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Supply Chain Due Diligence Laws

It is increasingly common to find rules requiring businesses, not only to take care of their own conduct, but also to do due diligence on the activities of their third party suppliers. For example, in what kind of conditions do people work, is there child labour, or is there modern slavery?

Map of Supply Chain Due Diligence Laws

Countries that have Supply Chain laws

Increasing pressure from consumers and investors has led to the broad adoption of ESG transparency policies, including supply chain due diligence, around the globe. Additionally, disruptions arising from the global COVID-19 pandemic as well as sanctions imposed against Russia have focused more attention on the importance of complying with supply chain laws and ensuring supply chain integrity.

Furthermore, the human rights issues, including slavery and human trafficking, addressed by supply chain due diligence laws likely will become even more important as Ukrainian refugees flee to countries where their unfamiliarity with the language and laws may render them vulnerable to abuse by unscrupulous companies.

We have surveyed Ius Laboris law firms regarding the status of supply chain laws in their jurisdictions. The survey revealed that stock or securities exchanges have led the way in regulating corporate transparency, including supply chain transparency, but national laws are following. The European Commission’s recent proposal for a directive on Corporate Sustainability Due Diligence (CSDD directive) undoubtedly will result in new or revised legislation in member states, although some EU members, such as France and Germany, have already adopted laws that may exceed the requirements imposed by the EU. Although there currently is no global mandatory standard for supply chain due diligence, it is clear that governments are increasingly focused on this issue, and companies would be well-advised to be prepared to comply with increased regulation in this area.

Eleven out of 25 countries surveyed have some type of supply chain law. UK and Australia have versions of a Modern Slavery Act. The UK Act applies to commercial organisations operating in the UK with an annual global turnover of more than GBP 36m per year while the Australian Act applies to entities in the Australian market with annual consolidated revenue of at least AUD $100 million. Although there are differences in the laws, both require companies to prepare and publish statements regarding the impact of slavery and human trafficking on their operations. The UK law requires a company to discuss any steps taken to prevent modern slavery or state that it has taken no such steps, while the Australian law requires companies’ statements to discuss the due diligence and remediation the company performs.

The French law imposing a duty of care on parent and ordering companies, which applies to companies and groups that employ more than 5,000 employees in France or more than 10,000 in France and abroad for two consecutive years, imposes broader supply chain due diligence requirements. Law No. 2017-399 requires covered companies to establish, publish, comply with, and evaluate a Compliance Plan that identifies risks. The Compliance Plan must prevent serious violations of human rights and fundamental freedoms and protect the health and safety of people and the environment throughout their sphere of the entity’s influence, including subsidiaries and subcontractors. The French law permits victims to bring civil lawsuits to obtain remedies for violations.

In Germany, the Act on Corporate Due Diligence in Supply Chains (Supply Chain Due Diligence Act) will enter into force on 1 January 2023. For the first year, it will apply to companies with 3,000 or more employees in Germany, but that number drops to 1,000 on 1 January 2024. It will require covered companies to take ‘appropriate measures’ to respect human rights and the environment within their supply chains. Companies that violate the law may be fined up to 2 percent of their annual global turnover (depending on the size of the company).

Additionally, in Switzerland, new provisions in the Swiss Code of Obligations include, among other things, supply chain due diligence and transparency obligations for Switzerland-based companies in relation to minerals and metals from conflict-affected areas and child labour. Since the law took effect only recently, enforceability and prosecution has yet to be seen.

Although Italian law does not impose a general obligation to carry out due diligence on supply chains, the law does make companies jointly liable for remuneration and social security liabilities of the supplier towards supplier’s employees. Similarly, in Mexico, the law regarding supply chains is not a due diligence law, but most of the labour, social security, and tax laws impose the obligation of the beneficiary of certain services to make sure their service providers comply with all that they are required to do, as the beneficiaries may be deemed jointly liable. In Luxembourg, a business contracting with a service provider must inform the Labour and Mines Inspectorate and if the service provider breaches health and safety rules the Inspectorate will inform the business. The business must then order the service provider to stop the violation and the service provider must confirm to the Inspectorate that it has done so. If it does not do this, the business must inform the Inspectorate, failing which, it will be jointly and severally liable with the service provider for costs, compensation and wages due to any employees who have suffered harm.

In Brazil, supply chain due diligence obligations are imposed through ILO Conventions 29 and 105, which Brazil ratified, and through the social rights and humanitarian clauses of the Federal Constitution.  Additionally, Brazil’s Ministry of Labour has a permanent ‘dirty list’ of suppliers. The Public Attorney’s Office has a permanent task force to take legal action against quasi-slavery and child labour. The most targeted segments are charcoal, textile/garments, agribusiness, and road cargo transport.

Canada has numerous laws relating to supply chain due diligence. These include the Special Economic Measures Act and the Justice for Victims of Corrupt Foreign Officials Act, pursuant to which the government can impose sanctions on parties involved in or who facilitate gross violations of human rights or acts of significant corruption. Additionally, Canada’s export and import laws require the government to consider, among other factors, whether goods or technology could be used to commit a gross violation of international human rights or humanitarian law or gender-based violence when determining whether to issue an export or brokering permit. Canada’s federal Customs Tariff was amended recently to prevent the importation of goods from any country that produced the goods in whole or in part from forced child labour. Furthermore, there is a bill pending before the Senate that would impose reporting requirements on businesses to ensure child labour and forced labour is not occurring in the supply chain.

US law requires exchanged-listed companies to provide specific disclosures if they use conflict minerals from certain countries. The federal Tariff Act prohibits the importation of all goods and merchandise mined, produced, or manufactured wholly or in part in any foreign country by forced labour, convict labour, and/or indentured labour under penal sanctions, including forced child labour. The Uyghur Forced Labor Prevention Act prohibits importation of goods from the Xinjiang Uyghur Autonomous Region of the People’s Republic of China, unless the government determines that the importer has complied with certain conditions including establishing the goods were not produced by forced labour. Additionally, the United States-Mexico-Canada Agreement (USMCA) has fully enforceable labour standards, including enforcement of laws regarding forced labour and child labour. Federal laws applicable to government contractors impose anti-trafficking safeguards, and the US Department of Labor publishes a ‘List of Products Produced by Forced or Indentured Child Labor.’ Federal contractors who supply products on the List must certify that they have made a good faith effort to determine whether forced or indentured child labour was used to produce the items supplied. The California Transparency in Supply Chains Act requires large retailers and manufacturers doing business in the state of California to disclose on their websites their “efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.”  Currently, a bill is pending in the US Senate that would require covered businesses to audit their supply chains for forced labour and publish a report on the results and their efforts to eradicate forced labour from the supply chain

Pending Legislation

In addition to the countries that currently have legislation governing supply chain due diligence, there are proposals pending in other countries. As mentioned, the European Commission has adopted its proposed CSDD Directive, which will require corporate directors to take into account human rights, climate change, and environmental consequences of their actions when fulfilling their duty to act in the best interest of the company. Once approved, EU member states will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission. However, some EU members, such as France and Germany, discussed above, have already enacted supply chain due diligence laws. Supply chain due diligence proposals are pending in the following jurisdictions:

Finland: Finland is working on a law based on the proposed CSDD Directive and this is likely to be in place in 2023 or 2024 at the earliest. Additionally, Finland’s Act on Contractor’s Obligations and Liability requires companies concluding contracts on temporary agency work or subcontracted labour to ensure that their partners observe their statutory payment obligations.

Romania: After the proposed CSDD Directive comes into force, Romania will issue transposing legislation and ensure the enforcement thereof. Additionally, the Proposal for a Directive of the European Parliament and of the Council on measures for a high common level of cybersecurity across the Union likely will include, among other things, supply chain due diligence. Other due diligence obligations embedded in EU legislation covering certain businesses are applicable in Romania.

Netherlands: The Dutch government is preparing to introduce a mandatory international corporate social responsibility (ICSR) policy, an important part of which will be supply chain due diligence. It is unclear when this legislation will be introduced, but the announcement of the drafting of the measure was made to increase pressure on the European Commission to regulate ICSR policy at the European level. Additionally, the Dutch government expects international companies to apply OECD Guidelines for Multinational Companies as the basis for their Corporate Social Responsibility policy and to report on it. The Dutch government wants 90% of its large companies to explicitly endorse the OECD guidelines by 2023.

Belgium: There is an April 2021 law proposal “establishing a duty of care and accountability for companies, along their entire value chain.” The proposed law would require companies to respect human rights, labour rights, and the environment within the framework of their own activities, the activities of subsidiaries or entities in their value chain.

Hong Kong: There is a proposed anti-slavery bill, however, it is thought that this is unlikely to move forward.

Judicial decisions of interest based on supply chain due diligence laws

In Brazil, the highest visibility settlement involved a high-profile fashion company several years ago after an investigation found that sewing was subcontracted to suppliers using illegal immigrants from neighbouring countries without providing any social rights. Subsequently, clothing label M. Officer refused to settle a similar investigation and eventually faced an unfavourable judgment. More recently, Ambev and Heineken were sanctioned with administrative fines because subcontractors of road cargo transport used illegal immigrants from Venezuela.

In 2020, for the first time, in Nevsun Resources Ltd v Araya, the Supreme Court of Canada held that private businesses in Canada can be held liable in Canada for violations of customary international law committed by its subsidiaries outside of Canada.

In Australia, there have been charges brought regarding modern slavery, with penalties in excess of AUD 100,000.

In the US there have been verdicts and settlements of claims involving forced labour and sex trafficking, many filed against businesses under the Victims of Trafficking and Violence Protection Act (TVPA), which creates significant corporate liability for entities that benefit from human trafficking if they know or ‘should have known’ about the exploitation. Actions have been filed by sex trafficking victims against businesses in the hospitality industry such as hotels, casinos, and restaurants, and by forced labor victims against businesses in labour-intensive industries, especially those that rely on third parties to provide inexpensive labour. Additionally, the Allow States and Victims to Fight Online Sex Trafficking Act (FOSTA) allows victims of human trafficking to bring certain civil claims against social media companies under the TVPA.

The largest single-plaintiff trafficking award occurred in 2018, when a human trafficking survivor was awarded USD 8 million against a cult that forced her to work more than 40,000 uncompensated hours from the time she was 11 until she escaped the cult at age 21.

In 2017 a jury awarded USD 3 million to a former housekeeper of a US diplomat and her husband on claims of forced labour and forced sexual servitude in violation of the TVPA.

In 2014 a jury awarded USD 14 million to five victims of human trafficking against a shipping company, an attorney, and a foreign labour recruiter, who violated US immigration law in recruiting Indian workers to perform repairs in the wake of Hurricane Katrina, and then forced the workers to live and work in abusive conditions. The company also settled a similar lawsuit for USD 20 million and then filed for bankruptcy.

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