The European Commission has proposed a new Regulation that would stop products made with forced labor from being imported into or exported from the European Union's 27 member nations, or otherwise made available on the EU market. It's one of the broadest and most punitive prohibitions to date.

The regulation would apply to all products and levels of production. Procurement and compliance teams will need to adjust their supplier risk management to focus more on ethical sourcing practices to comply. In this post, we provide an overview of the proposed Regulation. We've highlighted a few points you should be aware of.

Background

The EU's proposed regulation would be the most comprehensive in the world and would set a new standard for supply chain transparency and accountability. Companies doing business in or with the EU should closely monitor developments and begin preparing for compliance. The proposed Regulation would implement the EU's commitment under the 2016 Forced Labour Protocol of the International Labour Organization (ILO), to which it is a signatory. The Protocol requires its members to take appropriate measures to prevent and eliminate all forms of forced labor. The European Commission estimates that there are currently more than 24 million victims of forced labor worldwide, including nearly five million in the EU. The International Labor Organization now estimates the number of people in modern-day slavery at 40 million.

Who will it apply to?

It applies to all companies, irrespective of their legal form, which have their head office, principal place of business, administrative headquarters, or registered office in Germany, and employ at least 3,000 employees in Germany (1,000 as of 1 January 2024), including employees posted abroad. Foreign companies that (i) have a branch office in Germany and (ii) employ at least 3,000 employees in Germany (1,000 as of 1 January 2024) are also included in the scope of the GSCDDA.

According to Commission estimates, approximately 13,000 companies in the European Union and 4,000 non-EU companies that export to the EU would be initially affected by the proposed Regulation. The EU is a major importer of goods, with imports totaling €218 billion in 2017. It will apply to companies with at least 500 employees and net sales of at least €150 Million worldwide. Two years after the regulation goes into effect, it will apply to additional companies operating in high-impact sectors (e.g. textile manufacturing, agriculture, food, forestry, extraction of mineral raw materials, etc.) with at least 250 employees and a net turnover of at least €40 Million worldwide.

A New Blacklist
Under the proposed Regulation, EU Member States would be required to take measures to prevent the importation of products made with forced labor into their territory and to prohibit the exportation of such products from their territory. The EU would also create a "blacklist" of countries that fail to take adequate steps to prevent and address forced labor in their territory. EU customs authorities would be empowered to detain and seize products originating from blacklisted countries that are suspected of being made with forced labor.

Transparent Supply Chains

The proposed Regulation would prohibit the import, export, or sale on the EU market of goods and products that have been produced with forced labor. It would also require EU companies to exercise due diligence throughout their supply chains to ensure that forced labor is not being used at any stage of production, maintain records of due diligence efforts, and make those records available to EU customs authorities upon request. Expected measures to address the risk of forced labor in supply chains include mapping supply chains beyond tier one suppliers, developing policies and procedures, establishing grievance mechanisms, supporting suppliers, and providing training to employees.

Similar laws in the EU

In 2017, the Duty of Vigilance Act was established in France. This act requires companies with more than 5000 employees or €20 billion in consolidated revenue to create a risk management system. The purpose of this system is to prevent and lessen the negative impacts that their business activities might have on fundamental rights- like forced labor. Other efforts to combat forced labor are also being considered by the EU, including a proposed EU directive that would require large businesses to disclose their human rights due diligence efforts, particularly those relating to forced labor.

In Germany, the German Supply Chain Due Diligence Act (GSCDDA) will enter into force on January 1, 2023, and requires companies to take measures to address the risks of forced labor in their supply chains. The GSCDDA applies to companies with more than 500 employees that are either headquartered in Germany or have a subsidiary there, and which belong to certain economic sectors that are particularly at risk of forced labor, such as the production of food, electronics, and clothing.

The EU's proposed regulation on forced labor would be the most comprehensive in the world and would set a new standard for supply chain transparency and accountability. Businesses that operate in or with the EU should keep an eye on the situation and begin preparing for compliance. All German companies, regardless of their legal structure and size, with a head office, main place of business, administrative headquarters, or registered office in Germany and employ at least 3,000 people in Germany (1,000 as of 1 January 2024) are subject to the new rules. The GSCDDA applies to foreign companies that have a branch office in Germany and employs at least 3,000 people in Germany (1,000 as of January 1, 2024).

Enforcement

A body designated by each member state (known as a “supervisory authority”) is to supervise the companies’ compliance with the law. The supervisory authority is empowered to impose administrative fines of up to €400,000 on companies for violations of the law.

EU member states should be able to impose proportionate sanctions. This includes monetary sanctions that are based on a company's turnovers. However, each EU member state gets to regulate how much money these sanctions can be. The Proposal also has detailed provisions for compensating victims and the liability of companies. If companies do not comply with their due diligence obligations, they will have to pay damages. Liability can also arise from indirect business relationships.

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by
Justin Dillion

Justin Dillon is the founder and CEO of FRDM, a responsible supply chain company.