Economic crimes and supply chain diligence: a ‘how to’ compliance guide

February 2023  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2023 Issue

In 2022, amid an increased focus on supply chain challenges brought on by the coronavirus (COVID-19) pandemic, businesses and governments were forced to turn their focus to risks of corruption and economic crime in their supply chains. Concurrently, several countries took steps to enact legislation requiring supply chain diligence, and to strengthen this legislation where it already exists.

This article summarises the legislation passed and strengthened by a number of jurisdictions, with a focus on Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act, and discusses the role of supply chain diligence in combating corruption, forced labour and other forms of economic crime.

Global legislative trend: supply chain diligence

Supply chain diligence,   on corruption, forced labour and other economic crimes, has been an increasing focus of the commercial landscape over recent years. This focus is timely: while Transparency International has reported that anti-corruption efforts stagnated worldwide in recent years, the International Labour Organization estimated that there were as many as 50 million people worldwide in modern slavery in 2021, up 10 million from 2016 estimates.

Following from these challenges, governments of various jurisdictions have passed legislation reflecting an increasing trend toward regulatory scrutiny of supply chains. This legislation has been focused on (but not limited to) efforts to combat modern slavery. At a high level, some examples of such legislative regimes are outlined below.

First, president Biden signed the Uyghur Forced Labor Prevention Act into law on 23 December 2021. This legislation establishes a rebuttable presumption that any products mined, manufactured or produced wholly or in part in the Xinjiang Uyghur Autonomous Region of China, or produced by certain entities, are prohibited.

Second, the European Commission (EC) has proposed to prohibit products made with forced labour on the European Union (EU) market. This proposal covers products made in the EU for domestic consumption and exports, and imported goods, without targeting specific companies or industries. National authorities in member states will implement the prohibition through a “robust, risk-based enforcement approach”.

Third, in May 2022, the UK announced a new Modern Slavery Bill purporting to increase the accountability of commercial and public organisations to tackle modern slavery in their supply chains, as currently mandated by the Modern Slavery Act 2015. The proposed changes broaden the 2015 Act (which requires certain businesses to prepare and publish an annual modern slavery statement) to apply to public organisations, mandates the reporting areas to be covered in the statements, requires the statements to be published in a government-run registry, and introduces civil penalties for non-compliance.

Fourth, the German Act on Corporate Due Diligence in Supply Chains, enacted in July 2021, requires companies to ensure human rights compliance in their supply chains and obliges companies that employ at least 3000 people to strengthen due diligence across their supply chains. This will be extended to companies that employ at least 1000 people from 1 January 2024.

Fifth, France’s Duty of Vigilance Law requires certain French companies to publish an annual vigilance plan. This plan must establish effective measures to identify risks and prevent severe impacts on human rights and the environment resulting from the company’s activities, the activities of companies it controls directly and indirectly, and the company’s subcontractors and suppliers. The law empowers the court to impose penalties for non-compliance and provides for civil liability.

Sixth, in August 2022 the Australian government released an issues paper on the effectiveness of the Modern Slavery Act 2018 for public consultation. Public debate closed in November 2022, and the recommendations are expected to be published in March 2023. Among other things, the proposed changes introduce mandatory diligence obligations, lower the reporting threshold and introduce financial penalties for non-compliance.

Lastly, on 8 April 2022, the New Zealand government commenced a consultation on modern slavery legislation. As proposed, the legislation would create due diligence and disclosure obligations for a larger number of companies operating in New Zealand, including multinationals based outside of New Zealand. The legislation imposes additional responsibilities on larger companies.

Case study: Canada

Similarly, the Canadian government is expected this year to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act as part of a package of legislation designed to combat modern slavery, particularly in supply chains.

If enacted, the legislation would apply to government institutions and ‘entities’ that produce, sell or distribute goods anywhere in the world, import goods into Canada, or control an entity engaged in these activities. For the purposes of this legislation, reporting ‘entities’ include businesses listed on a Canadian stock exchange, as well as business that have a place of business in Canada, do business in Canada or have reported assets in Canada – if meeting at least two of the following three conditions for at least one of their two most recent financial years: (i) the entity has at least C$20m in global assets; (ii) the entity has generated at least C$40m in global revenue; or (iii) the entity employed an average of at least 250 employees.

As these thresholds are not based on Canadian operations but rather on global operations, the legislation may capture businesses with a limited nexus to Canada.

If passed in its current form, the legislation would require reporting entities to provide the government with and make publicly available a report of the measures and diligence processes used to prevent and reduce risk of forced labour or child labour being used to produce goods in or import goods into Canada. In some cases, this report must also be provided to the entity’s shareholders along with its annual financial statements.

Reporting entities that fail to comply with these new reporting requirements could face fines up to C$250,000. Any party that authorises, consents to or participates in the infringement may also face similar penalties. Reporting entities and businesses unsure whether they are in fact reporting entities should be prepared to begin reporting upon coming into force of the legislation and obligations thereunder – which is anticipated in early 2023 – and should consult with counsel regarding their reporting obligations.

What does this mean for businesses?

This increased attention on supply chain diligence means business risk must be managed at all levels of a business’s supply chain. While much of the legislation implemented globally focuses on issues of forced labour and modern slavery, supply chain diligence is equally important in ensuring compliance in respect of corruption and other forms of financial and economic crime.

Among other things, under the laws of certain jurisdictions (including Canada) companies may face liability for the acts and omissions of suppliers and contractors if found to be wilfully blind to the impugned conduct. Businesses also face significant business and reputational risks associated with acts of their suppliers if they have failed to maintain adequate controls and procedures and to set a tone at the top of compliance throughout their operations.

For businesses to mitigate both legal and reputational risk, they should understand the compliance processes in place at every step in their supply chains. While the steps may differ depending on the business in question, best practices include those outlined below.

Conduct an audit to identify compliance risks throughout the supply chain. Businesses should assess compliance risks throughout their operations and supply chain, including having proper knowledge of each supplier. This may include mapping out and understanding their operations and supply chain from top to bottom, including first-tier suppliers (direct suppliers) and second-tier suppliers (providers of labour hire and subcontractors). Importantly, the smallest suppliers furthest down the supply chain often carry the largest risk.

Design and implement a risk programme. Businesses should develop and implement a high-level plan of how risk will be managed within the organisation, which will inform policies and procedures. This plan should be tailored based on identified risks, including legal obligations as well as risks inherent to the business itself such as the industry and jurisdictions in which it operates. Consider what steps the business needs to take to comply with applicable laws, and what commitments are required of suppliers to ensure compliance and mitigate risk. Representations and warranties reflecting those commitments should be included in supplier agreements.

Review the effectiveness of the risk programme on an ongoing basis and revise accordingly. Policies, procedures and risks should be monitored on an ongoing basis. Certain compliance regimes (such as the proposed Canadian regime) also mandate ongoing reporting obligations for defined entities, which may include requiring entities to report, among other things, how they assess the effectiveness of their strategies. Monitoring effectiveness will allow businesses to track their successes and identify areas for improvement.

Have a ‘plan of action’ to respond when violations are identified. In the event any potential instances of noncompliance are alleged or discovered within the company’s supply chain, companies should proactively investigate and remediate any issues discovered. Responsibility for addressing issues and investigations should be assigned to an appropriate individual within the organisation, and counsel should be involved in all material investigations. Things to consider in any investigation should include: (i) whether external counsel should be engaged, based on the risks and severity of the alleged issues; (ii) mechanisms for both internal and external reporting, under the guidance of counsel; (iii) any disciplinary or remedial action necessary in respect of employees or counterparties, including termination of relationships where appropriate; and (iv) any remediation measures necessary to the company’s policies, controls and procedures.

Having an effective plan, a ‘tone at the top’ of compliance, effective policies and procedures, and ongoing monitoring is critical to mitigating the risks associated with often complex supply chains. While it may not be possible to eliminate risks entirely, having policies and best practices in place throughout their supply chain allows businesses to mitigate those risks and to ensure they are best positioned to respond to any issues identified.

 

Malcolm Aboud is counsel and Chelsea Rubin is an associate at Osler, Hoskin & Harcourt LLP. Mr Aboud can be contacted +1 (416) 862 4207 or by email: maboud@osler.com. Ms Rubin can be contacted on +1 (416) 862 4852 or by email: crubin@osler.com.

© Financier Worldwide

BY

Malcolm Aboud and Chelsea Rubin

Osler, Hoskin & Harcourt LLP

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