Navigating global modern slavery compliance: Legislative insights
Navigating the complex terrain of modern slavery compliance in your supply chain requires a strategic approach, with the cornerstone being a robust risk assessment. For an effective compliance program, particularly in the realm of modern slavery, understanding and addressing risks are paramount. This is especially crucial when operating across multiple jurisdictions globally.
Tailoring your program to align with the diverse expectations of each jurisdiction is essential. While having a universal program can serve as a foundational commitment, it demands considerable time and effort to identify and align with the most restrictive legislative or regulatory frameworks. In this intricate landscape, precision in adapting your program to meet specific expectations becomes the cornerstone of a comprehensive and globally responsive compliance strategy.
Exploring the multifaceted realm of modern slavery regulations is imperative for compliance leaders tasked with overseeing multinational operations. This in-depth analysis delves into pivotal legislations that mold corporate responsibility and sustainability practices on a global scale, including:
- EU Corporate Sustainability Due Diligence Directive
- EU Corporate Sustainability Reporting Directive
- Uyghur Forced Labor Prevention Act
- Canadian Modern Slavery Act
- Australia Modern Slavery Act Report
- Other legislative and regulatory developments
EU Corporate Sustainability Due Diligence Directive (CS3D)
The EU Corporate Sustainability Due Diligence Directive, initially introduced by the European Commission on February 23, 2022, signifies a pivotal development in corporate responsibility. Termed as the draft directive for the "Corporate Sustainability Due Diligence Directive" (CS3D), the original proposal sought substantial third-party due diligence requirements for certain companies operating in the internal market. CS3D mandates EU member states to ensure that covered organizations integrate due diligence considerations comprehensively into their operations. This entails maintaining a comprehensive due diligence policy that encompasses the organization’s approach and incorporates a code of conduct with specific "rules and principles." Covered organizations, including EU-based companies and non-EU entities meeting specific criteria, are obliged to regularly update and publish their due diligence policies. The directive focuses on the identification and mitigation of "adverse" environmental and human rights impacts, addressing a broad spectrum of social and environmental concerns.
The directive's core lies in addressing a range of adverse impacts, including environmental violations outlined in international treaties and conventions. Adverse human rights impacts cover violations of recognized norms, including those articulated in human rights conventions and prohibitions against forced labor, slavery, human trafficking, and infringement on workers' rights.
Covered organizations made aware of such impacts must take specific steps outlined in six key strategies. This includes neutralizing or minimizing adverse impacts, implementing corrective action plans, seeking contractual assurances from business partners, making necessary investments, providing support for SMEs, and collaborating with other entities, especially where individual actions may be ineffective.
Who is impacted?
- EU-based companies (≥ 250 employees, ≥ EUR 40 million worldwide turnover)
- Parent companies (≥ 500 employees, ≥ EUR 150 million worldwide turnover)
- Non-EU companies (≥ EUR 150 million, ≥ EUR 40 million generated in the EU)
Enforcement/rules:
- Penalties up to 5% of net worldwide turnover
- Withdrawal of goods from EU markets
- Potential ineligibility for public procurement
- Civil liability for non-compliance
Covered organizations that are made aware of environmental and human rights impacts have a duty to either bring the abuse in question to an end wholesale, or where impossible, to minimize the overall impact of that abuse on society at-large, utilizing the following six steps:
- Neutralize the adverse impact or minimize its extent by, among other things, paying direct damages to the persons affected and financial compensation to the specific community adversely impacted;
- Where immediate cessation of the identified abuse is impossible, to develop and implement a corrective action plan with “reasonable and clearly defined timelines” for both action on the part of the organization and measurement of progress;
- Seek contractual assurances from a direct business partner with whom the organization has an established business relationship to ensure adherence to the code of conduct incorporated into the covered organization’s due diligence policy;
- Make necessary investments, including into “management or production processes and [related] infrastructures” to end or mitigate the abuse in question;
- Provide “targeted and proportionate support” for SMEs with which a covered organization contracts to avoid the potential that the SME’s viability could be jeopardized by virtue of compliance with a code of conduct or corrective action plan; and
- In accordance with EU Competition Law, collaborate with other entities to increase the covered organization’s ability to bring the adverse impact to an end, “in particular” where no other action taken by the covered organization in isolation is suitable or effective.
A significant development occurred on December 14, 2023, when the Council of the EU and EU Parliament reached a compromise on CS3D. This compromise sets the stage for ultimate adoption by both institutions and entry into force, likely by the end of the current calendar year.
EU Corporate Sustainability Reporting Directive (CSRD)
In the autumn/winter of 2022, the European Union introduced a pivotal Corporate Sustainability Reporting Directive (CSRD), acknowledging the imperative to enhance reporting obligations previously outlined in the Non-Financial Reporting Directive (“NFRD”). This development culminated in the European Commission's adoption of a comprehensive proposal in April 2021, amending various directives and regulations concerning corporate sustainability reporting.
The finalized CSRD, officially adopted by the European Parliament and Council and published in the EU’s Official Journal on December 16, 2022, extends its influence beyond the existing 500-employee threshold referenced in the NFRD. This directive broadens reporting requirements to encompass all large companies and non-European companies (Third-Country Undertakings). Third-country undertakings are obligated to report on operational impacts related to environmental and social concerns, mirroring obligations imposed on their EU-based counterparts.
Furthermore, the CSRD includes reporting obligations for certain small and medium enterprises (SMEs) whose securities are traded on a regulated EU market. While emphasizing proportionality to their capacities and resources, the CSRD outlines specific reporting criteria for SMEs. The European Financial Reporting Advisory Group (EFRAG) has been delegated the primary responsibility for developing uniform EU sustainability reporting standards. In November 2022, EFRAG finalized and published initial standards focused on general requirements/disclosures, environmental concerns, social matters, and governance standards.
Environmental concerns require affected companies to report on activities related to climate change, pollution, water and marine resources, biodiversity and ecosystems, and natural resource use. Social matters necessitate reporting on the state of the company's workforce and the extended value chains, considering the impact on consumers and the community at large. A pivotal concept in the CSRD is "double materiality," obliging organizations to report on how they are affected by external factors and, reciprocally, how they influence these factors, contributing to societal and environmental outcomes.
The CSRD, effective from January 5, 2023, mandates member states to transpose it into their domestic law within 18 months.
- Noteworthy timelines for compliance include large public interest companies (those with over 500 employees) subject to the NFRD transitioning to CSRD reporting from January 1, 2024, with reports due in 2025.
- Large companies not previously subject to the NFRD will adhere to the new rules starting January 1, 2025, with reports due in 2026.
- Lastly, publicly listed SMEs and other undertakings are obligated to follow the CSRD rules from January 1, 2026, with reports expected in 2027. SMEs have the option to "opt-out" of CSRD coverage until 2028.
Who is impacted?
- Large companies (publicly listed or not)
- Non-European companies (Third-Country Undertakings) (≥ €150 million net turnover, ≥ 1 subsidiary/branch in the EU)
- Small and medium enterprises (SME’s) (securities admitted to trading on a regulated EU market)
Enforcement/rules:
- Reporting on environmental, social, and governance factors
- "Double materiality" concept
- Standards set by EFRAG
- Phased implementation starting from January 1, 2023
Uyghur Forced Labor Prevention Act (UFLPA)
On December 21, 2021, President Joseph Biden signed the Uyghur Forced Labor Prevention Act (“UFLPA”) into law, marking a significant legislative development. The UFLPA, effective from June 21, 2022, introduces a robust framework aimed at addressing forced labor concerns in China’s Xinjiang Uyghur autonomous region (“XUAR”). This legislation prohibits specific imports either from the XUAR or entities identified by the U.S. government on the UFLPA Entity List. A critical aspect is the establishment of a "rebuttable presumption" asserting that goods, partially or wholly produced in the XUAR, are presumed to be "tainted by forced labor." Importers must furnish "clear and convincing evidence" demonstrating that the goods were not made using forced labor for them to be allowed entry into the U.S.
In response to the UFLPA, the U.S. Customs and Border Protection (“CBP”) issued preliminary operational guidance in June 2022, advising importers to implement and maintain a robust system of continuous supply-chain mapping and monitoring. This is to ensure that their products are not produced, either wholly or partially, relying on forced labor. To counter the statutory presumption associated with products from the Uyghur region, CBP recommends importers to uphold comprehensive documentation tracing the supply chain from raw materials to the imported goods.
The required documentation encompasses various elements, including affidavits from each company or entity involved in the production process, purchase orders, invoices, packing lists, bills of material, and certificates of origin. Failure to overcome the rebuttable presumption may lead to severe consequences, including CBP seizure and forfeiture of goods originating from the XUAR. The UFLPA, through these stringent measures, reflects a commitment to combat forced labor practices and ensures accountability within the U.S. import framework.
Who is impacted?
- Importers dealing with goods from China's Xinjiang Uyghur autonomous region
Enforcement/rules:
- Rebuttable presumption of forced labor
- Requires documentation tracing supply chain
- Failure results in CBP seizure and forfeiture
Canadian Modern Slavery Act
In a pivotal move, Canada enacted its inaugural modern slavery legislation in May 2023, known as the Fighting Against Forced Labor and Child Labor in Supply Chains Act or the Canadian Modern Slavery Act. Companies falling under the Act's purview are mandated to publish on their websites and submit to the Minister of Public Safety and Emergency Preparedness an annual report by May 31 of each calendar year. The report must detail the steps taken to mitigate the risk of forced or child labor in their supply chains, including a comprehensive description of the company’s supply chain, existing forced labor policies, due diligence processes, training initiatives, and remediation measures for identified concerns. Additionally, the report should assess the effectiveness of the company’s efforts to prevent forced and child labor.
Who is impacted?
- Companies listed on a Canadian stock exchange, companies operating or holding assets in Canada, meeting specific thresholds, and involved in the production, sale, distribution of goods in Canada or importing goods into Canadian territory
Enforcement/rules:
- Annual report on steps taken to reduce forced/child labor risk in the supply chain
- Detailed reporting requirements
Australia Modern Slavery Act Report
An independent review of the Australia Modern Slavery Act 2018 was presented to Parliament on May 25, 2023. The Act, designed to enhance transparency in business operations and supply chains, underwent a statutory review after three years of implementation in 2022. A significant collaboration involving nearly 300 organizations from business, civil society, and academia contributed to the review’s public consultation process, resulting in the adoption of 30 recommendations for improvement. The review presented a mixed assessment, finding no concrete evidence that the Act had led to meaningful changes for individuals living in conditions of modern slavery. Three critical weaknesses were identified: variability in the standard itself, lack of enforceability in reporting obligations, and the risk of the process being overwhelmed by large and incompatible statements.
To address these shortcomings, the review recommended pivotal changes to enhance the effectiveness of the Modern Slavery Act. Key proposals include lowering the reporting threshold to $50 million, expanding reporting criteria, adopting a mandatory due diligence duty, and introducing penalties for non-compliance. These recommendations aim to strengthen the Act's impact, ensuring greater accountability and efficacy in combating modern slavery.
Who is impacted?
- Organizations operating in Australia
Enforcement/rules:
- Mandatory reporting on modern slavery risks and actions
- Statutory review and recommendations for improvements
Conclusion
The evolving landscape of modern slavery regulations reflects a global commitment to corporate responsibility, transparency and the prevention of human rights abuses. The EU's comprehensive directives, including the impending CS3D and the already enacted CSRD, set stringent standards for due diligence and reporting, placing accountability on companies worldwide. The Uyghur Forced Labor Prevention Act and Canada's Modern Slavery Act demonstrate a commitment to eliminating forced labor, with robust measures and reporting requirements. The ongoing review of Australia's Modern Slavery Act highlights the need for continuous improvement to address challenges and enhance effectiveness. Overall, these legislative initiatives underscore the international community's determination to eradicate modern slavery and uphold human rights within corporate practices and global supply chains.
The Diligent One Platform provides training modules for compliance teams to better understand what to look for when trying to identify slavery or trafficking issues both within their organization and across their third parties. In addition, Third-Party Manager in the Diligent One Platform continually scans for modern slavery infractions and continuously monitors sanctions and watchlists.
Access the recording of this webinar on modern slavery by Alexander J. Cotoia from The Volkov Law Group, PC.
