What You Need to Know

Key takeaway #1

The EU opted for a risk-based approach to investigations of products made with forced labor.

Key takeaway #2

The European Commission will be highly involved in the forced labor investigations as the natural "lead competent authority."

Key takeaway #3

Economic operators must be able to prove they performed due diligence with regard to high-risk products and products being investigated by the relevant authorities.

Enabling the respect of human rights in supply chains through a new EU customs enforcement mechanism

On March 13, 2024, the EU legislators reached a provisional agreement on the content of the regulation prohibiting products made with forced labour ("the FL Regulation"). This piece of legislation is part of a series of proposed directives addressing human rights in supply chains which also incorporates recent European ESG efforts (CSRD, CBAM, Regulation against deforestation).

The regulation's goal is to align EU policies with the UN Sustainable Development Goal 8.7 which seeks to eradicate forced labour globally by 2030. Prohibition of forced labour is already enshrined in EU primary1 and secondary law2. The added value of the FL Regulation is that it creates a new EU customs enforcement mechanism which requires importers and exporters to disengage from suppliers who may be producing goods made with forced labour. The Regulation would complement the supply chain monitoring obligations set under the Corporate Sustainability Due Diligence Directive ("CSDDD or CS3D") which was adopted by the EU Council on March 15.

As it stands, the FL Regulation prohibits the entry of products made with forced labour into the Union. This prohibition is enforced by risk-based investigations largely led by the European Commission and characterized by higher evidentiary standards and softer punishments in case of violation compared to Anglo-Saxon jurisdictions3.

  1. Prohibition of products made with forced labour
     The FL Regulation is based on a general prohibition whereby products made with forced labor are not to be placed within the EU stream of commerce. The prohibition covers all products which hold monetary value. The definition of forced labour is defined in the ILO Forced Labour Convention and should be understood as: "all 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".4 EU legislators consider a product to be made with forced labour if at any stage within the production process (including its extraction, harvesting, manufacturing or related working and processing done to a product), the use of forced labour can be detected. This standard covers sub-tier suppliers including suppliers of raw materials. Although similar foreign directives incorporate most of the same scope, the FL Regulation additionally prohibits the exportation of the products from the EU. By definition, this exclusion applies to all economic operators and constitutes a condition to the entry to the EU market.

  2. Investigations of products likely made with forced labour
     To enforce the prohibition on products made with forced labour, the EU Commission and national competent authorities will cooperate through the newly founded Union Network against Forced Labour Products. This will allow for streamlined communication and information sharing between the foreign bodies. Within the framework, the competent authorities will coordinate during all phases of the investigation leading to the banning of the targeted product. The process in which the investigation will be carried out is broken down in multiple steps:
    1. Investigations based on a risk-based approach
      1. Appeal to Commission's guidelines and public information at the pre-investigation phase
         The ban of products made with forced labour is founded on a risk-based approach, followed by a product specific investigation. During the pre-investigation phase, the authority assesses the likelihood of a product being made with forced labour. For this purpose, it relies on information provided by the EU Commission in its guidelines (which will be released no later than 18 months after the entry into force of the FL Regulation) and a database which lists forced labour risk areas and products. The method of review seems to follow parts of the benchmarking approach adopted in the Regulation against deforestation. The resources will be public and build off knowledge shared by third parties, including reports from NGOs who can also inform authorities of allegations during the pre-investigatory phase. In parallel, the EU Commission will provide specific instructions to economic operators which will outline the due diligence obligations needed to be performed.

      2. Necessary existence of objective and verifiable information to launch an investigation
        The evidentiary burden of the risk-based approach lies in the "substantiated concern" standard which must be reached by an authority to launch an investigation. This happens when the authority possesses objective and verifiable information to suspect that the products were likely made with forced labour. The authority considers the following factors when deciding whether to launch an investigation:
        • Scale and severity of the suspected forced labour, including if State-imposed forced labour is a concern;
        • Volume of products placed on the EU market;
        • Share of the product likely to be made with forced labour in the final product;
        • Proximity and leverage of a company with regards to the forced labor risk

        This differs from U.S. law where an investigation is initiated when it appears to be warranted by the circumstances, which is a significantly lower threshold to satisfy.

        Areas identified in the FL Regulation as being "high risk" by the Commission are not subject to a reversal of the burden of proof as seen with the sister legislation in the US, Section 1307 of the Tariff Act of 1930 and the Uyghur Forced Labour Prevention Act ("UFLPA"). The UFLPA establishes a "rebuttable presumption" that goods produced wholly or in part in the Xinjiang region of China or by certain identified entities are made with forced labour, and are therefore subject to an import prohibition. Thus, the mere fact that goods have any inputs from the Xinjiang region will spark an enforcement action by U.S. Customs and Border Protection ("CBP").

      3. High involvement of the Commission in the investigation phase
         Allocation of the investigations between national and EU authorities is based on the "lead competent authority" principle. When the suspected forced labour takes place outside of the territory of the Union, the Commission is the lead competent authority. However, when the suspected forced labour takes place in the territory of a Member State, the national competent authority of the Member State becomes the lead competent authority. At first glance, the Commission will likely be the most common lead competent authority. The scope of its lead competence includes instances where forced labour occurs outside of the EU which would seem to be in most cases, given what we saw with UFLPA detentions. As such, the Commission will be responsible for the strategic guidance of FL investigations launched in Europe targeting products manufactured outside of the EU. The Commission will also be able to monitor investigations at all stages of the procedure. National authorities have the obligation to inform the Commission of any meaningful decision made during an investigation. To enhance collaboration between institutional and national bodies, a mechanism will be introduced in the event of a cross-border investigation. A lead competent authority will work with the "Union Network against Forced Labour Products" to provide the Commission with relevant information and enhance cooperation between the lead competent authority and the other competent authorities.

    2. How operators should prepare for a FL investigation
      1. Performing due diligence
        Economic operators must be able to prove they performed the required due diligence with regard to the high-risk products and products being investigated by the relevant authorities. This means being able to provide information on steps taken to identify, prevent, mitigate and/or eliminate risks of the presence of forced labour in the company's operations and value chains. The content of the due diligence procedure should reflect the requirements under the applicable EU and national law, or the guidelines and recommendations, be it those issued by the Commission, or by international organisations such as the UN, ILO, or the OECD. Here, the EU legislator allows great freedom in the economic operator's choice of reference, letting foreign operators set up their due diligence in reference to international guidelines rather than the EU Commission's. It is recommended that the ILO forced labour indicators should be used as a baseline for assessing working conditions.

      2. Being able to provide accurate information on products made available in the EU
         Economic operators should also be capable of sharing product-specific information that is relevant and necessary for the investigation beyond the review phase. This includes information identifying the products under investigation, the manufacturer or producer of those products and the product suppliers. In essence, companies must provide authorities with a transparent supply chain including all suppliers involved in the production and transportation process.

      3. Lighter burden for Small and Medium Sized Enterprises (SMEs)
         The FL Regulation sets out standards which differ based on employee and revenue size. The standards imposed for information collection are set to be higher for economic operators who do not fall under the SME category. In addition, authorities must focus their efforts on economic operators involved in the steps of the value chain as close as possible to where the risk of forced labour is likely to occur.

  3. Consequences of a successful FL investigation
     If the investigation leads to the determination that the products were made with forced labour, the authority adopts a decision which contains three measures:
    • (i) prohibition to place or make available the "at risk products" in the Union market and export them
    • (ii) order the economic operators that have been subject to the investigation to withdraw the targeted products from the Union market (including products already on the market) and
    • (iii) order the economic operators that have been subject to the investigation, to dispose of the respective products in accordance with national law consistent with Union law.

    Importantly, the FL Regulation does allow authorities to block entry of products that were suspected of being made with forced labour as it is the case in other jurisdictions.

    These measures are only applicable after the determination that the products were made with forced labour. If only part of the product is considered to be made with forced labour and is replaceable, the order to dispose of the goods applies only to the noncompliant part. In parallel, the authority ensures that the prohibition applies to all economic operators, and not only to those subject to the investigation.

    Lastly, contrary to what was envisaged by the EU Parliament, the FL Regulation does not bind the relevant operators to compensate the affected workers.

    As this is a new area of legislation and practice for the EU, it remains to be seen how the relevant department will be organised by the EU Commission and how the latter will interact with national authorities of the Member States, NGOs and other interested parties. We suspect, though, that the EU Commission will get first guidance on FL risk areas from ongoing US investigations, where fact-finding or sanctions are completed.

How can Crowell assist companies in this space?

Crowell has advised global clients with forced labour advice specific to UK and US legislation and our Brussels trade and EU law team is monitoring this space very closely.

To comply with relevant anti-forced labor laws, clients typically require the following services:

  • A risk assessment which identifies geographic, product and supplier risks
  • A review of internal compliance documents, including supplier codes of conduct, supplier on-boarding protocols, and internal employee procurement policies
  • A formalized escalation process/protocol which identifies steps needed to be taken in the event a product detention or notification of an FL investigation is received
  • Updating and amending existing supplier agreements to incorporate forced labour provisions and strengthen supplier compliance with company requirements in the FL area
  • Establishing ownership of anti-forced labor program management within a company
  • Assistance in socializing forced labour concerns within the various company divisions and to executive boards
  • Preparing client responses to government enforcement authorities demonstrating that FL compliance obligations have been satisfied
  • Creating public facing reports to share progress on anti-forced labor program management
  • Carrying out legal investigations including field investigations in remote regions (this includes partnering with social compliance auditors)
  • Designing and implementing remediation measures to correct identified violations
  • Creation of corrective action plans
  • Monitoring and evaluating high-risk suppliers

Footnotes

1. Article 5(2) EU Charter of Fundamental Rights

2. Directive 2011/36/EU on preventing and combating trafficking in human beings and protecting its victims;

Directive 2009/52/EC of the European Parliament and of the Council of 18 June 2009 providing for minimum standards on sanctions and measures against employers of illegally staying third-country nationals

3. Refers to the UK Modern Slavery Act and the US' Uyghur Forced Labour Prevention Act (UFLPA)

4. Article 2, CO29 - Forced Labour Convention, 1930 (NO.29)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.