December 7, 2021

Supply chain alert: The risk of human trafficking

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By Eric N. Fidel From Corporate Counsel

When the media talks about human trafficking, the first thing that comes to mind is the kidnapping and sale of women and children–of girls lured from their homes. But human trafficking is more than just sex trafficking. Many victims of trafficking are conscripted into modern-day slavery through force, fraud or coercion. This takes the form of debt bondage, forced labor and involuntary child labor. Human trafficking is also a supply chain issue, and the companies involved may not even be aware of the violations.

Human trafficking in the supply chain may take many forms. For example, a consumer might stay at a hotel where the sheets were made from cotton harvested by migrant farmers who work with no water and no rest. They may consume a chocolate they found on their pillow, made from cocoa beans picked using child labor. They could order shrimp for dinner which was fished using forced labor, and served in a restaurant where the dishwashers and waiters have had their passports confiscated. During dinner, they might take a call on a cell phone built with materials that were mined by children and assembled by bonded labor.

This is more than an ethical issue; it is a business issue. President Obama noted that human trafficking slavery “ought to concern every business because it distorts markets.” Consumers and investors have an increased awareness of supply chain risk, and an increased aversion to companies perceived as exploiting slave labor. To address these moral and economic issues, the United States and other governments are actively passing legislation addressing labor trafficking and child labor practices, much as they had with conflict minerals a couple of years ago. This legislation includes various state, federal and international laws.

The Legal Landscape and Liabilities

Of course, human trafficking and child labor are illegal in almost every country. But violations of the laws against such practices are commonplace. This is due to a worldwide demand for cheap labor and services, as well as the lack of meaningful law enforcement.

Businesses that rely on lackluster enforcement to avoid liability are taking a huge risk. Enforcement policies are changing, subjecting companies to potential criminal liability. Moreover, newer laws are imposing civil liability based upon a company’s conduct in the supply chain. These laws are requiring public disclosure of efforts taken to address labor trafficking and child labor, similar to the way the Securities and Exchange Commission now requires conflict mineral reporting.

Businesses with $100 million in gross worldwide revenues that are doing business in California are subject to the California Transparency in Supply Chains Act. It was one of the first laws in the United States to address slavery and human trafficking in supply chains. It requires manufacturers and retailers to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains for tangible goods offered for sale. The law doesn’t require any action taken in regards to the supply chain.

The proposed federal Business Supply Chain Transparency on Trafficking and Slavery Act of 2014 (H.R. 4842) would require companies to file annual reports with the SEC to disclose their efforts to identify and address specific human rights risks in their supply chains. Companies with annual worldwide gross receipts exceeding $100 million are subject to it. Yet, unlike the California law, it is not limited to manufacturers and retailers. It will apply to any public or private company currently required to submit annual reports to the SEC. The commission will issue regulations requiring companies to disclose whether they have taken any measures to identify and address the risks of forced labor, slavery, human trafficking and the worst forms of child labor throughout their supply chains. The bill also calls on the secretary of labor to publish a list of the companies required to follow the legislation and a “Top 100” list of companies “adhering to supply chain labor standards as established under relevant federal and international guidelines.”

The enforcement landscape is rapidly evolving. In January 2015, President Obama issued an executive order titled “Strengthening Protections Against Trafficking in Persons in Federal Contracts.” The Federal Acquisition Regulatory (FAR) Council has already scrutinized government contractors and subcontractors for supply chain violations. And now government contractors and subcontractors are required to have compliance plans for prevention, monitoring, and detection of trafficking in persons.

Additionally, the SEC and the U.S. Department of Justice, in a recent Foreign Corrupt Practices Act (FCPA) Guideline, state that corruption includes the concept of human trafficking. Anything that threatens stability and security by facilitating criminal activity within and across borders, such as the illegal trafficking of people, may be considered corruption and subject a company to FCPA liability.

Similar to U.S. efforts to fight slavery and human trafficking, the United Kingdom enacted the UK Slavery Act. It imposes disclosure requirements on any business operating in the United Kingdom. These requirements exist regardless of the place of incorporation. Even foreign corporations are subject to it. Compliance with the act requires that companies issue a statement detailing steps they have taken during the past financial year to ensure that slavery and human trafficking are not taking place in its business operations, or issue a statement acknowledging that the business has taken no such steps.

Corporate social responsibility laws in the European Union, Canada and India also create supply chain liability.

Managing Supply Chain Risk

No amount of policy redrafting, training and due diligence can guarantee a supply chain free of risk. Yet, all companies should consider developing a supplier codes of conduct as well as internal codes of conduct aligned with the various laws (such as those promulgated by the American Bar Association and the Electronic Industry Citizenship Coalition) designed to protect them from committing human rights abuses and from subjecting themselves to supply chain liability.

At a minimum, such a code should,:

(a) Prohibit labor trafficking and child labor in its operations, including any facilitating activities such as charging workers recruitment fees.

(b) Require freedom of movement for workers, and pay all employees at least the minimum wage in all countries of operation.

(c) Have an enforcement and remediation mechanism that is applied throughout the company’s supply chain.

(d) Maintain internal accountability through periodic risk assessments and internal audits. Companies should always seek to improve their performance in light of these reviews.

(e) Train relevant employees to understand the indicators of human trafficking and how to respond.

(f) Apply to all ,employees, direct and indirect, including subcontractors, labor recruiters and other business partners. Companies should include clauses in their contracts requiring adherence to international standards and applicable laws and regulations, as well as the adoption and observance of a codes of conduct that prohibit forced labor and child labor.

In addition, companies need to be aware of the reporting requirements that they must obey. Given that a federal act may be passed that would impose required disclosures, companies need to be prepared to address human trafficking in their supply chain head on. Even small companies that will not meet the reporting threshold will most likely be required to make certain disclosures to the larger corporations to which they are suppliers.

The Bottom Line

Supply chain risk requires companies to adopt many perspectives. A company must engage in overseeing risk, strategizing on issues such as branding and sustainability, and reporting what it learns to the authorities. This means that the company must be aware of human trafficking even during M&A transactions, labor and employment negotiations and securities offerings and other financing.

Being proactive in adopting and implementing policies and procedures to eliminate labor trafficking and child labor in supply chains is crucial to preserving a company’s name and protecting it from running afoul of the complex, and growing, web of government regulations–including anti-trafficking laws both at home and abroad.

Eric N. Fidel is an associate in the Fox Horan & Camerini corporate department. He joined the firm following his graduation in 2014 from the University of Michigan School of Law, where he served on the editorial board of the Michigan Journal of International Law. During law school, he served as an intern at the University of Michigan Human Trafficking Clinic.. He is admitted to the bars of New York and New Jersey and speaks conversational Russian.

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