The proposal highlights the growing global attention to the human rights obligations of companies, not only to their employees, but also to the workers in their supply chains.

On September 14, 2022, the European Commission (the Commission) presented a proposal for a regulation (the proposal) to ban the production or import of products made by forced labor in the EU. The proposal is the latest example of the growing number of legislative requirements being developed in relation to ESG considerations in corporate supply chains, particularly in relation to human rights issues.

Proposal

The proposal would prohibit EU “economic operators” from placing products made by forced labor on the EU market or exporting products made by forced labor. Forced labor itself is defined by reference to the definition of forced or compulsory labor in the Forced Labor Convention of the International Labor Organization.[1]

Responsibility for enforcing the ban would lie with EU member states, which would be responsible for designating the competent authorities responsible in this area. The proposal sets out a two-step process that competent authorities are required to follow to determine whether a product infringes the ban: a so-called preliminary phase provided for in Article 4 of the proposal, followed (if necessary) by an investigation at Article 5 of the proposal.

Preliminary phase

In the first phase of any investigation, the competent authority, on the basis of all the information available to it, should determine whether there is a “well-founded concern” of a violation of the ban.

In order to make such a determination with respect to the particular product under assessment, the competent authority would request from the entity under assessment information about the steps that entity has taken to identify, prevent, mitigate or end forced labor risks in their operations and value chains. The entity’s actions may be based on other applicable EU or Member State legislation, due diligence guidelines to be issued by the Commission (see below) or guidance issued by an international organization, or any other due diligence process.

Entities would be required to respond to such a request within 15 days of its submission, and the competent authority would then have an additional 30 days from the date of receipt of this information to make its decision.

The proposal specifically states that competent authorities should follow a risk-based approach when conducting pre-trial investigations and focus on economic operators involved in the value chain of the product as close as possible to where the risk of forced labor is likely to have occurred and taking into account the size and economic resources of the entities. While the proposal would therefore apparently apply equally to small and medium-sized businesses as it does to large companies, it appears that the application process would be one where competent authorities could award compensation depending on available resources.

Section 5 Investigation

If the Competent Authority determines that there is a substantial likelihood of a violation of the prohibition, then it may request further information and conduct a full investigation. This includes carrying out surveys in countries outside the EU, provided that the company being surveyed gives its consent and that the government of the country in which the inspection is to take place does not raise no objections.

If the competent authority found a violation of the ban, it would issue a decision prohibiting the placing of the product on the EU market or the export outside the EU, and the withdrawal and destruction of any product on the market. Companies would be allowed to challenge such decisions by presenting new evidence.

Commission guidelines

The proposal would also oblige the Commission to publish guidelines, no later than 18 months after the entry into force of the proposal, which include guidance on forced labor due diligence, which take into account the guidelines and recommendations international organizations, as well as the size and economic resources of companies. Compliance with these guidelines will then be a method by which companies can prove that they have followed the correct processes in order to avoid bringing products to market that would violate the ban.

Previous initiatives

The proposal has been introduced at a time when the EU has already introduced, or is in the process of introducing, legislative requirements on companies in relation to their supply chains. In February 2022, the Commission published a proposal for a Corporate Sustainability Due Diligence Directive (CSDDD), which would require companies to implement a number of processes and initiatives to conduct due diligence to to discover any “actual and potential adverse impact” on the environment and/or human rights in their supply chains (learn more about the proposed CSDDD in this Latham blog post). The latest proposal specifically notes that, while the CSDDD addresses business behavior and due diligence processes for businesses within its scope, it does not provide for measures specifically intended to prevent the placing on the market of products manufactured with forced labor.

In addition, the EU’s Corporate Sustainability Reporting Directive (CSRD), which will extend requirements for EU companies to publicly report on ESG-related information, will likely also contain reporting requirements. regarding human rights issues. The draft European Sustainability Reporting Standard (ESRS), which was published for consultation in March 2022 and aims to outline the specific information required under CSRD, included requirements for companies to disclose relevant policies for guarantee respect for the human rights of workers both in the company and in the supply chain of the company.

However, most notable with regard to forced labor was the enactment of the Uyghur Forced Labor Prevention Act (UFLPA) in the United States in December 2021. The UFLPA introduced, effective June 21, 2022, a “presumption refutable” that all goods mined, produced, or manufactured in whole or in part in the Xinjiang region of China were produced using forced labor and therefore, unless proven otherwise by the importer of record, ineligible for importing into the United States (for more information on the UFLPA, please see Latham’s blog posts here and here).

Unlike the UFLPA, the proposal does not specifically target Xinjiang province or China, and instead applies to all products regardless of the country in which they were produced (including EU countries ). It is understood that this amendment has been made bearing in mind the EU’s obligations under international trade law, and it marks a key difference to the resolution adopted by the European Parliament in June 2022, which focused only on imports and (while applying to imports from any country) made specific reference to the situation in Xinjiang in the associated press release.

Next steps

As a proposal from the European Commission, the proposal must now be considered by the European Council and the European Parliament, who will negotiate a compromise agreement under the ordinary EU legislative process. This likely means that the proposal, as amended, is unlikely to be enacted until the second half of 2023. In its current wording, economic operators will be subject to the prohibition of the proposal from the date two years after entry into force of the proposal. .

Latham & Watkins will continue to monitor developments related to the proposal and other emerging supply chain human rights legislation around the world.

Endnote

[1] “any work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily”.

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