Background
Under Target 8.7 of the United Nations sustainable development goals, UN member states have committed to eradicate forced labour.
In this context and in response to growing demands from civil society, promoting corporate sustainability due diligence standards and combating forced labour, the EU has been working on various initiatives to protect human rights.
On 23 February 2022, the European Commission presented a proposal for a Directive on Corporate Sustainability Due Diligence, aiming to introduce a harmonised human rights due diligence requirement for large companies operating in the EU to prevent, and mitigate actual and potential human rights and environmental adverse impacts, including labour rights, which extend to cover the business operations conducted by their subsidiaries as well as along their value chain.
On 14 September 2022, the European Commission presented a Proposal for a Regulation on prohibiting products made with forced labour on the Union market, aiming to prohibit the placing and making available on the EU market and the export from the EU of products made with forced labour, including forced child labour (“the Proposal”).
Scope of application
The Proposal prohibits any economic operators to place or make available on the EU market products that are made with forced labour regardless of their origin. The Proposal prohibits the use of forced labour at any stage of the supply chain, including extraction, harvest, production, manufacture, or processing.
To take into account the Small and Medium-sized Enterprises ("SMEs"), national authorities shall consider the size and resources of the companies when carrying out their assessments and investigations. The European Commission will release guidance addressed to SMEs.
Investigations and decisions
The Proposal provides that the enforcement will be carried out by Member States' authorities (the "Competent authorities") using a risk-based approach, focusing their efforts where they are likely to be the most effective and taking into account the size and economic resources of the economic operators, the volume of products concerned and the scale of suspected forced labour.
As a preliminary phase, Competent authorities will assess whether there are good reasons to suspect that products are likely to have been made with forced labour on the basis of information provided by civil society, a database of forced labour risks, risk indicators and due diligence that companies carry out.
Before initiating an investigation, the Competent authority will have to request information from the economic operator on the actions it took to identify, prevent, mitigate or bring an end to risks of forced labour in its operations and value chains with respect to the targeted products. Economic operators will have 15 working days from receipt of the request to respond to the Competent authority.
If the economic operator demonstrates that it complies with applicable legislation in a way that mitigates, prevents or brings to an end the risk of forced labour, the Competent authorities shall decide no investigation is necessary.
Competent authorities shall initiate investigations on products for which there is a substantiated concern of violation of the applicable law. Competent authorities will notify the economic operator under investigation within 3 working days and inform it of the products concerned, the reasons and the possibility to submit further documents to the Competent authority.
Economic operators under investigation will have 15 working days to submit to the Competent authorities any information relevant and necessary to the investigation. Competent authorities will then have to carry out necessary checks and inspections.
If the investigation reveals that a product was made with forced labour, the Competent authority will issue a decision: (i) prohibiting to place or make the forced labour products available on the EU market and to export them; (ii) ordering the withdrawal from the EU market of the forced labour products; and (iii) ordering economic operators to dispose of the forced labour products.
The Member States are required to lay down penalties applicable for non-compliance with the decisions of Competent authorities, which should be effective, proportionate and dissuasive. The Proposal only penalises non-compliance with the decisions and not the initial import or export of products that are made with forced labour.
- Review and withdrawal of the decision
Decisions of the Competent authority are subject to judicial review in accordance with national laws.
If economic operators provide evidence that they have complied with the decision, and that they have eliminated forced labour from their operations or supply chain, the Competent authority should withdraw their decision and inform the economic operators.
Controls at EU borders
The Competent authority will have to communicate to the Member States' customs authorities their decisions, notably those prohibiting the placing or making available of the forced labour products on the market and their export or those ordering the withdrawal of the products already placed or made available on the market and the disposal of these products. Member States' customs authorities will rely on such decisions to identify the products concerned and carry out imports and exports controls.
Where customs authorities identify a product that is likely to be derived from forced labour, they will have to: (i) suspend the release for free circulation or the export of that product; and (ii) notify the Competent authorities of the suspension and transmit all relevant information.
Should the Competent authorities conclude that the product is the result of forced labour, they will require customs authorities not to release it for free circulation nor to allow its export.
If the Competent authorities have not requested the customs authorities to maintain the suspension or if the Competent authorities approved the release for free circulation or export, the product will be released within 4 days.
Guidelines
The European Commission will issue guidelines within 18 months from the entry into force of the Regulation, which will include forced labour due diligence guidance, information on risk indicators of forced labour and a list of publicly available information sources of relevance.
Next steps
The Proposal will follow the ordinary legislative procedure which involves the European Parliament and the Council of the EU. This procedure is likely to last at least between 18 and 24 months.
The Proposal complements a range of other measures proposed by the European Commission in the last year concerning environmental, social and governance criteria in business practices, such as Corporate Sustainability Due Diligence Directive, Regulation on Deforestation-Free Products and Corporate Sustainability Reporting Directive.
Therefore, international businesses should start preparing and revisit existing human rights due diligence, including labour rights, processes and consider whether they are in line with the Proposal to reduce the risk of having products banned and associated penalties as well as bad publicity.
The Proposal follows a global trend set by the US after the adoption of the Uyghur Forced Labour Prevention Act. Businesses should anticipate increasingly stringent requirements against forced labour in major markets of the world.
Although the Proposal does not single out specific regions or goods, there is an understanding on the side of both EU policymakers and Chinese government officials that Xinjiang region would be affected by the Proposal. Companies complying with a potential forced labour regulation in the EU may face retaliatory measures in China. While companies must comply with EU law, they should try to do so in a way that avoids further inflaming the issue or calling attention to their actions and policies in a way that invites a consumer backlash or government retribution in China.
Hogan Lovells would be pleased to discuss how your business might be impacted by the legislation and whether submitting comments would be the right strategy for your business. In addition, we can also advise on due diligence and mitigation measures to ensure supply chain integrity and how to implement compliance programs to avoid being implicated in violating trade or sanctions laws.
Authored by Christelle Coslin, Lourdes Catrain, Aline Doussin, Margaux Renard and Alp Ozturk
