainability reports. In contrast, in 2011, only 20% of these companies published such a report.[1] Many companies have come to recognize that a strong ESG program is important to investors, customers and other stakeholders. In particular, companies that sell products into consumer markets and have significant brand recognition face growing expectations that their products and business operations will address ESG considerations. Promoting human rights and preventing human trafficking is an important component of an effective ESG program. Human trafficking does not require the relocation of people. Rather, human trafficking includes forced labor, child labor and slavery, as well as coercion, abduction, fraud and exploitation connected with labor and is sometimes referred to as modern slavery.

The U.S. State Department estimates that human traffickers are denying nearly 25 million people their fundamental right to freedom.[2] This is not an isolated problem. Slavery and human trafficking exist throughout the United States and globally.[3] Human trafficking cases have been reported in all 50 states and the District of Columbia.[4] The U.S. Department of Labor has identified 155 goods from 77 countries produced by child or forced labor.[5] Researchers found that 71% of companies believe there is a likelihood of modern slavery occurring at some point in their supply chains.[6] Apparel has been identified as one of the top five products imported into the United States at risk of having been made using forced labor, along with electronics, fish, timber and cocoa.[7]

The Legislative Response

In response, some jurisdictions have enacted laws that require certain types of companies to investigate their supply chains and to take efforts to combat human trafficking and forced labor. For example, the California Transparency and Supply Chains Act.[8] effective January 1, 2012, requires covered companies to disclose on their websites their efforts to combat human trafficking and forced labor in their supply chains. The law applies to retailers and manufacturers with annual worldwide gross sales over $100 million that do business in California. The UK Modern Slavery Act requires covered companies to produce and make available on their website an annual statement, approved by their board, that addresses their efforts to prevent slavery, human trafficking and forced labor in their supply chains. The law applies to companies doing business in the UK with at least 36 million pounds (approximately $50 million) in annual global sales. The U.S. Federal Acquisition Regulations (FAR) prohibit federal contractors and subcontractors from using fraudulent or misleading recruitment practices, denying employee access to identity documents, and using recruiters who do not comply with local labor laws or who charge recruitment fees. The regulations apply to contractors and subcontractors with any portion of a federal contract outside the United States over $500,000.

In enacting the California Transparency in Supply Chains Act, the California Legislature found that while slavery and human trafficking exist in every country, these crimes are often hidden from view and are difficult to uncover. As a result, consumers and businesses can inadvertently promote and sanction these crimes through the purchase of goods and products that have been tainted by slavery and human trafficking in their supply chains. The publicly available disclosures required under the California Transparency in Supply Chains Act are intended to ensure that large retailers and manufacturers provide consumers with information regarding their efforts to eradicate slavery and human trafficking from their supply chains so consumers can make informed decisions.[9] Studies have shown that many consumers are willing to pay a premium for ethically sourced goods.[10]

The United States has taken steps to combat human trafficking. The U.S. Trafficking Victims Protection Act (TVPA) of 2000, requires the U.S. Secretary of State to submit an annual report to Congress that ranks governments’ efforts to combat trafficking in persons.[11] The United-States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA), entered into force July 1, 2020, prohibits the importation of goods produced in whole or in part by forced or compulsory labor.[12] U.S. Customs and Border Protection (CBP) has the authority to use Withhold Release Orders to suspend the importation of goods at a U.S. port of entry if CBP has a reasonable basis to conclude that forced labor was used in the production of a good entering the U.S. In 2020, the CBP issued 13 Withhold Release Orders across multiple industries, including agriculture, apparel, consumer goods, electronics, and pharmaceuticals.[13] In January 2021, CBP issued a region-wide Withhold Release Order on cotton products and tomato products produced in China’s Xinjiang Uyghur Autonomous Region based on information that indicates the use of forced labor in the production of these products.[14] At the G7 summit, President Biden urged the G7 leaders to collectively rebuke China over forced labor in Xinjiang.[15]

In Canada, draft modern slavery legislation is currently before the Senate of Canada, Bill S-216, An Act to enact the Modern Slavery Act and to amend the Customs Tariff. [16] The current iteration of the bill applies to a wide range of businesses that produce, sell, or import goods into or within Canada. The bill will require annual reporting on the steps taken to prevent or reduce the risk of forced labor at any step of the production process. The maximum penalty for failing to comply with the annual reporting requirement is $250,000, and directors and officers can be held personally liable if they have any role in directing, authorizing, or participating in the companies’ failure to comply with statutory requirements.

Mitigating the Risk

What can companies do to mitigate the risk of modern slavery in their supply chains? Companies that have global and complex supply chains should conduct due diligence to identify, assess and mitigate potential risks of forced labor in their supply chains. Efforts should include a dialogue with all stakeholders. Grievance mechanisms should be put in place to allow individuals to report concerns, including reporting concerns anonymously. Audits should be employed to periodically verify information provided by suppliers. The example of supply chain diligence mandated by the U.S. SEC Conflict Minerals Rule may be a useful framework. Under the Conflict Minerals Rule, covered companies are required to conduct due diligence on their supply chains and undertake a reasonable country of origin inquiry for the covered conflict minerals (tin, tantalum, tungsten and gold) and report their findings in an SEC filing. As a result of the Conflict Minerals Rule, standardized tools became available to covered companies to meet their reporting requirements. For example, the Conflict Free Sourcing Initiative developed a Conflict Minerals Reporting Template which many covered companies require their suppliers to provide. Some studies suggest that the supply chain diligence required by the Conflict Minerals Rule has helped companies improve supply chain transparency and risk identification capabilities enabling more informed sourcing decisions and faster, more effective responses to risks.[17]

Going forward, companies should expect more scrutiny and regulation regarding human rights and anti-human trafficking in their supply chains from regulators, consumers, and investors. In addition to ensuring compliance with existing legal requirements, companies should be prepared for demands from customer for ethically sourced products and from investors who are putting greater emphasis on ESG matters in deciding where to deploy their capital.

1 - Governance & Accountability Institute, Inc., “90% of S&P 500 Index Companies Publish Sustainability/Responsibility Reports in 2019, July 16, 2020, https://www.ga-institute.com/research-reports/flash-reports/2020-sp-500-flash-report.html

2 - Trafficking in Persons Report, 20th Edition, June 2020, US Department of State. 2020 Trafficking in Persons Report (state.gov)

3 - SB 657 Home Page | State of California - Department of Justice - Office of the Attorney General, Introduction, last visited June 12, 2021.

4 - Trafficking in Persons Report, 20th Edition, June 2020, US Department of State. 2020 Trafficking in Persons Report (state.gov)

5 - List of Goods Produced by Child Labor or Forced Labor, List of Goods Produced by Child Labor or Forced Labor | U.S. Department of Labor (dol.gov), last visited June 22, 2021.

6 - Study gives insight into company responses to modern slavery, Ethical Trading Initiative, October 17, 2015, Study gives insight into company responses to modern slavery | Ethical Trading Initiative (ethicaltrade.org)

7 - An Investor Guide to Addressing Forced Labor in the Apparel Industry, Nancy Reyes Mullins, University of California at Berkeley, July 2020, p. 6, reyes_mullins_an_investor_guide_to_addressing_forced_labor_in_the_apparel_industry_mdp_july_2020.pdf (berkeley.edu)

8 - SB 657 Home Page | State of California - Department of Justice - Office of the Attorney General,

9 - The California Transparency in Supply Chains Act, Introduction, SB 657 Home Page | State of California - Department of Justice - Office of the Attorney General. page last visited on June 12,2021.

10 - Human Trafficking and Supply Chains, Recommendations to Reduce Human Trafficking in Local and Global Supply Chains, Sutapa Basu Ph.D. and Johnna E. White, MPA, University of Washington Women’s Center, June 2017, Human-Trafficking-Supply-Chains_2017-reduced-size-for-website.pdf

11 - Trafficking in Persons Report, 20th Edition, June 2020, US Department of State. 2020 Trafficking in Persons Report (state.gov)

12 - Chapter 23 of the United States-Mexico-Canada-Agreement (USMCA), Office of the United States Trade Representative, https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement-between (last visited June 13, 2021).

13 - U.S. Customs and Border Protection, Fiscal Year 2020 Withhold Release Orders Span Multiple Industries Represented by CBP Centers of Excellence and Expertise, FY2020 WROs by CEE (cbp.gov)

14 - CBP Issues Region-Wide Withhold Release Order on Products Made by Slave Labor in Xinjiang | U.S. Customs and Border Protection

15 - Wall Street Journal, Biden Pushes G-7 to Criticize China Over Forced-Labor Allegations, June 12, 2021, Biden Pushes G-7 to Criticize China Over Forced-Labor Allegations - WSJ

16 - Bill S-216, An Act to enact the Modern Slavery Act and to amend the Customs Tariff, https://www.parl.ca/DocumentViewer/en/43-2/bill/S-216/first-reading (last visited June 23, 2021).

17 - Deloitte, Addressing Human Trafficking Risk and Supply Chains, Lessons From Conflict Minerals, us-risk-conflict-minerals-pov.pdf (deloitte.com)

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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