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The Emerging Compliance 'Hot Topic' for 2016: Regulations Regarding Trafficked, Coerced Labor

In many businesses, supply chain management historically has fallen outside the core of the company's compliance function. But that was then. A renewed push this year by state, federal and international regulators – not to mention consumer advocacy groups, NGOs and foreign legislatures – to conscript the business community into the fight against human trafficking and the use of child, indentured, forced and other forms of coerced labor has brought supply chain management to the front and center of the corporate compliance world.

The Emerging Compliance 'Hot Topic' for 2016: Regulations Regarding Trafficked, Coerced Labor

2015 saw an unparalleled spike in legislative and enforcement efforts specifically focused on ridding the world's supply chains of products tainted by coerced labor.  By way of example, the UK Modern Slavery Act and the Federal Acquisition Regulations Anti-Trafficking Provisions, both issued last year, place affirmative obligations on most larger businesses to evaluate the risk associated with, and disclose steps taken to end, suspected human trafficking or coerced labor in their supply chains.  And the costs for non-compliance with these laws are great, ranging from brand-damaging consumer advocacy and NGO group pressures, to costly class action lawsuits, to potentially brand-ending debarment and even criminal prosecution.

With other anti-trafficking regulations pending around the globe, all available evidence suggest that 2016 will bring an historic increase in enforcement efforts to ensure that materials procured through coerced labor do not make their way into consumer products.  Given this backdrop, corporate compliance officers face significant pressure to ensure that (1) their supply chain operations are up-to-date and (2) the required disclosures do not become legal risk centers.  Supply chain management professionals must familiarize themselves with the new coerced labor regimes, and evaluate the steps they can take to address the likely unfamiliar compliance challenges in the context of their particular business. 

The 'Big Three' Coerced Labor Regimes

Before we discuss how supply chain management personnel can help companies address compliance challenges posed by the new anti-trafficking laws, let’s first look at what those challenges are.  The following is a summary of the “Big Three” coerced labor regimes.

The California Transparency in Supply Chains Act of 2010 (Cal. Civ. Code § 1714.43)

The California Transparency in Supply Chains Act (the “California Act”), which took effect Jan. 1, 2012, was the first regulation to require certain businesses to publicly disclose on their internet home page the company’s efforts to eradicate from their supply chains human trafficking, slavery and other forms of forced labor.  That said, the California Act applies only to large retail sellers or manufacturers doing business in California. 

Businesses subject to the Act are required to make very specific disclosures, including: (1) whether the company requires its direct suppliers to certify that any materials and goods incorporated into the company’s product comply with local anti-trafficking and slavery laws; and (2) whether the company uses independent, third parties to conduct unannounced audits of its suppliers to monitor compliance.   

Although now mandatory, compliance with the California Act, and enforcement actions thereunder by the California Attorney General, have lagged.  Recent developments, however, suggest that will soon change.  In the Spring of 2015, the California Attorney General’s Office sent a series of “don’t say we didn’t warn you” letters to companies they believe likely fall under the Act’s jurisdiction – letting them know that they are expected to be compliant. 

September and November 2015 also saw a number of class action lawsuits based on theories that companies’ mandatory disclosures under the California Act were incomplete or inaccurate.  Note, however, that on December 9, 2015, U.S. District Court Judge Cormac J. Carney in Barber, et al., v. Nestle USA, Inc, et al., Case No.: SACV 15-01364-CJC, dismissed the plaintiffs’ claims in that case as barred by California’s Safe Harbor Doctrine.  The plaintiffs had argued that Nestle was required to inform consumers of the “likelihood” that its products contain ingredients sourced through forced labor.  Judge Carney ruled that the California Act does not require such affirmative disclosures, and instead merely requires companies to inform consumers of the steps taken to reduce the chances that company products are tainted by coerced labor.  Judge Carney further ruled that Nestle’s complained-about public statements concerning company compliance efforts under the California Act were merely “aspirational,” and, therefore, did not mislead consumers.

Legal actions aside, advocacy groups complaining about what they consider the poor level of compliance with the California Act have waged campaigns to “out” businesses who have failed to comply, which generated significant negative-PR and potential loss of revenue from angry consumers.  Given this current landscape, to the extent companies have not yet become compliant with the California Act, they are well-advised to do so.

Jurisdiction - Applies to all companies that are:

1.     A retail seller/ manufacturer (based on tax status);

2.     With annual gross worldwide receipts exceeding $100m; and

3.     “Doing business” in California (property or salaries in California exceeding $50,000).

Disclosure must address what, if anything, the business does to:

1.   Evaluate its supply chain for/address “risks of human trafficking and slavery.”

2.   Audit suppliers to evaluate compliance with company standards for trafficking and slavery. 

3.   Obtain certification from direct suppliers that materials incorporated into goods comply with applicable anti-trafficking and slavery laws.

4.   Maintain internal “accountability standards and procedures” for those who fail to meet company standards.

5.   Train employees/ management with supply chain responsibility to identify trafficking and mitigate supply chain risks.

Note that the company’s internet home page (not the sustainability page, corporate social responsibility page, or any other sub-page) must contain a “conspicuous” and “easily understood” link to full text of disclosures.

Potential penalties for non-compliance:

California Attorney General injunction, class action lawsuits for false or misleading declarations, and consumer and advocacy group actions and related brand-damaging negative PR.

The Federal Acquisition Regulations (FAR) Anti-Trafficking Provisions:

In January 2015, following California’s lead, the Federal Acquisition Regulatory Council promulgated detailed rules giving effect to President Barack Obama’s 2012 Executive Order 13,627, “Strengthening Protections Against Trafficking in Persons in Federal Contracts.”  

The final FAR provisions, effective as of March 2, 2015, mandate that all federal contractors, regardless of the size or nature of the contract, take certain affirmative actions related to combating human trafficking and slavery in their supply chains.  In simplified form, the FAR provisions do two things: (1) prohibit government contractors, subcontractors and their employees and agents (regardless of tier) from engaging in trafficking-related activities; and (2) require contractors and subcontractors to take other specific actions. 

Under the final FAR provisions, all government contractors and subcontractors, regardless of the size or nature of the contract, (rather remarkably) must, among other things, contractually promise to:

Immediately disclose (or self-report) to the government any credible information received from any source alleging that a contractor employee, subcontractor or subcontractor employee has engaged in conduct that violates the FAR provisions; and

Cooperate with, and provide access to, enforcement agencies investigating compliance with anti-trafficking and forced-labor laws.

In addition, businesses holding government contracts with an estimated value exceeding $500,000 for supplies (other than for commercially available off-the-shelf items) or services to be acquired or performed outside the U.S. must:

Develop, maintain, and post on the company website a detailed compliance plan that includes, among other things, concrete procedures to prevent agents and subcontractors from engaging in trafficking-related activities; and

Certify annually that, after a due diligence inquiry, neither the company nor its employees engaged in any trafficking-related activities, or, if a violation is identified, the contractor has taken appropriate remedial and referral action.

When it comes to potential penalties for non-compliance, the FAR anti-trafficking provisions carry real weight.  Individuals found to have knowingly and willfully made false certifications of compliance face federal criminal liability and up to five years imprisonment and a fine of $250,000.  In addition, businesses found to be non-compliant with the FAR provisions face a number of potential penalties, including being disbarred and deemed ineligible for future projects (a likely death-knell for most government contractors). 

Of course, these are just the remedies available to the government agency: companies running afoul of the FAR provisions also risk class-action lawsuits under the False Claims Act and other federal statues; action by advocacy groups; and consumer boycotts of products allegedly made using child or trafficked/forced labor.  In short, the final FAR provisions notably raise the bar by requiring hundreds or thousands of U.S. and foreign-based companies to ensure their entire supply chains are free from human trafficking and forced labor.

Jurisdiction

Applies to all federal contractors for goods/services (size/nature of contract irrelevant)

Substantive Requirements

Federal contractors, subcontractors, their employees and their agents are prohibited from (and certify that they are not) engaging in human trafficking, as evidenced by, for example:

• Using forced labor

• Misleading/fraudulent recruitment practices

• Charging recruitment fees

• Destroying, concealing, confiscating, or otherwise denying employee access to his or her identity docs

• Failing to provide employment agreement (if required) in employee’s native tongue and prior to employee’s departure from home country. 

In addition, contractors and their subcontractors must agree to:

• “Cooperate fully” with, and provide reasonable access to, agencies conducting investigations into, among other things, violations of these provisions; and

• Self-report, among other things, “activities that …are inconsistent with the requirements of this order or any other applicable law or regulation

Disclosure Requirements

For contracts for services or supplies that (1) exceed $500,000 and (2) are for supplies or services to be acquired/performed outside the U.S. (other than off-the-shelf items), contractors and subcontractors must:

Create and post at the workplace and on their company website a formal compliance plan including various categories of information; and

Certify annually that, after a due diligence inquiry, neither the contractor nor its employees engaged in any trafficking-related activities, or, if a violation is identified, that the contractor has taken appropriate remedial and referral action.

Potential penalties for non-compliance:

• Imprisonment:  “Knowing and willful” false certification is a crime.  Reckless disregard or conscious avoidance of truth qualify as “knowing.”  Consequences include up to five years imprisonment and $250K fine.

• False Claims Act:  Government Fraud (31 U.S.C. §3729).

• Debarment:  Business death knell for non-compliance (48 CFR 9.406-2). 

• Loss of award fee or termination of contract:   TVPA (22 U.S.C. § 7104(g) and other provisions. 

UK Modern Slavery Act of 2015, Part 6 (Transparency in Supply Chain Disclosures) 

For certain companies doing business in the UK, the newest of the coerced labor regimes, the UK Modern Slavery Act of 2015 (“UK Act”), will require the company to make an annual slavery and human trafficking disclosure statement on the company’s website.  Approved in March 2015, many of the UK Act’s requirements mirror those of the California Act, including that the Act’s provisions apply only to entities conducting business in the jurisdiction.  However, a few notable differences exist: for example, the UK Act applies to companies supplying goods or services (the California Act applies only to retail sellers and manufacturers).  In addition, instead of a list of specific disclosure requirements, the UK Act provides a non-exhaustive list of subjects that “may be included” in a company’s annual slavery and human trafficking statement.  Finally, the UK Act mandates that a company’s annual disclosure be approved by the company’s board and signed by a director (or, for partnerships, by the members and a designated partner, respectfully).  The UK Act is slated to take effect in 2016.

Jurisdiction - Applies to all companies that are:

A corporation or partnership (wherever incorporated or formed) that is:

1.    Carrying on “a business, or part of a business” in any part of the UK and is

2.   A supplier of goods and/or services

3.   With a total annual turnover exceeding £36m (globally)

Disclosure Requirements:

Company must prepare annual statement detailing steps taken during the past financial year to ensure slavery and human trafficking are not taking place in (1) any of company’s supply chains and (2) any part of its business. 

The approved/signed disclosure statement may include (but is not limited to) information concerning:

• Company’s structure/ business/supply chains

• Company’s anti-trafficking/ slavery policies

• Company’s anti-trafficking/ slavery due diligence processes

• Identification of higher-risk areas in business/ supply chains and steps taken to manage risk

• Company’s effectiveness in preventing trafficking in its supply chain, based on performance measures company considers appropriate

• Anti-trafficking/ slavery training available to staff

Note that the company’s internet home page must include link to annual statement “in a prominent place.”

Potential penalties for non-compliance:

• High Court Injunction (civil action brought by Secretary of State)

• In Scotland only,  action for specific performances of a statutory duty under § 45 of the Court of Sessions Act 1988

Supply Chain Management’s Role in Addressing Compliance Risks

The FAR provisions and the UK Bribery Act place substantial, new obligations on corporate compliance officers to ensure that all materials incorporated into the company’s products comply with (1) company policies; and (2) the laws against coerced and child labor in the country or countries in which it does business.  With the Big Three coerced labor regimes focused on companies’ global supply chains, supply chain management personnel are well-situated in 2016 to play an integral role in this process. 

What follows are some basic “big picture” steps supply chain management personnel can take to help companies address the disclosure and other requirements of the new anti-trafficking laws. 

Ensure that all contracts with suppliers and subcontractors:

Include an indemnification clause;

Grant the company audit rights;

Require the supplier/subcontractor’s full cooperation in the case of any internal investigation or review;

Obligate the supplier/subcontractor to notify the company immediately in the case of actual or potential nonperformance/problems;

Grant the company the right to, as needed, contact the relevant authorities in the case of violation; and

Require the supplier/subcontractor to consent to follow company-developed action-plan in case of any instances of non-compliance.

Require each supplier/subcontractor to represent and warrant that it:

Is in compliance with all applicable national and international laws and regulations, as well as the company’s code of conduct, including prohibiting coerced and child labor in its facilities;

Requires its respective suppliers, including labor brokers and agencies, to do the same;

Treats its workers with dignity and respect, provides them with a safe work environment, and ensures that the work environment is in compliance with applicable environmental, labor and employment laws, and the company’s code of conduct;  

Refrains from corrupt practices, and does not engage in human rights violations; and

Has not and will not, directly or indirectly, engage in certain activities connected to coerced and child labor. These activities should be expressly detailed in the certification.

Design due diligence forms and audit programs to evaluate and address risks of coerced and child labor in the company’s supply chains.

Develop and publicize internal accountability standards for employees and contractors in the company’s supply chain management and procurement systems regarding coerced and child labor.

Assess supply chain management and procurement systems of company suppliers to verify whether those suppliers have appropriate systems to identify risks of coerced and child labor within their own supply chains.

Train employees and business partners, particularly those with direct responsibility for supply chain management, on the company’s expectations as they relate to coerced and child labor, particularly with respect to mitigating risks within the supply chains of products.

T. Markus Funk is founding co-chair of Perkins Coie's Supply Chain Compliance practice; Chelsea Curfman is counsel in the firm's White Collar & Investigations practice.

Source: Perkins Coie LLP

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